Updating Your Employee Referral Program — ERE Community Q&A Part 3 of 5

This article is the third in a five-part series on updating your employee referral program. Look for the rest of the questions Thursday and Friday. Part one and Part two are online.

These questions are derived from a recent webinar on how to drive better understanding of world-class employee referral program practices and support continuous improvement of a sourcing channel that has become the dominant source of quality hires for many organizations.

Questions on Reward Methodologies

Any recommendations for paying after X number of days versus paying 50% up front and 50% after X number of days? That’s an easy one. Never ever delay payment — it’s a program killer. Try giving your kids their Christmas presents six months later in July, and see how happy they are with the idea. For rewards to have their desired impact, they must come almost immediately after the action. If you’re concerned about the turnover rate of a certain employee’s referrals, you need to realize upfront that the referring employee can do little to control the factors that impact the retention of new hires. If an employee quits within six months, blame the hiring manager (maybe you should ask them to repay the referral bonus out of their paycheck!). If a particular employee’s hires all quit, first talk to them, and if necessary, ban them from participation in the referral program. Don’t punish everyone for the errors of a few. Another innovative way to tackle this issue is to advertise a bonus lower than the bonus amount actually intended, and augment it at a later date with an additional bonus tied to other factors such as retention, new-hire performance, etc. This method rewards the employee upfront and incents their ongoing support of the referral post-hire.
What would your recommend for a company that has focused on the money in the past (up to $5,000), but in this economy wants to reduce the baseline referral bonus to $1,000. How do we message this without getting a negative effect? One of the few positive things about broad-scale economic turbulence is that everyone becomes conditioned by the media to expect a reaction from their employers, even if their firm is seemingly unaffected. Because employees are expecting it and understand the logic behind it, any negative effect of reducing ERP bonuses will be minimized during such turbulence naturally. However, during good times, restructuring a program around a lower bonus can result in a relatively small but vocal outcry. Most outcries don’t last that long, and the long-term impact of them is generally minimal, but if you can avoid them, it’s a good thing! Our research into employer branding program effectiveness contributed a very relevant learning with regards to this issue: if you explain why to employees they often do not cry out nearly as much! That research revealed that more often than not the outcry does not occur as a result of the change itself, but rather with the employees’ inability to devise the logic behind the change. This learning is relevant to policy changes, strategy changes, program changes, workplace environment changes, leadership changes, etc. Tough times also provide an opportunity to renew your efforts to educate your employees that they should be making referrals for their own good and for the good of the team. When business is down, and very little hiring is going on, it becomes even more critical to make those few hires really count. Because recruiting resources are also diminished, it’s time for everyone to do their part because weak referrals and weak hires mean lower performance bonuses and less job security for the entire team. Employee referrals should always be about an employee’s opportunity to work alongside a great new hire, rather than having to work with “Homer Simpson.” Make it your job to convince every employee that recruiting, much like quality control, is just too important to be left in the hands of a few individuals.
Would you recommend drawings based on highest number of referrals given, or based on highest number of hires from referrals? In most of the programs that leverage a drawing to award a small volume of high-value prizes as opposed to or in addition to a cash bonus, entry tickets are awarded based on the hire actually being made. Some programs also have a scaled system where the number of entry tickets is determined based on the level of positions filled, mission criticality of the positions filled, etc. By giving a reward only when a successful hire occurs, you incent the employee not just to provide you with the name, but with a high-quality name. It also encourages the employee to extend their work to include selling and convincing their candidate to accept a firm’s offer. However, the raffle approach does not preclude you from offering much smaller rewards for just referring. There are a number of firms that provide coffee gift cards, T-shirts, or other small gifts just for referring. However, we do not recommend any rewards for referrals that don’t meet the minimum job requirements or for jobs where you already have a surplus of qualified candidates. (One firm that used to award a one-pound box of chocolates for every referral found that in the weeks leading up to Christmas the number of inbound referrals quintupled. If you are going to reward the act of making a referral, make sure you counter the benefit with a self-filtering component, as mentioned earlier, to reduce the volume of unqualified referrals entering the system.)
What about the inverse — an increase in bonuses right now to acknowledge the tough economy? Logically, you are correct. An added advantage of a cash-bonus-based referral program is that it provides money to employees that might have just as easily gone to external search firms or vendors. It is true that when employees add up their total compensation, referral bonuses can be viewed by employees as an important addition to their disposable income. That said, it would certainly require an enlightened CFO to allow you to increase bonuses during an economic downturn.
Our company’s corporate culture is based on corporate social responsibility, and we are thinking about making donations to charities for directors and above who make successful referrals to the charity of their choice. Is this something other firms are doing? We applaud your approach, and yes a number of firms are doing this. Some of the other social-responsibility minded firms even allow any referral to elect to donate their bonus or a portion of it to charity. Senior executives know people also, so you want them to make referrals, but you don’t want a conflict of interest to arise. By donating any reward executives would otherwise receive to charity, you help the community and you avoid any direct cash benefit to them. They get the “feel-good” benefit, and maybe even a tax benefit.
Is there any correlation between large referral bonuses and more candidate referrals? Do you get more referrals with more money? There are many outstanding employee referral programs that generate both high quality candidates and a high volume of hires without offering cash rewards at all. We encourage you not to develop a referral program that focuses on the money. That said, it is certainly true that a cash bonus gets the attention of employees and it helps contribute to a buzz about the program, but there is a point at which higher bonuses begin to contribute diminishing returns. Our research as well as several other studies have indicated that bonuses in excess of $1,200 for non-exempt and $1,460 for exempt hires rarely increase the participation rate in the program to degrees that would warrant the larger bonuses. If you can get 45% of the organization to participate for $1,200, does it really make sense to get 48% to participate by raising the bonus to $4,000? The actual dollar point at which diminishing returns start to occur vary with the job, the industry, the firm, and with the economic conditions at the time. One firm that offered $8,000 found that the dollar amount was high enough to actually distract some employees from their regular jobs and incent them to focus just on referrals. In general, anything over $5,000 tends to distort normal employee behaviors and ethics, so be careful whenever you exceed that amount. The best way to identify the ideal reward amount is to start relatively low and then increase it to the point where you see diminishing returns. Another alternative is to offer a lower base reward and to offer a higher add-on bonus for mission-critical or hard-to-hire jobs.
Should the bonus amount be net or gross? Both approaches are used, with net being much more common. “Grossing up” the bonus means covering the taxes so that the employee ends up with the actual bonus amount. Obviously this approach increases your reward costs, but it also increases the “WOW” factor. Employees are used to receiving their net pay, so when they receive the total amount, they immediately take notice of it and often tell others about it. Programs that award real cash as opposed to a check can also have a similar impact as a memorable event.
Our referral program only pays when someone is hired. Is this an old-fashioned program? No, most programs reward success (hiring) rather than just effort (submitting a name). If you do reward simply providing names, it should only be a token reward.
Have you seen any companies use additional days off as an incentive? Yes, our research shows that about one in fifty programs use PTO as an incentive. You can offer a variety of non-monetary rewards provided that the CFO and your benefits people don’t object to them because of transactional costs and tax implications. The key is to offer something that your employees deem as “highly desirable.” Although offering employees choices increases the complexity of the program, tailoring the reward to the individual’s preferences is likely to increase its positive impact. Other non-monetary rewards to consider include lunches with the CEO, choice of scheduling, and personalized thank-you notes.
What is the normal “payout” structure when a referral is given? The research is relatively mixed about what firms are actually doing, revealing that roughly 40% pay out bonuses on the new-hire’s start date, 40% withhold or split the bonus into two payments, and 20% use complex payment systems we could not even begin to describe here. What is clear from the research, however, is the impact on the bonus payment terms on employee satisfaction with the program and willingness to refer again. Programs that reward the employee on or very near (within one pay period) the new-hire’s start date often have both satisfaction rates and willingness to refer again rates more than 14 percent better than firms that split or withhold payment to a later date. We advise that you pay the referral bonus on the new-hire’s first day and that you “gross up” the bonus, so that if you promise $1,000 the employee actually receives $1,000.