Approaching Referral Fees With Your Business In Mind

Dec 20, 2010

As we finish the fourth quarter of 2010 and enter a New Year, I encourage you to consider a New Year’s resolution around the idea of generating more business and candidate leads through referrals. That being said, a question arises that has been asked for as long as recruiting has been a profession: Should we pay for referrals?

More and more executive recruiters are being faced with the question of “referral fees” by professionals we are contacting in our day-to-day recruitment campaigns. I know my firm has seen a real increase in the past year or two and this raises many questions. As an industry, how do we want to respond to this dilemma? As a recruiting firm owner, how do I train my Account Executives and Recruiters to respond to this question? Is this ethical? How do I capture this expense in my accounting? Do I need to file a 1099 when I pay someone a “referral fee”?

This is kind of a “HOT” topic with many in our industry. On one hand, I know what my time, energy, and skills are worth. I feel very passionately about the fact that we “earn” a living through hard work and dedication. Talent acquisition, when done properly, is a very professional and detailed step-by-step process. For the most part, we don’t see other professions offering significant referral fees for business and many of us don’t like the feeling of giving up a portion of the fee that we worked so hard to earn. However, I also believe that if the recruiting firm has a policy for referral fees and if the recruiter is ok with giving up a portion of the fee for a referral, it does increase the possibility to make a placement you otherwise would not have made.

In writing this article, I did a lot of thinking on the subject and spoke with some of the top recruiters and recruitment firm owners that I know. As I suspected, many were divided on the subject. Some pointed out that if you were selective by only paying those that asked about the referral fee, you could alienate or upset other trusted partners that referred people to you without receiving a referral fee. That is, if they later found out that you had a “referral fee” policy. Is your referral policy consistent & uniform or do you change it on an as needed basis?

I believe this issue will become more and more of a hot topic in our industry over the coming year, so I will share some of my thoughts to help you better deal with this in your office and on your desk.

  • Consider an established policy one way or another for your office and clearly write out how much and how your referral policy works.
  • Consider only paying “referral fees” only on the most difficult-to-fill searches or perhaps only on searches in which the client company offers to cover the extra cost.
  • Train your AE’s & Recruiters on language that will help them get the referral without having to pay a referral fee. (See Suggestion Below)
  • Be very specific when discussing the details of your referral policy with someone who will be referring candidates to you. A detailed & professional referral policy will preserve the relationship for future business. For example:

For the position of “I.T. Security Manager” we’ve approved a referral fee of $1,000 to anyone who refers someone to us, if we place the person with our client within six months and provided that it is a candidate that we don’t already know or that we haven’t already communicated with. The referral fee is paid after we receive payment from the end-client and after the terms of the “Guarantee Period” have been met.

  • Before quoting a referral fee amount, ask them what they think a quick referral would be worth to them. Maybe they’ll suggest a $50 gift card.
  • A brief survey of five other recruiting firm owners, revealed that when recruiters do pay referral fees, they generally are in the $500, $1000, to $2500 range.

Even if you or your office personally believe in paying referral fees, I encourage you to limit the practice as much as possible. Not only is it better for your own bottom-line and profit margins but it also helps to protect the industry as a whole. Remember, we work hard and provide lots of value-added services over the course of our business relationship with a client. Sourcing/Recruiting, Qualifying, Interview Preparation, Interview Debriefing, Offer Negotiating, On-boarding, and many other services are included with most of our services.

When you find yourself discussing referral fees with a professional in your industry or with a fellow recruiter, I encourage you to consider a professional, yet challenging response that will allow you to get the referral without having to pay a referral fee. Best practices and example questions or statements are below to help you prepare for your next discussion on referrals:

  • Close every good recruiting and business development call by asking for a referral.
  • One of the best times to ask for referrals is after placing a candidate or filling a role for a client. This is also a good time to ask for a testimonial.
  • Do NOT ask, “Who do you know that is looking?” Instead, ask, “Who do you think is an ‘A Player’ that may have the qualifications for a position like this?”
  • Track the number of referrals you get as a key-metric to measure your improvement in this area.
  • When someone asks you if you pay a referral fee, have a prepared response.
  • Discuss the “Pay it Forward” concept and plant the seed of how it feels to be a good Samaritan. It feels good to do good. What goes around comes around.

Here is an example response (one which I use myself):

“We rarely pay referral fees unless it is approved by the client and usually on engaged or retained searches, or on very difficult-to-fill searches. My job is to help people improve their current situation and we often times help people accelerate their career faster than if they stayed in their current position. I guess my hope is that if you have a friend or colleague that you think highly of, you’d also want to help them if you knew I had an opportunity that could potentially be very beneficial to them and their family. I find that most people want to be helpful when possible and hopefully they’re willing to let each person make up their own mind as to whether they’re interested in the opportunity. Do you think it’d make the most sense if I confidentially called your referral and left your name anonymous or would you like to send an email introducing the two of us?“

However you decide to deal with the issue of referral fees, you’ll be able to better handle the situation if you are prepared. Understand your personal and company policy on this issue and role-play your response so that you can minimize the number of referral fees you pay each year. If we all take this issue to heart, we may just save our industry millions of dollars over the next decade, and you may increase your billings in 2011.

this article is from the December 2010 print Fordyce Letter. To subscribe and receive a monthly print issue, please go to our Subscription Services page.

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