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How to create and implement an employee referral program

Last updated

11 September 2023


Dovetail Editorial Team

Reviewed by

Shawnna Johnson

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In highly competitive fields, companies often struggle to find employees with the required skill sets and fit in with the company's culture and values. A growing trend in the job recruitment field is the use of employee referral programs (ERPs).

As we'll see in this article, an ERP can be a powerful tool for quickly bringing in high-quality candidates, even in competitive job markets.

What is an employee referral program?

Finding the right employee isn't just about skill set. A new hire needs to integrate seamlessly into the existing company culture. It can be difficult for companies to find someone with the skills and attitude to fit their needs.

However, existing employees often have like-minded friends and acquaintances. When those connections share the same skills and attitude as an existing worker, the odds of them being a good fit are elevated.

An ERP takes advantage of this. Much like a customer referral program rewards existing customers for bringing in new ones, an ERP rewards existing employees for bringing in new hires. Modern recruiters are increasingly relying on this method for the same reason sales departments rely on customer referrals: it works.

Why do you need an employee referral program?

We've mentioned ERPs bring significant benefits. Now let's take a closer look at what those benefits are. Here are just a few reasons companies are increasingly turning to ERPs:

  • Enhancing candidate quality: When an employee recommends someone for a job, they put their reputation on the line. This makes them more likely to only recommend well-qualified candidates.

  • Accelerating recruitment process: From first contact to the first day on the job, the recruitment process can be long. Employees often refer candidates quickly which eliminates the normally lengthy period of sourcing talent.

  • Cost savings: Ordinary recruitment methods often require advertising or third-party sourcing, neither of which is cheap. Even with generous rewards, ERPs tend to be more cost-effective than searching for applicants using traditional methods.

  • Improved retention rates: Because they already have a connection to someone at the company, employees hired through an ERP tend to stay longer, as opposed to those who are hired through more traditional routes.

  • Strengthened company culture: When employees feel they have played a part in the hiring process, it fosters a sense of belonging and camaraderie that improves company morale and culture. Additionally, employees typically refer candidates whom they know will fit culturally in the organization.

Is there a downside to an employee referral program?

Although the many benefits they bring have made employee referral programs popular, there are a few potential downsides to consider:

  • Lack of diversity: Employees usually refer people from similar backgrounds as themselves, which can limit the diversity of your candidate pool.

  • Potential for favoritism: Referral programs by nature bring in candidates with some form of relationship with trusted employees, increasing the chances of favoritism.

  • Over-reliance: If you begin to rely too heavily on a referral program, you might miss out on great candidates from other sources.

  • Workplace dynamics: Having too many employees who know each other outside of work can increase the chances of personal disputes spilling over into the workplace.

  • Pressure on employees: Employees might feel pressured to refer someone, even if they aren't sure about that person's fit for the position.

The two types of employee referral programs

ERPs can be approached in one of two ways, each with its own set of pros and cons.

Traditional cash-based ERPs

The traditional style of ERP offers financial rewards to employees who refer a candidate who goes on to be hired. These rewards can vary depending on the type and level of position or how difficult it is to find an applicant for the role.

Most cash-based ERPs pay a bonus to the referring employee after a specific period, usually 30–90 days after the candidate is hired.

Incentive-based non-monetary ERPs

For extra cost savings, some companies opt for non-monetary rewards for referring employees. This may include extra days off, exclusive events, formal recognition, and anything else employees may value.

Comparing the pros and cons of each type

Deciding which approach to use for your business depends on your needs and goals.

A cash-based approach provides a direct incentive for employees to consider their friends and colleagues as potential new hires for the organization. Unfortunately, that engagement might come at the cost of quality referrals as employees are interested primarily in getting paid. It can be great for companies with urgent, limited staffing needs. For less urgent, longer-term needs, it can become expensive quickly, depending on the reward.

A non-monetary approach may attract referrals that better align with company culture. Employees will participate largely out of a sense of belonging within the company. It is the more cost-effective option, but the volume of referrals could be much lower than with cash-based rewards.

Before you start an employee referral program

Given the tradeoffs between the two types of ERP and the other factors involved, proper preparation is key to creating a successful program. There are three major elements to consider when preparing for an employee referral program.

Understand your company's hiring needs

Although ERPs may be similar to customer referral programs, employees are not customers. You are much more picky about hires.

Consider the roles your company needs to fill and the skills and qualifications for those positions. As you create your ERP, this information will help you align it with the company's strategic objectives.

Align ERPs with your company's values and goals

Everything your company does should be an extension of its culture and values. This includes implementing an ERP. The incentives and rewards should align with your values as a company. For example, a company focused heavily on teamwork may create group-based rewards so employees work as a team to bring in referrals.

Aligning with existing culture will boost participation and increase the number of referrals that fit the culture.

Gain leadership buy-in and support

Very few programs can work without support from organizational leaders. To sell leaders on the idea of an ERP, prepare a compelling business case that highlights the benefits discussed in this article.

Leadership buy-in will provide a powerful advocate for the program and the necessary resources to implement it.

Building your company's employee referral program

With the preparation out of the way, you can take the first steps toward creating an ERP. We’ve identified eight important steps and best practices that will boost your hiring prospects and engage your employees.

Step 1: Define program objectives

The first step is to define clear, measurable objectives. Are you aiming to fill a certain set of positions, improve hiring quality, or enhance employee engagement? The goals you set will guide your program's design and allow you to track its success.

Feedback from all key stakeholders is important here, to ensure everyone agrees how well the results of your efforts align with company goals.

Step 2: Choose incentives wisely

The incentives you choose should be something your employees will value enough to engage with the program. As discussed in the previous section, you should also find ways to align them with the company culture.

If using a monetary reward system, calculate how much you can afford to spend for each successful referral. For non-monetary systems, make sure your employees find value in what you offer as a reward.

Step 3: Establish clear guidelines

The ERP guidelines outline the referral process. They'll let employees know the eligibility criteria and the steps they must take to submit a referral. The guide should be detailed and cover every scenario to minimize confusion and disputes. If confusion or disputes arise, the materials should be updated to avoid the same issue in the future.

Examples of what to include are how to make the referral, what’s required for the submission, and when to expect payment.

Step 4: Develop an intuitive referral platform

Whether you develop it in-house or use a third-party solution, the platform handling the referrals must be easy to use. It should allow employees to easily submit referrals, track their progress, and be notified of updates on the process. The more seamless the experience, the greater participation will be.

The tool should also be flexible enough to automate as much of your reward structure as possible.

Step 5: Communicate program details

Employees can't participate in a program they know nothing about. Your ERP launch should be accompanied by a strong communication plan. Use engaging materials that detail the program's benefits, guidelines, and incentives. Use as many internal communication channels as possible to get the word out. Management should encourage participation in the program during its initial rollout and among new hires.

Step 6: Train employees and managers

At launch, there will be questions about how the program works. To ensure the greatest level of participation and minimal confusion, conduct training for employees and managers about how the program works.

Provide an effective way of answering any questions members of staff may have. If questions frequently arise, use them to update the materials.

Step 7: Recognize and reward

To get the most engagement possible, recognize and reward the employees who actively participate in the program.

Company announcements, newsletters, and other internal communication programs can celebrate the achievements of the program. This will create a sense of accomplishment for the referring employee and encourage others to join in.

Step 8: Monitor and evaluate

Like many other business processes, an ERP needs to be constantly refined for the best results. Track metrics such as referral count, quality of hires, and time to hire. Calculate the ROI you're getting out of the program to ensure you aren't spending more than you should.

Make changes when there are shortcomings in any of the metrics. Feel free to experiment with different strategies to find what works best for your company. At regular intervals, gather employee feedback about the program and make adjustments where necessary to improve participation.

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