What are referral bonuses?

A referral bonus is any type of incentive or reward you offer a current employee for referring a successful candidate for a job vacancy with your organization. Defining a successful referral depends on your preferences, but it often means a candidate who’s hired for the position and stays for a specified length of time. Incentives can vary, but the bonus is usually paid out as cash.

Reasons to offer employee referral bonuses

Offering any type of bonus costs your company financially, but referral bonuses can give you a good return on investment. Some benefits of establishing an employee referral bonus program include:

• Additional candidate source: Using multiple talent-sourcing methods can expand your candidate pool, giving you more choices when you need to hire someone. Your employees might know someone with the skills you need, and they can become brand advocates when encouraging these people to apply.
• Quality candidates: Current employees will often refer people who’ll reflect positively on them. Referring someone they know will do a good job shows they have good judgment. If you require the new hire to stay a certain length of time, your employees will want to recommend someone who’ll be a good employee and will stick around for a while.
• Cost effective: If you establish a successful employee referral program, it could prove more cost-effective than some of your other candidate sourcing strategies, such as using recruitment agencies.
• Efficient: Using employee referrals can also save time. Your employees attract candidates to your company, which cuts down on how much time your recruiters spend looking for new hires.
• Morale boost: Being rewarded for referring candidates can boost morale and help your current employees feel appreciated and valued.

Drawbacks of referral bonuses

You should also be aware of the potential negatives of using employee referrals. Keeping these things in mind can prevent you from making a poor hiring decision. These potential drawbacks include:

• Increased cost: If you’re using employee referrals in addition to other paid recruiting methods, you’ll have an added expense when you pay out your bonuses.
• Low-quality referrals: Some employees might encourage anyone they know to apply for a chance at earning the bonus even if the person isn’t qualified. This can result in having to weed through more resumes to get what you need.
• Tensions between employees: If you hire a current employee’s friend, you’ll likely make at least one person happy. But other employees may see it as favoritism , or they might feel frustrated over the closeness of the new hire and referring employee. Some employees may also be upset if their referred candidates weren’t chosen. To limit such tensions, ensure you hire based on qualifications and not just because of a referral.
• Unfair preference: Some companies give preference to referrals over candidates from other sources. You might not scrutinize these applications as much as you would an application from another source. This could lead to overlooking a candidate with the right skills if they don’t know someone who already works for your company.
• Less diversity: It’s common for people to associate with others who are similar to them, which could lead to less diversity in your candidate pool. If improving workplace diversity is important to your organization, using employee referrals could make it more difficult to reach those goals.

Referral bonus options

Referral bonuses can come in many forms. Cash is a popular option that offers a strong incentive for your employees. They can use it for anything, and having extra cash is always appreciated. You can use other bonus methods if your staff members prefer different incentive types. Some examples are:

• Gift cards
• Physical gifts
• Company-wide recognition
• Charitable donations
• Trips
• Experiences, such as tickets to events
• Extra paid time off

Your employees may have different preferences for their bonuses. Consider offering multiple options to let referring staff members pick the one that appeals to them the most.

Establishing a referral bonus program

If you decide referral bonuses could help your recruiting efforts, creating a formal referral program helps you instill consistency. Put all the details in writing so your employees are clear on what they can expect. These steps can help you develop your program.

1. Decide who can participate

Establishing eligibility before you start offering bonuses can avoid confusion. Determine who can receive a bonus. Most companies allow the majority of employees to participate, but it’s common to exclude some groups, such as management and HR team members. Since these employees often have power in the hiring process, they have an incentive to favor their own referrals if they can get a bonus for them.

2. Establish the criteria

Some companies limit bonuses to certain positions and require applicants to meet specific conditions. Decide on the criteria for your organization as you establish your program. Think about things like:

• Qualifying positions: Some organizations offer referral bonuses for every vacancy. Others limit them to the positions that are more difficult to fill. Bonuses are usually only paid for full-time, permanent openings and not contract or freelance positions, but you can offer bonuses for any type of position you want.Establish when you’ll offer a bonus, and let your employees know.
• Eligible candidates: It’s common to only offer a bonus if the candidate has never applied to the company before. If you use an applicant tracking system, you can verify if this is their first contact with the company.
• Qualifying result: Establish what event triggers a bonus. Most companies require the referred candidate to accept the job. Some companies might offer a smaller bonus if a referral gets an interview with a larger bonus coming if they’re hired.
• Length of time: It’s also common to only pay out a bonus if the employee stays with the company for a certain length of time. This could be 3 months, 6 months or longer. Having your referring employees wait too long for a bonus could make the program less motivating. You can also split the bonus with part of it being paid upon hire and the rest being paid after certain time intervals.

3. Choose the bonus

Create your bonus structure for employee referrals based on what you want to offer. Getting feedback from your employees to see what type of bonus would be most motivating can help you establish your rewards. If you choose financial compensation, determine how much you’ll pay for each successful referral, which may depend on your budget. You might also have a graduated bonus schedule based on the position level, with entry-level positions earning a few hundred dollars and executive-level hires earning thousands of dollars.

4. Track referrals

If you use a recruiting platform, you can often integrate your referral tracking with the current setup. This makes it easy for applicants to show they’re a referral, and you can easily see who referred each candidate. Implement a system of documenting, tracking and following up on referrals to ensure you pay out the bonuses as established by your program.

Making referral bonuses more effective

Referral bonuses are only effective if you get your employees on board with the program. The following tips can help make your program more effective:

• Make the details clear: Your employee referral program should spell out all qualifications, requirements and timelines for the bonuses. This ensures you administer the program fairly, and it cuts down on disagreements with employees.
• Promote the program: Your employees may need encouragement to use the program if it’s new. Announce the incentives when you start the program, and make sure everyone understands how the bonuses work. Mention it occasionally in emails, newsletters and meetings to encourage higher participation.
• Implement referral bonuses consistently: Being consistent with the referral bonuses encourages your employees to continue using the program. Ensure you pay out the bonuses on time without the referring employee needing to remind you to make the program as simple and motivating as possible.
• Screen referrals rigorously: It’s easy to show preference for referrals since they have a connection to the company. However, they should still undergo rigorous screening like other candidates to ensure they meet your criteria. Give applicants from other sources a fair chance as well to help you choose the best match for your position.

Referral bonus programs sometimes take a little time to perfect for an organization. Looking for feedback from your employees and making adjustments as needed can help make your program more effective.