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10 Compelling Numbers That Reveal the Power of Employee Referrals

by May 7, 2012, 1:24 am ET

I strive to be the world’s most prominent advocate of employee referrals simply because there is no more powerful tool in recruiting. Well-designed referral programs not only identify top prospects that are not in a job-search mode but they also require employees to assess candidates for skills and fit and to sell them on the company and the job. Taken together, this identification, assessment and selling feature make referrals superior to any other source.

If your corporation is not getting close to 50% of your hires from employee referrals, I have gathered 10 compelling numbers that should change your perspective.

Hard data on the value and impact of employee referrals (*see references at the end of this section)

  1. Hire volume — Referrals are the #1 source in hiring volume. *&***
  2. Hire quality — Referrals are also the #1 source for new hire quality.*
  3. Speed (application-to-hire time in days) – Referrals are the #1 fastest time to fill (29 days for referrals, 39 days for job boards, and 45 days for career sites) **
  4. Average length of employment of all initial hires after one year (retention) – Referrals are #1 at 46% retention after 1one year (compared to 33% from career sites and 22% from job boards). **
  5. Average length of employment of all initial hires after two years (retention) – employee referrals are #1 at 45% retention after two years (compared to 20% from job boards after two years and 14% after three years). **
  6. Percentage of all applicants -- Referrals are only 6.9% of applicants **
  7. Percentage of all hires – 46% of all hires at top performing firms are referrals ****, while for all firms, they range between 28% *** and 39.9% of all hires. **
  8. Applicant-to-hire ratio — Referrals are #1 and are hired at a rate of 1 out of 3 applications for top-performing firms and 1 out of 10 at average firms. Compare that to an average applicant to hire ratio of 1 out of 18 from all sources. ****
  9. Cost per hire – Job boards hires cost on average $1,671 versus referral hiring costs of $2,306 (only $635 more). ****
  10. Diversity impact – Despite the old myth that referrals have a negative diversity impact, referrals were #1 as the “most productive” source for diversity hires, well ahead of major job boards, company affinity groups, and diversity career fairs.***

* Source — Staffing.org 2011

** Source — Jobvite index 2012

*** Source — CareerXroads 2011 – 2012

**** Source — Dr. John Sullivan and Associates research 2008-2011

Top 30 Employee Referral Program Benefits

If you are trying to get additional leadership or financial support for an employee referral program and the above metrics are not enough, here is a long list of the benefits that referral programs can provide. The benefits are grouped into two categories, business benefits, and benefits that accrue to the recruiting function.

Business benefits

The benefits that will accrue to the business and to hiring managers include:

  1. Higher candidate quality – data shows that referral candidates can be five times more likely to get hired than other candidates. This is because educated employees know that their role is to seek out individuals with superior skills and experience. And because referral candidates are proactively sought out and prescreened by your employees who know the job and the company, the candidate pool is a higher quality than most sourcing pools that are made up of “active candidates” who found the firm on their own (most referrals are currently employed). Having the candidates prescreened by employees saves on recruiter time and this additional level of screening means having a low percentage of “turkeys” in the candidate slates, which pleases hiring managers.
  2. Quality of hire — new hires from well-designed referral programs routinely produce the highest on-the-job performance of any recruiting source. In addition, referral new-hires have significantly higher retention rates than hires from other sources.
  3. High impact hires – because the best ERP programs prioritize and focus on high-impact and revenue-generating jobs, they produce fast quality hires in the specific business areas where they are needed the most.
  4. Less wasted management time – because these programs generate fewer weak applicants, managers have to spend less time interviewing weak candidates and sorting through less-than-optimal resumes. And because of the quality of the candidates, managers are generally highly satisfied with reqs filled through the ERP.
  5. Candidates are a better fit – well-designed referral programs produce a high percentage of candidates that fit the culture. This is because your employees know your corporate culture and they are able to screen out those who are a weak fit. This means that hiring managers waste less time on candidates with the right skills but the wrong “fit.” New hires who are a better fit may require less onboarding time, less training, and they may reach minimum productivity levels faster because they are instantly a better fit with the team.
  6. Low termination rates – because employees add a layer of skill prescreening and fit assessment, some referral programs have data that prove that referral hires have as much as a 350% reduced chance of having to be fired.
  7. Improved employee retention rates – a referral program that involves a large percentage of your employees will likely increase the retention rates of your current employees. This is because your employees will need to learn more about the practices that make your firm great in order to sell potential referral prospects. This increased understanding and knowledge will help build their pride and their loyalty as current employees because they are reminded why their firm is superior and why they should stay. Widespread learning about the company’s strong points may also serve to strengthen the corporate culture.
  8. Rapid hire capability — Referral processes that are proactive (i.e. they seek out individual employees for referrals) and that contain “alert processes” can notify a select group of employees about an immediate job need. These targeted “special need” alerts generally result in rapid referrals and fast hires.
  9. Faster time to initial productivity – higher quality hires mean that new hires get up to speed faster. In addition, because many employees will mentor, guide, and assist the individuals who they have referred, often the time to productivity will be even faster.
  10. Added diversity — well-designed referral programs have no negative diversity impacts, and targeted ones with an emphasis on diversity can actually increase diversity.
  11. Expanded global hiring capability — with global economic growth and widespread access to the Internet, employee referral programs now work effectively to attract top prospects in most countries around the world. And because the social and professional networks of your employees are now likely to be global, referrals can provide the firm with an important supplement to its current global recruiting capability.
  12. A morale indicator — if employees don’t like a firm or their boss, they will not refer others for a job. As a result, employee referral rates closely mirror employee morale, so managers and HR can use referral rates as an indication of good or bad morale in a function or unit.
  13. Additional employee learning – referral programs cause employees to proactively seek out numerous other professionals as potential recruits. A side benefit of this process of interacting and asking questions of other professionals is expanded benchmarking, added competitive intelligence, and employee learning.

Benefits to the recruiting function

Benefits that accrue primarily to the recruiting function are numerous. They include:

  1. Immediate results — referral programs do not have long development times and fortunately, once implemented, they produce results almost immediately. In fact it is not unusual to double the percentage of referral hires within the first year.
  2. Low risk of failure – as referral programs become more data intensive, the critical success factors that are required for operating an effective one have become clear. Programs designed with these critical components almost always produce a positive ROI and have an extremely low probability of complete failure. Having a low probability of failure is extremely important when your resources are limited and you cannot afford to invest in a failure.
  3. Social network growth makes referral programs even more effective — the tremendous growth of social networks now makes it even easier for your employees to make contacts and to build networks and recruiting relationships.
  4. A stronger employer brand and superior messaging – because your employees “live the job” every day, what they say to candidates is likely to be viewed as more authentic and believable than messages on your corporate website or even sales pitches by individual recruiters. In addition, because they know the job and the managers better, your employees can often provide more detailed and current information about the job and the team than standard recruiters can. All combined, this will greatly strengthen your employer brand while simultaneously increasing the percentage of prospects who are willing to apply for and eventually accept jobs. And if you put together a referral and social media toolkit for educating your employees, your results will be even more powerful. And finally, having employees active on social media will also increase the likelihood that they will identify and counter negative comments that they find about your firm.
  5. Fewer legal issues – referral programs themselves generate few complaints or legal issues. And the resulting better quality hires, fewer turkeys, and lower turnover rates together help to minimize any potential legal issues after hiring.
  6. Less recruiter time required — whenever recruiters are overburdened, any new recruiting program should minimize the use of their time. Employee referral programs leverage the time and the networks of your employees, so for referral candidates a significant portion of the finding, screening, and candidate selling is done by someone other than recruiters. And since nearly 50% of all hires at top-performing firms come as a result of employees’ time spent on networking and social media, recruiters’ time can then be focused on the remaining 50% of the positions. Fewer weak applicants also means that recruiters waste less time on those who have little chance of getting hired.
  7. A broader sourcing network – because your employees interact with similar professionals throughout the industry every day, the combined professional and social networks of your employees is guaranteed to include many times more qualified individuals than the sourcing network of any individual recruiter. And in addition, the existing relationship and trust that your employees have built with individuals in their network make it easier for these employee contacts to be converted into recruiting prospects.
  8. Targeted referrals – if your referral program educates employees so that they know which specific firms you would like to target, the number of referrals from benchmark firms will increase dramatically.
  9. Employee willingness to participate – nearly 60% of all employees express their willingness to participate in employee referral programs. And if your program is highly responsive, you will continue to get referrals from a broad range of employees.
  10. A long-term impact – once you have successfully rebuilt your program, you can expect the positive impacts on recruiting to continue for at least two years without major changes to anything other than marketing materials and rotating prizes (if you are in a company that does not provide incentives, you still need a program/process).
  11. High-volume capability – across corporations, referral programs routinely produce the highest volume of hires, a larger percentage than from any other source.
  12. Lower costs – expanding the use of referral programs for executive and technical positions can dramatically reduce executive search and agency fees. Well-designed referral programs deemphasize large individual referral bonuses (or sometimes no bonus) and as a result, your cost per hire can actually be lower than traditional sources. When significant individual referral bonuses are used, they have the added impact and benefit of putting more dollars into your employees’ pockets, aiding retention. And finally, because employees frequently go to conferences and professional events and because the cost of their travel is already covered, the company gets the benefit of on-site face-to-face recruiting and the recruiting department doesn’t have to send a recruiter and pay for his or her travel.
  13. PR and product branding value – having thousands of employees talking to their friends and colleagues every day about the firm, the quality of its products, and how well it is managed has a tremendous product branding value.
  14. Executive search capability – employee referral programs also work well for vacant executive positions. A well-designed executive referral component can supplement the use of agencies and reduce the total fees paid to them.
  15. Improved college recruiting — because referral programs can be successfully applied to college students who are extremely well-connected, your college recruiting results could improve significantly, especially at schools that you can afford to physically visit.
  16. An increased appreciation of the role of recruiting – effective referral programs make recruiting highly visible, and as a result, the program can make recruiting a continuous topic of conversation and focus throughout the organization. Well-designed programs cause employees to develop a feeling of ownership for the hiring process. Once involved, employees see both the difficulties and the benefits of recruiting, and as a result, their understanding of and their respect for the function almost always increases.
  17. Vendor support — the development of a strong vendor community in the area of referrals makes it easier to get supplemental help and technology support for your corporate program.

Final Thoughts

If you are currently considering a redesign of your recruiting function, focus your limited time and resources on programs with the highest immediate impact, the lowest cost and the smallest chance of failure. You simply have to get it right the first time. Fortunately, all of the data indicates that one single option stands out far above all others. And that is implementing or upgrading your employee referral program/process to take advantage of the growth of social networks.

If you want to look good fast and you can’t afford a long learning curve or to suffer from a major failure, there is really no other first option.

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.