How to Create an Effective Employee Referral Program

Looking for new hires can take a lot of time and effort. One way to save hiring resources and improve the quality of your new hires is to implement an employee referral program. Employee referrals produce candidates who perform better and stay with companies longer. In fact, according to an Indeed survey, 74% of employers said candidates sourced from employee referrals were extremely qualified for the role.*

In this article, you’ll learn more about how employee referral programs work, why employee referrals can benefit your business and how you can start an effective referral program of your own (with employee referral program ideas for you to try).

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Editor’s Summary:

  • A referral program motivates your current employees to help you find potential new employees, usually with a referral bonus or reward.
  • Referral bonuses typically range between $1,000-5,000 per successful hire.
  • When creating a referral program, make the referral process easy, offer a mix of incentives, promote the program regularly and track results to find ways to improve.
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What is an employee referral program?

An employee referral program is a recruiting strategy that companies use to find qualified candidates. Employers typically offer incentives to current employers who recommend new employees for open roles — usually a friend, family member or someone else in their network.

Employee referral programs can do wonders for a business looking to expand without putting an unnecessarily heavy burden on recruiters and hiring managers. In fact, an Indeed survey found that 66% of companies use referral programs to find applicants. Referrals were also cited as the third most popular way to fill open roles (after online job sites and company career websites).**

Benefits of an employee referral program

When you use your own productive and talented employees to find additional workers, they tend to recommend people with a lot of those same attributes. Additionally, a friend of a current employee is much more likely to fit in with a company’s culture because the initial employee is already such a good fit.

If you’re looking to hire people fast and save money while doing it, a referral program might just be the best option. Employee referral programs increase revenue by motivating both new and existing employees to be productive. Additionally, you probably won’t have to spend nearly as much money in finding the candidate in the first place. According to one study, the average cost-per-hire is $4,129. An employee referral program cuts this cost significantly, even after considering the cost of designing and implementing the program.

There are a number of other reasons why you should consider implementing an employee referral program as part of your recruitment strategy, including:

Improves the quality of new hires: Current employees have unique qualifications to identify and recommend great candidates. They already understand the company’s mission, values and culture, and they know people with the talents required for the job. This makes their referrals more likely to fit in well with the company and perform at a high level.

Increases employee retention: Because referrals often match jobs and company culture better, they are more likely to work at a business longer. Not only that, but when an employee refers a candidate to a role they feel a sense of accomplishment, especially if that person is hired. These factors help dramatically reduce employee turnover rates.

Saves time and money on the hiring process: Referrals speed up the hiring and onboarding process which saves resources. You can get potential candidate information quickly, which decreases costs associated with job postings. Candidate selection is faster and referred candidates are usually already familiar with the company and onboarding process, which makes their experience more enjoyable. With a decrease in time to hire, you spend less money on talent acquisition and improve the productivity of your hiring strategy.

Improves your company’s reputation: A high percentage of job seekers spend time researching company reviews before applying to jobs. When a proper employee referral program is in place, employees will be happy to recommend your company to their network. This is a great way to attract the best talent for current and future openings.

How employee referral programs work

A referral program works by motivating current employees to help find potential new employees, usually through a referral bonus or reward. A referral bonus is a payment that employers give employees as a gesture of appreciation after the person they referred is hired and remains at the company for a certain amount of time. Referral bonuses typically range between $1,000-5,000.

Of course, the cost of a referral bonus is just a portion of what’s necessary to cover the program itself. You’ll still have to implement it within your company culture and launch it in a way that motivates employees to take advantage of it. Additionally, maintaining the program incurs costs as well. The hope is that the benefits — such as increased revenue and lower cost-per-hire — will outweigh the costs of the program.

Related: How to Motivate Your Employees

How to create an employee referral program

Here are a few ways to create quality employee referral programs that work:

1. Get management on board

Before you can move forward with any kind of internal employee referral program, get approval from management. Not only will you need them to understand the value of these programs, but you also need them to actively encourage employees to participate. If they take it seriously, the rest of the business will, too.

Additionally, you can use management as a resource to set hiring goals and allocate the necessary resources toward the referral program. Approval from management isn’t enough if your budget doesn’t cover the program, though, so it’s important to fully understand how the program operates within your company limitations. Before you can approach management with requests, know your hiring needs and required resources.

2. Create an easy referral process

If you want employees to do something extra (beyond their normal job duties), like participate in a referral program, it needs to be straightforward and simple. Referral rules and rewards should be easy to understand and apply so that an employee doesn’t feel like making a referral would be extra work. There are a few ways you can keep this process simple:

  • Use an online employee referral tool
  • Create a simple online form
  • Put a resume drop box in your HR department’s office
  • Create an email template that employees can easily use to refer qualified candidates
  • Plan to solicit referrals via email each time you post a new job

Another way to encourage more referrals is by giving employees company resources that make it easier to talk to potential referrals. For example, a company introduction video or career page with employee testimonials and job details can be an effective way for employees to tell others about how great it is to work at your company.

Related: The One Question to Get More Out of Employee Referrals

3. Set goals for the program

While your ultimate goal is to get more qualified candidates for open positions, identify some specific, measurable goals for a new employee referral program. The program should also be time-bound so you know in what timeframe you need to achieve these goals. Some examples of goals you could set are:

  • Get 25% more qualified candidates for open positions
  • Reduce the time to hire by 10 days
  • Reduce employee turnover by 50% during Q1

4. Offer a mix of incentives

Your employee referral program should offer some sort of incentive, whether it’s a financial incentive, a non-financial incentive or a combination of both. For example, instead of a referral bonus, you could offer gifts or extra time off. Additional employee referral program ideas include paid vacations, fun prizes (e.g., noise-canceling headphones, dinner at a fine restaurant in town) or donating money to a charity of the employee’s choice. Some of these incentives are less expensive than offering monetary compensation but can still be appealing to employees.

The best way to determine what incentives to offer is to ask your employees what would motivate them most. Here are some other employee referral program ideas to consider:

  • Hold contests: Having referral contests between teams and giving out prizes can help build excitement and encourage teamwork. Recognize top referrers to improve employee work satisfaction and help establish referral culture.
  • Consider more than money: Poll your employees and ask them specifically what type of incentives would motivate them to refer candidates. The more excited they are about referring, the more likely they are to do it.
  • Customize based on location: Do some research about the area to customize your referral program. Think about special businesses or services only available in your area that employees would like.

If you do decide to offer monetary referral bonuses, consider using a tiered system. This could mean offering more money for the positions that are more difficult to find candidates for. Another way to create a tiered system is to give a flat amount for each referral and then more money for each stage the candidate makes it through during the hiring process. You could also offer compensation when the new hire reaches the six-month mark.

5. Announce the program and provide instructions

The first thing you should do when implementing a referral program is to announce it to everyone in the organization. Publish your incentive structure and highlight the most desirable rewards. Be sure to include clear instructions so that everyone knows how they can make referrals. Deliver the instructions in a video, downloadable PDF or on a webpage on your company’s internal site. It’s also a good idea to post the information in areas where employees congregate, such as a break room, to keep the information easily accessible.

Consider including details about your employee referral program in your new hire onboarding process.

6. Recognize employees for referring candidates

If an employee refers a candidate who you end up hiring, recognize them for making an impact at your company. To recognize them, try:

  • Posting a profile on them in the company newsletter
  • Posting about them on the company’s social media sites
  • Announcing their contribution on the company’s internal website or communication channel

7. Integrate referrals into your company culture

Your referral program shouldn’t be something that feels like an add-on at your business. Instead, make it a part of the company culture. While it should be a part of the onboarding process, it’s also helpful to include it in other parts of your company. Integrating it that way makes the program feel like a more natural part of the company rather than a recruiting tool designed to boost hires and save money.

Here are some ways to incorporate your referral program into your company culture:

  • Have an official launch to create enthusiasm around the program. Organize a party or announce the program at a company-wide meeting. Give employees the most important details and focus on motivating them to participate.
  • Boost employee engagement by promoting the referral program. Consider running a couple campaigns a year to brand the program internally. Come up with a memorable tagline and other marketing tactics to enhance employee involvement.
  • Host quarterly recruitment happy hours. This can be a great way to meet potential candidates in an informal setting. Have your employees invite their referrals and serve food and beverages.

8. Track the success of your referral program

To identify whether your program is working at your company (or identify areas of improvement), it’s important to track your results. You should be evaluating referrals based on quantity and quality. For example, think about:

  • The number of referrals that were made total
  • The number of referrals who were hired
  • Whether you filled more positions with referrals or through other recruiting methods
  • How long the candidates have stayed with the company
  • How managers and employees feel about the program

*Indeed survey, n=663
**Indeed survey, n=1,000

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*Indeed provides this information as a courtesy to users of this site. Please note that we are not your recruiting or legal advisor, we are not responsible for the content of your job descriptions, and none of the information provided herein guarantees performance.

Last updated: Nov 13, 2020