What are Employee Referrals? Advantages and Disadvantages

What is an Employee Referral?

It is the hiring process done based on the referral of a candidate referred by an employee of the organization. Though the employee referral program might sound like a new concept, it is quite an old way of recruiting the best fit for the position.

The degree of success varies to a large extent and sometimes it took a long time to fill up the positions, whereas there are times when the whole recruitment process complete within a matter of time.

Everything has its own pros and cons and an employee referral scheme is no different. There are companies where you will find that the employee referral program is not that popular and in some places, the hiring is totally dependent on employee referrals.

If your employee referral program is under appreciated, then you must take serious consideration to enhance it a bit and in case it heavily relies on the employee referral program, then you must take into consideration, the pros and cons of the employee referrals.

Employee Referral Importance:

In the recruitment and selection process, an employee referral program plays a very important role. Though this program comes with its own advantages and disadvantages, it is still one of the popular ways of hiring employees.

It allows the employees to get their friends and known resources to join the company, in a way helping their people and the organization both. It is also advantageous to the organization, as they can avoid the extra burden of advertising and shortlisting candidates. This helps them to decrease the load of the whole recruiting process.

Top 10 Reasons Why Employee Referral Is So Important:

1. Candidate quality will be better
2. Wider candidate pool
3. Hiring speed
4. Boosts morale
5. Cost
6. Counter negative reviews
7. Quicker onboarding
8. Good candidate fit
9. Better retention rate
10. Appreciation for recruitment

Employee Referral Statistics:

1) Employee referrals give highest ROI:

• 82% of employers said that employee referrals above all other sources for generating the best return on investment (ROI). (Source: CareerBuilder)

2) #1 for Referrals:

• The #1 way people discover a new job is through a referral. (Source: LinkedIn)
• Referrals were are listed #1 as the “most productive” source for diversity hires, well ahead of major job boards, company affinity groups, and diversity career fairs. (Source: CareerXroads)
• 75% of companies prefer to use employee referral program systems that allow for automated or semi-automated processes (Source: Zalp)

3) Top Channels for Referrals:

• The top channels people use to look for new jobs are word of mouth (50%), social professional networks (56%), and online job boards (60%). (Source: LinkedIn)
• 69% of large companies have a documented referral process, compared to 46% of smaller companies. (Source: iCims)
• Recruiters in 53 percent of best-in-class organizations use social media networks for referrals, compared to only 37 percent of less successful organizations. (Source: Aberdeen)

4) Top Companies for Referrals:

• Larger companies tend to recruit more of their new hires from employee referrals (27 percent) than mid-sized (24 percent] or smaller companies (14 percent). (Source: iCims)
• About 33% of companies use third-party software systems to manage their employee referral programs. (Source: Meritage)

5) At least one referral:

• 2/3 of referred employees have referred at least one person for a job at their company. (Source: iCims)

6) Employee referrals reduce time to hire and cost to hire:

• Referred candidates are 55% faster to hire, compared with employees sourced through career sites. (Source: HR technologist)
• Employee referral programs can save companies $3,000 or more per hire! (Source: Recruiter.com)

7) Employee referrals improve quality of hire:

• 88% of employers said that referrals are the #1 best source for above-average applicants. (Source: Dr. John Sullivan research)
• The chances of a referred candidate getting fired decrease by an average of 350%. (Source: Achievers)

8) Employee referrals reduce the turnover rate:

• After two years, retention of referred employees is 45% compared to 20% from job boards. (Source: ERE)

9) Employee referrals generate more profit:

• Employees who were hired through referral programs produce 25% more profit for their companies than new hires hired via other sources. (Source: FirstBird)

10) Employee referrals improve offer acceptance rate:

• Referred candidates are more likely to accept your job offer by a statistically significant 2.6–6.6 percent. (Source: Glassdoor)

11) Employee referrals bonus costs:

• 69% of companies offer cash bonuses that fall between $1,000 — $5,000. (Source: Meritage Talent Solutions)
• Almost 70% of companies offer between $1,000 and $5,000 in cash incentives for staff members who can refer to qualified candidates. (Source: Meritage)
• Employee referrals can save organizations $3,000 or more per hire (Source: Recruiter)
• 28% of organizations trying to fill a typical exempt position will offer a $1000 referral bonus. (Source: CareerXroads)

12) Why People Refer?

• 35% of employees refer to help their friends. 32% do it to help their company. 26% do it to be seen as a valuable colleague. Only 6% do it for money and recognition. (Source: LinkedIn)

13) Non Employee Referrals:

• 41% of referral hires are from non-employees and Rewarding Trusted Non-Employees Increases Referral Hires by 69% (Source: Zao)
• Non-employees most desired as referral sources include company alumni, customers, social media connections and vendors. (Source: Meritage)

Employers who pay out employees in real time see an 83% uptick in engagement in their employee referral program Share on X

How Employee Referral Program Works?

The employee referral program is an informal way of asking your employees to fill up the vacant position with someone they know who is qualified enough for the job.

Usually, when you ask someone to dig in deep to see whether they can find a suitable candidate for the job, then most likely they wouldn’t put in much of an effort. But, if you add some job referral service rewards for high-quality candidates, then the employees will take the pain to figure out the right kind of candidates.

You must explain the various benefits they will be enjoying if they refer to the right candidates. This will ensure that you get the right mix and don’t waste your valuable time in sifting the weak candidates.

You can offer some –

• Monetary benefits, if the hired candidate retain for more than 2 months
• Fringe benefits
• Own services or goods

When you are providing the employees with some benefits, whether it is cash or goods, then they will take the onus on themselves to acquire that.

To add that extra money to their wallet, they will screen the profile of the candidate well, so that their candidates get select and they make money at the end.

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Advantages of Employee Referrals:

There are several advantages that you can avail of if you are going for employee referrals. Here we are listing some of them –

1. You can vouch for high-quality candidates:

Through referral programs that work you can create a pool of candidates who are best suited for the job. The quality of the candidate is always high when you are seeking candidates through employee referrals.

One of the reasons behind this is that the initial screening is already done by the current employee and as his reputation will be at stake, therefore, he will only be selecting the candidates who will be able to deliver.

If the employee keeps on referring to poor quality candidates, then it shows that he or she doesn’t have much of judicial power. It might also affect his career as well, so he would definitely avoid referring to someone who is not fit for the job.

2. The monetary bonus is a crowd puller:

The monetary bonus that the company offers is a great way of encouraging the employee referral method and it also helps the company get the best fit for the vacant position.

It obviously works as a morale booster and the employees try to refer only the best candidate.

3. Best alternatives for recruitment channels:

If you have outsourced the methods of recruitment because of the complications involved in it, then you can rely on the employee referral program to simplify the matter.

The cost will also be reduced in referral recruitment methods. When you are using an employee referral program, then you will save a huge fortune on advertising, job fairs, employment agencies, etc.

Initial screening is done by the employees only, so you can save your valuable time as well.

4. Best suited for specialized positions:

There are some positions that are hard to fill through conventional channels. So, if you have such a position open, then you can definitely try the employee referral program.

Employees network a lot with various people in their own profession or otherwise and this is how they came across some rare talent, which requires an extremely specialized position.

5. The employee retention rate is much higher:

The retention rate in the case of employee referral program policy is much higher as compared to other sources.

It is mainly due to the reason that the new employee is already familiar with the environment and it won’t take much time or effort on his behalf to absorb the culture of your company as he already knows someone from the company.

Disadvantages of Employee Referrals:

Though the number of advantages is quite high in the case of the employee referral program, it is not void of disadvantages as well. Here are some of the disadvantages of the employee referral programs –

1. Risks of getting alienated from other staffs:

When you are hiring someone through reference, then the workforce cannot be termed as even playing turf anymore.

Most likely they will hang-in together, thus raising the risk of getting alienated from other team members.

2. Might lead to charges of discrimination:

If your company is heavily dependent on the employee referral program, then you might face the charges of discrimination from the candidates who have been rejected.

3. Lack of ideas:

The employee referral program could bring in the attitude of stick together, which will hide the organizational problems and in turn increase it.

Even the growth of referral program ideas will also stop and a stagnant stage might appear.

4. The disillusionment of the referral program:

When you have strict guidelines for the bonus that will be paid out for the referrals, then the employees might get disillusioned about the whole process, which will, in turn, lead to the discontent of the employees.

If you want to make the most out of this employee referral program, then you must take into consideration the disadvantages of the process as well and work accordingly. Do not depend on the employee referral program entirely; instead, make use of the best recruitment strategies other sources as well.

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