Does the Employee Referral Bonus Incentivize the Right Behavior?

Employee referral is no doubt the most coveted source for quality candidates in recruiting. There are tons of articles out there touting the benefits and methods for incentivizing employees to make more referrals. Most companies with formal employee referral programs will pay out a referral bonus anywhere from $500 to $5,000 to employees who refer a candidate that gets hired. This bonus is considered small potatoes compared with agency fees of 15 - 25 percent of the starting salary for a new hire, so why not?

I am definitely a believer in the value of referrals. However, before you start giving away trips to the Bahamas, you should consider how the incentive might actually diminish the value.

What makes a referred candidate so valuable?

The main reason for the increase in quality is on the basis that if an employee is referring a candidate, they know the person. They know the company culture and they see the fit. There is also an assumption that employees will only refer high quality candidates because their reputation is at stake.

Many years ago as an HR Generalist, I worked for a large government contractor that delivered systems integration services. We always had a need to hire top tech talent for new contracts, and we decided to jack our employee referral bonus up to $1,500 to get higher quality candidates (that's like $5,000 in today's economy).

Sure enough we started to get a lot of referrals. There was one employee in particular who seemed to be very helpful. After about the fifth resume, we got suspicious. Before long he had referred ten candidates. After a little detective work, we determined that this employee was simply accessing resumes on the internet and submitting them as referrals.

Now, you could potentially make the argument that it's still worth the referral fee, because the employee brought the candidates to our attention perhaps sooner than a recruiter would have sourced them. However, in the case of these ten candidates, there's absolutely no reason to assume the quality would be any higher due to the knowledge of the culture fit or risk of reputation to the employee. The quality of these candidates is no greater than those coming from an unsolicited contingency recruiter throwing resumes at the wall to see what sticks.

How do you make sure your Referral program is incentivizing the right behavior?

Here are a few ideas:

Recognition over Financial When giving rewards as part of a referral program, you should emphasize the recognition and de-emphasize the financial gain. Many programs today will include the accumulation of points that can be exchanged for gifts or prizes, and public record of the leaderboard that highlights the employees who contribute most. This type of program can be used to market and promote the need for referrals without turning it into a bounty hunt.

Don't Limit Duplicates Most programs will limit the reward to only the first employee to refer a particular candidate. In many cases the systems will even do a duplicate check during the submission and inform the employee that "this candidate is not eligible, since we already have the resume in our database." This only makes sense if your program is about the money, because why would you pay for something you already have? But if you are focused on quality, duplicate submissions are actually better. It means that more than one employee has knowledge of this candidate, and believes they are an ideal fit.

Recruiting Culture My personal preference is to offer no referral bonus at all, and make the identification and referral of talent core to the culture of the business. What would happen if each employee had a goal for the year to make a single referral, and then they were measured on this in the performance review? People in leadership roles could have a larger target for identifying talent, and a portion of their incentive compensation should ride on the results.

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How do you feel about employee referral programs? What do you think is the best way to incentivize employee referrals?