A Guide to Employee Referral Programs (Plus How To Make One)

By Indeed Editorial Team

Updated October 5, 2022 | Published April 3, 2020

Updated October 5, 2022

Published April 3, 2020

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

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Recruiting and hiring the ideal candidates for jobs can be difficult, especially when looking for people with specific skills and experience. Asking current employees about people they know who may succeed in these jobs could help improve your company's hiring practices.

In this article, we discuss employee referral programs and how they work, explain these programs' most common components, outline how to make and implement one and list the benefits associated with these recruiting strategies.

What is an employee referral program?

An employee referral program, or ERP, is a structured program in which employers ask their employees for candidate recommendations. Employee referrals are internal methods used to find the best talent among current employees' professional networks.

Employers encourage referral recommendations through incentives such as bonuses and time off. In most cases, employees receive these incentives if their recommendation works for the business for at least 90 days.

Read more: Employee Referrals: Benefits and Tips

How do employee referral programs work?

Many employers and hiring teams begin their ERPs by outlining what they need in new hires. This includes aspects such as skill level, experience, character and education level. Then, they communicate the features of the program to employees and discuss their hiring needs, including the timeline and hiring process.

Employees contact professionals in their network that fit the employer's outlined requirements and ask for their resumes and cover letters. Employees submit any resumes or cover letters they gathered, and hiring managers proceed with the interview process after reviewing all the applications. Employees who submit referrals usually act as a reference for the candidate, helping employers gain insight into their work ethic and experience.

Related: How Hiring Managers Review Resumes

Common components of employee referral programs

The following are some common elements you can expect in an employee referral program:

Incentives or rewards

For greater participation in referral programs, many employers offer incentives. This encourages current employees to explore their networks and find the best quality candidates for the open position. Money-based incentives are the most common since they appeal to nearly all employees.

Some companies could offer additional paid time off instead of a cash bonus. Employers who want to implement an ERP can take a poll to see what kind of rewards are best for employees that elicit more engagement.

Related: 70 Creative Ways To Reward Employees (Plus Why It Matters)

Advertisement and communication

It's helpful for employers to disclose the ERP to employees as soon as they can to give the hiring team greater access across many different channels because employees have more time to explore their network. It's helpful to make a formal announcement that reaches all employees.

For example, an employer could make a formal announcement during a meeting and send a follow-up email with all the details. They could also add application and hiring deadlines to the company calendar so employees can follow the timeline.

Performance measurement

Businesses record and analyze metrics related to their ERP objectives to improve future efforts. During the planning phase, they outline specific criteria they require and make changes to future ERPs based on the success of the latest program.

Metrics they often consider include the percentage of candidates sourced from each channel, the percentage of new hires sourced through the ERP, changes in hiring frequency and changes in the hiring budget.

Feedback generation

Feedback is also a necessary component because it shows the company the overall performance of the current ERP. Consider gathering both internal and external feedback from current employees and new candidates. The feedback businesses gather from these individuals offers deeper insights and details than data alone.

Read more: How To Get Essential Feedback From Employees in 4 Steps

How to create an employee referral program

Follow these steps to create and implement an effective referral program for employees:

1. Evaluate your hiring processes

Review your previous hiring attempts, and identify positions that you struggled to fill. Consider starting small with your referral program by focusing on jobs that can be challenging when trying to find qualified candidates. This allows you to test your program before scaling it.

2. Determine the rewards

Decide what employees receive if they refer a new hire successfully. Most organizations provide a monetary reward, but you may also choose other perks, such as additional paid time off or a physical item. It's also important to establish the requirements for the new hire to meet for the employee to receive the reward, such as passing a 90-day probation period.

Related: 9 Types of Referral Bonuses

3. Assess your application process

Evaluate the program you use for hiring, and confirm whether it's user-friendly. It's important to use a program that simplifies referring someone or providing referral information. If necessary, consider investing in a new system or introducing an added service that helps manage referrals.

4. Announce the system

Inform employees about the referral program, including how they can qualify, what they receive and what the process is for referring someone. For example, specify if they need to provide specific information about the person before they apply or if the candidate needs to provide the employee's information on their application. Ensure everyone knows where to find information about the program and job openings.

Related: 30 Types of Employee Rewarding Programs and How To Design Them

5. Provide a job description

Share job descriptions for the particular positions that you're hiring for, especially if you're introducing a new position. While employees may be familiar with what other people do in an organization, outlining the specific responsibilities and job requirements is important. It helps ensure everyone understands who may be an ideal candidate for the job to think about who they might refer.

6. Communicate with employees

Update employees as appropriate about the progress of the person they referred. If a referral isn't progressing in the hiring process, contact the employee who recommended them to thank them for referring the candidate and to encourage them to recommend others in the future. This can help employees feel appreciated even if you didn't choose their referral.

7. Recognize good referrers

Acknowledge employees who refer someone to the company successfully. For example, share a list each quarter celebrating employees who recommended someone to the organization. This reinforces your appreciation for them and reminds other employees about the program.

Related: Employee Reward vs. Recognition: What's the Difference?

8. Continue testing your program

Try modifying your referral program to determine what works best. For example, if you have a high-priority position in a competitive niche to hire for, think about offering a higher bonus. It may also be a generally good idea to survey employees about what referral benefits appeal to them the most.

Benefits of referral programs for employees

The following list outlines several benefits that come from employee referral programs for candidates, employees and employers:

Increased hiring frequency

Leveraging an entire employee network grants access to both active and passive candidates, diversifying the talent pool and increasing hiring frequency. This is especially crucial in industries with competitive job markets. Gaining candidates at a faster rate through ERPs also reduces the need for certain steps in the recruitment process, such as reviewing hundreds of resumes and screening candidates.

Access to better candidates

In industries where specialized skills are in high demand, such as information technology, employee referrals are often more effective in attracting the right talent. These programs allow recruiters to explore greater networks of vetted professionals with unique skills. Employers and recruiters could also see a greater number of high-quality applicants in comparison to traditional recruitment methods.

Better performance for the assigned budget

Companies sometimes invest large amounts of money into the hiring process to ensure they secure quality candidates. This places greater importance on hiring the right person for the job to make the investment worthwhile. Employee referrals reduce the need for job advertising, external recruiters and other related areas, reducing the overall hiring budget.

Brand ambassadorships

Employee referral programs create opportunities for potentially free brand ambassadorships. As employees explore their available networks, they sell the company on its value proposition, informing candidates on how the company can satisfy their employment needs. Value propositions often have increased credibility coming from individuals who already work for the company.

Reduced turnover

Sourcing candidates through an employee referral program reduces turnover because current employees recommend candidates they know are good fits for open positions. Current employees usually know how their referrals will fit into the company culture, which is one of the most important aspects of reducing turnover. Increased tenure also positively impacts the hiring budget with less need to fill positions over a long period.

Related: 20 Ways To Reduce Employee Turnover

Increased employee satisfaction

Because employee referral programs attract qualified candidates whose goals align with the company, employee satisfaction also increases with time. Those employees who fit well into a specific company culture are often connected with others who thrive in the same or similar cultures.

This can increase the new hire's happiness and enhance the employer's relationship with them. When employers, supervisors and teammates work well together, engagement, productivity and overall satisfaction increase.

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