Hiring 5 min

5 Reasons Why an Employee Referral Program is the Best Way to Hire New Talent

May 23, 2020

Hiring the right people is one of the best ways to ensure your company succeeds.

But the question is, how are you finding and hiring the right people?

Companies can now try and fill empty roles on job boards and through recruiters, yet there’s an even better way to hire candidates—referrals. Think about it like this, if a friend, family or colleague recommended a product to you, you would look at it more favourably, right? The same reasoning goes with implementing an employee referral program at your company. Current employees can recommend candidates so you can hire the right people without having to hunt for them on job boards or advertisements. 

In this piece, we’re going to explain why you need an employee referral program and 5 benefits of implementing one. Let’s get hiring!

Wait—why do I need an employee referral program?

An employee referral program is a structured, organized way for your current employees to recommend favorable candidates to open positions within your company. 

Instead of using outside hiring techniques like recruiters and job boards, your employees do the heavy lifting by using their existing networks to find a suitable person for a job opening. Here’s the thing—if you don’t already have an employee referral program, your company is falling behind. A study by SHRM found employee referrals is now the leading strategy companies use to hire new employees. The study analyzed over 14 million job applications and found that nearly half of all hires were sourced internally.

Referral programs are also more effective than other methods like job boards and recruiters at finding a candidate that fits. Studies show referral programs not only cut recruitment costs, but they also allow companies to tap into a talent pool they might have never had access to through their employees. 

Harvard Business Review (HBR) stresses that there’s also a difference between strong and weak referrals. HBR’s Kate Gautier says it’s wise for companies to have a structure in place to test how well employees know their referrals, as people who only know each other only through social media have the same hiring outcome as candidates with no referral at all. Instead, companies should aim for their employees to be referring people they have “strong connections” with. 

“These people were former coworkers who had known each other for more than one year,” she says. 

“At the other end of the spectrum were referrers connected only through social media, and we found that the strong connections were nearly three times as likely to result in a good hire than the online connections. 

“In fact, the online connections were no more likely to result in a good hire than people who weren’t referred at all.”

Now that you know why an employee referral program is a good idea, let’s look at 5 of the main benefits of putting a plan into place. 

5 reasons why an employee referral program is the best way to hire new talent

1. It encourages employees to make good referrals

Research shows 88% of employers say referrals are the largest source for above-average applicants.

That’s great for the business—but what about the employee that referred them?

If you have an employee referral program in place that rewards referrals for above-average applicants, it can turn your hiring process into a win-win situation. Of course, you can offer financial rewards and bonuses to employees, but try and think outside the box, too. Google learnt the hard way when their employee referral program doubled its $2,000 referral bonus but made no significant effect on hiring numbers. 

Companies can now move towards other rewards and experience to encourage employees to give referrals for above-average applicants. Distillery, for instance, hands out Apple watches and iPhones, while DigitalOcean makes a $1500 charitable donation in the name of the employee who gave the referral. 

If your employees are being rewarded, they’re more likely to make good referrals. 

2. It fast tracks the hiring process

Referred candidates are quicker to hire than those you find on job boards. 

According to a JobVite study, a candidate that’s been referred takes about 29 days to hire and onboard. If you find a candidate through a recruiter or on a job board, however, it will take an average of 39-55 days to bring them on board.  

If we break down those stats, a clear pattern emerges. Instead of having to go through the timely process of posting on job boards, screening CVs and running candidates through pre-interview tests, you can jump straight to the interview. This cuts out weeks worth of precious time where instead of having a job vacant—it can be filled earlier. 

3. It’s cheaper

According to research by LinkedIn, an employee referral program helps you cut down on hiring costs as you don’t have to pay for job boards, recruiting fees and agency commissions. 

The money you save can go beyond these obvious cuts, though. There’s also the money you’ll save in time as you don’t have to screen a candidate or spend weeks going through the traditional hiring process. Instead, the employee that’s made the referral will do the heavy lifting as they’ll be screening the candidate for you. 

Meritage Talent Solutions Founder Kara Yarnot says her own research has found companies can make significant savings using an employee referral program even after the cost of a bonus has been factored in. 

“For example, if a typical agency charges a fee of 20% of a hire’s first-year salary, that could be $20,000 for a single $100,000 hire,” she says. 

“Even if you gave your employee a $2,000 referral bonus for successfully recommending a new hire, that’s an $18,000 savings, compared to hiring through an agency.”

4. Employees stick around for longer

Finding the right employees is one hurdle, but keeping them around is even harder. 

Studies have found that employees found through referral programs are likely to stick around for longer than those hired using traditional channels like job boards and recruitment agencies. The study found employees that were referred stayed in a job at least 38 months, while non-referred employees left after 22 months for non-referral hires—a 70% difference. 

As Kristina Martic explains, the success of your employee referral programs can be directly tied to the quality of the hire.

“If you hire someone who is not a good fit, they will leave sooner,” she explains. 

“Candidates that come from other sources such as job boards don’t know about you as an employee as much as candidates who talk to your current employees.”

The logic is simple: a current employee is unlikely to encourage someone to work at your company unless they think it’s a great place to work themselves. Therefore, candidates are likely to stick around for longer once they find out how great your workplace is! 

5. It gets your employees more involved

Finally, employee referral programs can make a workplace feel more like a family. 

If an employee feels entrusted by your company to make hiring recommendations, it can boost their investment and self-worth at their workplace. It’s unlikely an employee is going to recommend somebody for a position if they don’t think they’re up for the job. On the flip side, encouraging them to look into their own networks to source good employees can instill a sense of pride and belonging at the company that monetary rewards can’t. 

Salesforce is a great example of bringing employees together and getting them more involved in the company.  The company organizes Recruitment Happy Hours, where they ask employees to bring along people who they think would be a good addition to the company. 

“In a recruitment happy hour, we ask our colleagues to invite friends, family, relatives and all those people in their network who they feel would be a good fit for the open roles and on the day, they will have the opportunity to have meaningful conversations with recruiters and hiring managers about those positions.” – Salesforce

These happy hours are also the perfect platform to show potential employees how invested the company is in its staff. For example, Salesforce now has mindfulness rooms inside their workplaces, and they pay their staff to volunteer in their communities

It’s not to say that Salesforce doesn’t pay cash rewards for referrals (they’ve handed out $5.5 million worth), but their referral strategy goes beyond money. They’re showing referrals why their company is a great place to work—and it’s working. The company is consistently ranked as one of the best places to work in the world. 

Wrapping up

Finding the right people to work for you is hard. 

Job boards and recruitment agencies can be a timely and expensive process to navigate. Even worse, you can spend all that time and money finding an employee for a job, just for them to leave you for another company in under two years. 

Employee referral programs have been consistently proven to be the best way to recruit new staff. Not only is it cheaper and faster to hire people this way, but referred employees are typically above-average quality. If you put trust in your team to make quality referrals and reward them for your efforts, you can kiss the expensive and lengthy online job hunt goodbye—and build a loyal workforce in the process. 

Kimberlee Meier is a writer for ReferralCandy and CandyBar, two software tools helping small and medium businesses improve their customer acquisition and retention through automated customer referral and loyalty programs.

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