Employee Referral Schemes: The Secret Weapon in Your Hiring Arsenal?

<div class="grey-callout"><h2>Key Takeaways</h2><ul>
<li>Effective recruitment method: Employee referrals use employees' networks to attract qualified candidates, often leading to improved retention and performance.</li>
<li>Diversity concerns: Referrals can lead to a lack of diversity, as employees tend to recommend people similar to themselves.</li>
<li>Cost-effective: Often, referrals don’t require significant financial incentives, as employees are motivated by helping their friends and improving their workplace.</li>
<li>Potential risks: Dismissing a referred employee might result in losing the referring employee as well, due to loyalty.</li>
<li>Ongoing promotion: Regularly refreshing and promoting the referral scheme helps maintain its effectiveness and engagement.</li>
</ul></div>

What are Employee Referrals?

Employee referrals are a method of attracting passive applicants where employees recommend friends, family, past colleagues, and acquaintances, to apply for jobs. As the saying goes, “It is not what you know, but who you know that matters”.

Employee referrals are successful because they tap into a human desire to share good news with people we care about and like. Additionally, it gives employees responsibility and involvement, which can lead to a sense of achievement.

However, it can be painfully slow to develop employee referrals.

It is quite straightforward. The contact details or CV are given directly to the employer who then continues with a slightly adapted recruitment process. Because employees are making personal recommendations, applicants are pre-screened to a degree, leading to improved employee retention and performance (LinkedIn, 2015).

Unfortunately, the pre-screening is a double-edged sword as people tend to know others like themselves, creating diversity issues. For example, Huang (2024) reported that of 100 referrals, 44% will be white men, 22% will be white women, 18% will be men of colour, and 16% will be women of colour. For this reason, employee referrals should be one of many Applicant Attraction Channels.

Glassdoor (2015) suggests applicants are 2.6% - 6.6% more likely to accept a job offer if referred

If the recommended candidate is employed, the referrer may receive a referral reward, such as money or gifts.

Employees who successfully refer new staff will likely stay longer (LinkedIn, 2015), probably because they feel obligated to stay as they would be letting their friends down by moving on. Similarly, a report by Deloitte (2020) suggests that employees who are referred are more likely to be retained.

However, when dismissing a referred employee, an employer might also lose the referrer due to their strong loyalty. Losing multiple employees is a particular problem if referring family members. I consistently saw this when recruiting for a large employer based in Wales; almost entire families would come and go because of (misplaced) loyalty

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<span class="grey-callout"><span class="text-color-purple">Note:</span> I would like to provide some balance to the statistics I’ve just shared through surveys from Deloitte, LinkedIn, Glassdoor, etc. Respondents are from large, well-resourced, well-known, and well-respected companies. The Deloitte research, for example, was from companies with a turnover greater than $500 million. Therefore, the results are biased, and few companies can achieve similar results.</span>

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Another problem is that those surveyed are often from a global demographic and the surveys don't consider cultural nuances. 

Finally, the surveys are often from a small sample. Again, the Deloitte survey was based on only 560 employees, and 71% of them were male.

So please treat these surveys with some scepticism. If you work in a smaller company, you will naturally have less potential for employee referrals, and the results will not always be like those of corporations.

Which Business Should use Employee Referrals?

Whilst almost any business can benefit from employee referrals, the size and nature of the company can affect its success:

• Size of business: Larger businesses have an advantage due to the “network effect” where a larger workforce has a broader network of potential referrals. This is particularly useful for companies with a diverse range of roles, as they can tap into various networks across different departments and specialisations.
• Employee experience level: More experienced employees have more established professional networks. However, if you’re specifically looking for early career jobseekers, you will most likely find them referred by less experienced employees.
• Nature of the industry: Employee referrals are more important when specialised skills and talent are scarce. In contrast, industries with more general skills are not so dependent on referrals.
• Positive employer brand: Satisfied employees are more likely to refer to their network.

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What Type of Job Can you Fill Using Employee Referrals?

Companies can use employee referrals for almost any type of job. They are even more effective for hard-to-fill jobs such specialist roles and leadership positions.

However, if a job is confidential or urgent, employee referrals are less suitable. Instead try a job site or recruitment advertising agency; or a recruitment agency, recruitment advisor or HR consultant.

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When Would an Employer use Employee Referrals?

It is essential to start employee referrals early in the recruitment process. This is because it takes time to get referrals, and as it is a cost-effective recruitment solution it can slow burn without wasting money.

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How Much do Employee Referrals Cost? Time vs. Money

The main cost of employee referrals is the time involved in setting them up and continuing to promote them.

Often, no reward is necessary for employee referrals. Studies show employees recommend for emotional and altruistic reasons, such as helping a friend or making their organisation a better place to work.

If you do offer a reward, it should be a small gesture, being a balance of saying “Thank you” and motivating quality introductions. It does not necessarily have to be a financial reward, but a perk like a small gift or additional holiday allowance. You might also give the bonus to charity, removing the perceived bribe element. Research by Pieper (2017) showed that a higher-value incentive does not create a larger number or better quality of applicants.

Because employee referrals can create diversity issues, referral bonuses could be increased for recruits in underrepresented groups (Bhattacharya, 2015).

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Do Employers Have any Guarantees when Using Employee Referrals?

There are no guarantees of filling a job via employee referrals. You can also get diminishing returns as repeatedly asking for referrals can exhaust employees with limited networks.

The best safeguard is to tie referral bonuses to the referred employee completing their probationary period. This helps align the referrer with the candidate’s long-term success in an organisation.

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How to Set Up an Employee Referral Scheme

Here is a step-by-step guide to building an employee referral scheme that works:

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Step 1: Make your business worth referring

It may sound obvious, but only great employers deserve referrals in the first place! This does not just mean having an employer career page that gives a perception of being a great employer. It means treating employees with care and appreciation and having career prospects that meet their expectations.

A good question to answer is, “How do I make this such a great place to work that staff want their friends and family to join?” Taking action helps an employer become worthy of referrals; it will also improve staff retention and reduce the need to recruit in the future.

If a company is not getting employee referrals, this could be feedback that it is not an employer worth recommending, and so its employees aren’t engaged.

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Step 2: Ask for employee referrals and sharing on social media

An employee referrals policy and other templates are available for you to download from my website. Details are at the end of this article.

Start by emailing or messaging employees about the employee referral scheme.

Generally, it is best to raise awareness of each vacancy in a low-key way. Otherwise, if you constantly ask employees for help, they become fatigued, and requests become “noise”. If you have multiple job vacancies, sending a weekly bulletin is better so employees are not receiving too many messages.

The message should succinctly explain:

• A brief overview of the job.
• How employees can easily submit their referrals.
• Remind them of any referral rewards.
• If a job is advertised online, include a link encouraging employees to share the job advert on social media.

Good referrals can also come from one-to-one conversations with:

• New employees: Ask, “Who did you previously work with that was a Great Performer?”
• Existing employees: Ask, “Who are Great Performers you know that we should recruit?”
• Customers: They interact with suppliers and competitors. Ask, “Who do you rate highly at suppliers or competitors whom we might want to recruit?”
• Suppliers: If you value a supplier’s employee more than the supplier relationship itself, you may wish to poach that member of their staff. Alternatively, you may be able to place a “Help Wanted” advert in a supplier’s shop. For example, a hiring manager recruiting tree surgeons placed an advert in a shop where they purchase equipment. It cost almost nothing and got highly relevant applicants.

If employees struggle to answer, jog their memories by being more specific, for example, “Who is the best credit controller you have ever worked with?”... “Where are they now?”

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<span class="grey-callout"><span class="text-color-purple">Tips:</span> Specific advice about asking for referrals:
<ul><li>Employees are putting in a lot of effort to get referrals, so make their lives as easy as possible. Avoid asking them to get CVs or submit details via an employer career page. Streamline the process by only asking for the applicant’s name, email, and telephone number to be sent to HR or the hiring manager.</li>
<li>Generally, HR and internal recruiters are not eligible for referral rewards. They already get paid for this job and should not be put in a questionable position about where applicants came from.</li>
<li>Senior leadership might also be excluded from referring employees for their department to avoid accusations of bias.</li>
</span>

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Step 3: Introduce yourself to a referral correctly

It is important to respond quickly and prioritise referred applicants. A referrer has probably raised an applicant’s expectations, so a lack of responsiveness builds up bad feelings, and the employee will not be inclined to recommend anyone else in the future.

Even if a referred applicant is obviously unsuitable – whilst it wastes everyone’s time and gets hopes up unnecessarily – an employer may feel obligated to have a conversation to avoid offending either the applicant or the employee who referred them.

When approaching a referred applicant, remember that they can rebuff a poor introduction, so proceed cautiously. 

Phone them first, “You were recommended to me by {referrer name}, as I understand you’re great at your job, and I’m always looking for talented staff. I’d love to discuss whether our company may be a good fit for you. Is now a good time to talk?”

Email them as a last resort if it is difficult to reach them on the phone. Some key points include:

• Mention the referrer’s name: If applicants see a familiar name in the subject line, they are more likely to open and respond to the email.
• Use a friendly yet professional tone.
• Briefly explain the role: Make them curious enough to start a conversation. 
• Clearly explain the next steps: Arrange a phone call as it is more personal. I don’t recommend asking them to apply via an employer career page because it is often a lot of effort and too formal.

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Step 4: Start the selection process

If the initial phone call went well, start the selection process with Telephone Interviews. Some employees may have misunderstood the job and recommended irrelevant people, or they may have become desperate to receive a referral bonus and recommend anyone! Therefore, Telephone Interviews limit these risks and ensure you spend time with suitable candidates.

There is lots of recruitment advice contained within my recruitment book. Some specific to employee referrals includes:

• Be especially careful when you need to decline unsuitable candidates. A generic email will not suffice; a Templte for Declining Unsuccessful Applicants by Email is available.
• Referrers should not be involved in the recruitment process.
• If mis-hires from referrals occur, do not blame the referrers. However, if mis-hiring becomes a problem, improve the recruitment process, and perhaps make incentives dependent on a successful tenure of six to 12 months.

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Step 5: Follow up with referrers

Referrers have made a lot of effort and deserve to be kept in the loop. At the very least, thank them for each referral. Even if you are swamped with work, if you don’t meet this basic expectation, you’ll lose the referrer’s trust, making them less likely to recommend someone again.

If they were incentivised with a referral reward, make sure they receive it!

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Step 6: Keep refreshing the employee referral scheme

After a while, an employee referral scheme can become stale. Employees know about the scheme, but constant announcements become less exciting and possibly ignored. Therefore, here are some ideas to keep it fresh:

• Referral socials: Host referral happy hours by inviting colleagues for pizza and drinks.
• Graded rewards: Incentivise based on outcome. For example, offering a small reward for all applicants shortlisted, another reward for those who got an interview, a larger reward for those who started, and a final reward for those completing the probation period.
• Alternative rewards: Instead of monetary rewards, perks can be offered, such as gift cards, hospitality experiences, and personalised presents.

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Software to manage employee referrals is not required

Try employee referrals before buying any software “solutions”; it is likely you have everything required:

• Use existing email, a messaging app, intranet or even your workplace notice board to inform employees of job opportunities.
• You will not get inundated with referrals, so use a spreadsheet or something similar to keep track of referred candidates.

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Additional Resources

• Recruitment Book: The Secrets of Great Recruitment - How to Recruitment Great Employees.
• Downloadable PDF guide; Simple Steps to Create a Powerful Employee Referral Program.
• Downloadable script; Introducing Yourself to a Referred Applicant
• Article; Employee Referrals: An Overview of Using Networks for Talent Acquisition.
• Article; How to Contact a Referred Applicant.
• Article; Employee Referral Policy Template.
• Article: Employee Referral Scheme: Announcement Email: Why Your Next Hire May be Just an Email Away.
• Article; Employee Referral Scheme: Email Announcing New Job.
• Article; Employee Referral Bonus Examples: 10 Rewards That Drive Quality Referrals.
• Article; Employee Referral Scheme: Email Conacting Referred Applicant.
• Article; Advantages & Disadvantages of Using Employee Referrals for Recruiting Staff.