Budgeting for a World-Class Employee Referral Program

Mar 23, 2008

by Dr. John Sullivan & Master Burnett

It’s no secret that employee referral programs are proving themselves around the world to be a highly effective and efficient channel for sourcing quality candidates. While many employers are drawn to the source based solely on attractive cost-per-hire predictions, those savvy enough to measure the impact post implementation are finding out that candidates sourced via referral are more apt to:

  • Meet job requirement expectations.
  • Accept offers more often.
  • Meet minimum standards of productivity faster.
  • Perform better long-term on the job.
  • Turn-over less often.

While on average only 1:3 firms measure the economic impact of these factors, those that do can easily attest that employee referral programs produce one of the highest ROIs in the HR function and possibly even the enterprise.

Past experience with ERPs, success stories in the media, and unrelenting demand for top talent has led nearly every major company competing for talent on a global level to either initiate a new program or reinvigorate an existing program in 2008. One question that nearly everyone is asking is “How should we budget for a world-class employee referral program?” It’s a great question.

World-class programs elevate program execution to an art form with scientific precision, and carry out a number of activities that average programs often overlook or discount.

Those activities have a cost associated with them, some of it fixed, some of it variable. Our research found that the average-performing program, one that produces approximately 26% of all hires, had a cost per hire (inclusive of bonus amounts paid) of $2,306. The top-40 performing programs invested more, paying out nearly $5,855 per hire on average, and that difference had nearly nothing to do with the reward.

In 2006, it took hiring 38% of all hires via employee referral to make the top-40. By 2007, that percentage had grown to 46%. If early statistics prove indicative, by year’s end it will require hiring more than 62% of all hires via employee referral to rank among the best in 2008.

$3,549 Well Spent

Some people see the added cost-per-hire to run a world-class program and immediately think it would never work in their organization. Other, more strategic recruiting professionals, see the added cost-per-hire and start to wonder what return warrants the added investment.

In 2006, Booz Allen Hamilton surveyed 73 major employers, and 88% found that hires made via employee referral performed better on the job than candidates hired via other sources as measured by their companies’ performance appraisal systems. If those systems were valid, that performance must be worth something, right?

Based on that statement, we looked at the companies with top-40 ranked employee referral programs and asked them to complete a statistical analysis of their programs’ performance, looking in particular at the factors mentioned in the opening of this article. While not all 40 completed the analysis, those that did found some startling numbers.

The following chart presents the minimum and maximum observed data points between employee referral program hires and hires by all other sources combined with respect to each of the measures previously mentioned.

If you have ever spent time as a line recruiter, a few of these data points should have jumped out screaming at you! At the very least, applicants via the ERP were 13 times more likely to meet job requirements, and 17% more likely to accept an offer. Immediately that should register a recruiter time savings, but think of the time savings for all managers and employees involved in the assessment process!

Start tacking on the savings related to decreased turnover and increased productivity and you can easily see why companies with top-performing programs are not pinching pennies.

How Top-Performing Programs Spend the Extra Money

  1. Applies dedicated resources. Every one of the companies with a program in the top-40 had a dedicated program manager in place to drive the strategy and execution of the employee referral program by the end of 2007. The smallest company in the top-40, employing just over 3,000 employees, has a dedicated team comprised of a program manager, communication specialist, and full-time recruiter. The average number of dedicated ERP staff per employee in top-performing programs is 1:1,390.
  2. Has a documented strategy. Most employee referral programs are managed in an ad-hoc employee opt-in manner. Such approaches limit the strategic value of the program by failing to incorporate program drivers that create activity when needed most in the most needed areas. World-class programs coordinate program execution with the overall staffing strategy and workforce plan to drive the volume necessary into the process to create the output volume of hires needed based on traditional yield model analytics. Our research demonstrates that programs that lack the proactive management element are more apt to fill the ERP pipeline with candidates who approach employees asking to be referred versus employee sourcing and selection of top talent.
  3. Has specific goals and objectives. Because most programs lack formal management, it is not uncommon for the average program to have no specific goals. The absence of such goals leave program communications, reward structure, and program evaluation baseless. World-class programs determine probable participation rates by various demographic strata; set targets for program performance; establish tracking metrics; and leverage the data to drive decision-making around participant experience.
  4. Places emphasis/priority on mission-critical jobs using differentiated communications and rewards. It’s great when an employee refers a friend who they would like to work alongside, but that doesn’t mean the company has a need for that person at that time. Truly strategic referral programs attempt to drive traffic into the program by leveraging demographically targeted custom communications and differentiated rewards. While they may still leverage companywide communications from time to time, the bulk of ERP-authored communications in top-performing programs is directed at the team/department level and frequent in nature. Most top-performing programs deliver targeted messages weekly regarding hot jobs, tips for identifying talent, sharing success stories, etc.
  5. Prioritizes referrals. This is based on three elements: quality of the referral source; the position being referred for; and competitive intelligence drivers. Remember: Homer Simpson knows people, too! World-class programs prioritize response to referrals based on what is needed most by the company. If Employee A has a phenomenal track record for referring candidates the org hires, then his referrals should be fast-tracked. Likewise, if Employee B has referred 100 candidates, none of which the org has ever hired, he/she should be banned from the program! However, at times the org may also want to prioritize response based on competitive intelligence needs. Candidates often give up lots of info during interviews, info which when aggregated can have significant strategic value to senior leaders.
  6. Periodically adjusts communication strategy based on employer brand and positioning strategy. Most programs communicate stale, generic messaging and do it for long periods. The human mind is insanely powerful at filtering out patterns. How long after a new billboard is installed along the freeway do you continue to notice it? Communication approaches should last no longer than 90 days and be tied to the audience. A few messages can be organization-wide, but most should be department/function/location centric.
  7. Uses a viral marketing engine to drive engagement and disseminate selling stories. You could pretty much take messaging from Company A and put Company B’s name on it and no one would know the difference. Messaging that originates in HR is often so generic that it is immediately ignored by the educated masses we seek to influence in recruiting. World-class ERPs coordinate their efforts with the employment branding program to develop an inventory of “Wow!” stories that are so compelling they spread virally. Such stories truly differentiate an organization in such a way most competitors cannot compete. These stories provide an arsenal of things for employees to share in social settings and to leverage when approaching a potential recruit. (If you can’t think of any such stories for your organization, you should quit!)
  8. Uses a combination of push/pull techniques to manage flow of inbound referrals. Some percentage (between 12% and 23%) of employees will voluntarily refer someone at some point during their tenure with the organization even if the organization doesn’t have an ERP. The secret is to manage the process such that at least 25% of the organization is participating annually.
  9. Provides extreme customer service. Employees are special people, we already know them and can evaluate their performance, yet we treat their friends and colleagues like crap, often just like we treat applicants walking in off the street. All referrals should receive a custom response within 72 hours of submittal. The referring employee and the referral should receive status communications at every step in the process, including a communication upfront to establish the process and likely timeline so as to set expectations. Our research shows that more than 72% of employees who have participated in their companies’ ERP program found the experience unpleasant. More than 68% were not likely to participate again.
  10. Uses existing information to minimize assessment steps. ERPs are all about the perception of special treatment. World-class programs leverage any and every piece of existing information about a candidate to minimize the assessment steps needed, making it look like the organization is skipping steps in their otherwise tedious process.
  11. Uses technology wherever possible to provide 24/7 service. While a few of the top-40 programs are purely human-powered, many are leveraging home-grown technology systems and customized ATS systems to enable customer-service 24/7. If you have turned off the module that allows employees to track referral status in your ATS, turn it back on and start populating it with real feedback. The one caveat to using technology: DO NOT UNDER ANY CIRCUMSTANCES FORCE EMPLOYEES TO USE THE REFER-A-FRIEND FUNCTIONALITY IN MOST ATS SYSTEMS THAT DOES NOTHING MORE THAN SEND A URL ASKING A REFERRAL TO TORTURE THEMSELVES BY COMPLETING THE SAME GENERIC APPLICATION AS EVERYONE ELSE! Instead, make it easy. Use a simple form asking for contact info, how the employee knows the candidate, what makes them think the candidate would be a good fit for the role/company, and whether they would be willing to vouch for the candidate as a quality hire. (Nothing will reduce the amount of chaff in the referral system more than asking that last question!)
  12. Has extensive metrics to monitor/diagnose the process and program. Self explanatory!
  13. Rewards all activity. Most programs send a generic, automatically generated thank-you note upon submission. Unless a hire is generated, that is often the only communication a referring employee will ever get. World-class programs seek to drive program participation and that translates into rewarding all activity in such a way that employees are not motivated to refer for reward sake, but feel valued by the process.
  14. Has open participation to all stakeholders. Lots of stakeholders related to the organization can source top talent, but most organizations limit participation to existing employees. World-class programs allow former ee’s, consultants, contractors, shareholders, etc. to refer.

Putting a Final Figure Down on Paper

As consultants, we learned a long time ago that what one company can do with $100,000 would take another organization five times as much (think government). The secret to budgeting for a world-class ERP is working backwards. Ask yourself the following:

  • How many hires are projected for the next budget cycle (growth + attrition)?
  • What percentage of hires would we like to generate via the ERP: 35%, 46%, 70%, or more?
  • To realistically be capable of delivering the experience outlined in the section about what top-performing programs do differently, what resources would be required in your organization?
  • Estimate the cost for each resource identified and total them up.
  • Now add about 20% to cover things you might have overlooked and you’ll have a decent budget for year one.

Final Thoughts

Most organizations really miss the mark when it comes to managing their employee referral program. The biggest mistake they make is trying to do it cheap and thinking that employees will understand when they never hear anything back.

Managed correctly, ERPs can have significant impact on an organization’s capacity and capability to achieve their strategic objectives, two things anyone who has ever spent time in operations will tell you are key. Sure, it may seem like managing the program well will make recruiters less necessary, but in reality, it proves that recruiters can work smarter and demonstrate strategic-level contributions.

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