Improving Your Employee Referral Program and Justifying Your Investment

Investing in your employee referral program (ERP) consistently generates one of the highest returns on investment in terms of both cost and quality per hire. Without lifting a finger, chances are you can get anywhere from 10-25% of your hires from employee referrals. Many companies look at this number and think, “Why mess with success?” The answer: because successful programs have the potential to generate 50-75% of your hires with a minimal investment. The next logical question is, “How can I improve upon a program that is already bringing me a quarter of my hires?” You’ve probably seen enough statistics to make your head spin about referred employees. For example, referred candidates:

  • Are less expensive to recruit and more qualified
  • Stay at your company longer
  • Adapt to the company culture more quickly
  • Take less time to find
  • Accept your offer more readily because they already trust the employment experience your company will deliver

So I won’t bore you with those, although you can visit an excellent white paper on the subject. While a little dated (written in 2000), I assure you that the statistics are still very close to accurate. The focus of this article will be on what the barriers to an effective referral program are, and on ways to improve your program’s effectiveness and generate return on investment. Barriers to an Effective ERP There are, of course, many reasons why an employee referral program may not work well. Here are some of the most common barriers I’ve encountered: Barrier #1: Lack of Communication Here’s a great exercise to determine how well the basics of your employee referral program is being communicated. Randomly survey 10 employees in a variety of disciplines, asking them questions about how the program works, what the rules are, and what the rewards are. Ask them where they can make a referral, and what the process is for making one. If your surveyed employees say, “I don’t know” to any of the above, you could definitely be doing more to promote your program. If you want to take this approach further, coordinate a company-wide online survey to determine what level of awareness about the program exists. Communication problems are not limited to program awareness, however. Many point to an ERPs positive effect on employee morale and retention as yet another benefit, as the program shows that you value your current employees’ opinions and referrals. But in employee referral satisfaction surveys, employees regularly cite a lack of follow up with them about their referred friend’s status as a major drawback to the program. In turn, this makes them much less likely to refer another friend. It can also hurt your company’s relationship with your current employees, who ends up feeling like their opinion is less valued as a result of their experience. Barrier #2: Lack of Tracking Your employee referral program cannot exist in a vacuum if you hope to make it a truly successful venture. Metrics for return on investment are a vital part of any recruitment expense or program you implement. This does not necessarily have to relate to costs. To keep the program working well, you’ll need to know how well the program is being embraced by your employees, how often referrals are being made, which areas of your company are most active and why, and what your expenses are compared to your returns over time. Therefore, effective programs should track not only costs, but also:

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  • Quality of hires, through tenure, productivity, and promotions
  • Activity by department and job function
  • Employee satisfaction with the program
  • Success rates and number of hires during specific time periods using on-demand reports

Barrier #3: Administrative Burden Murphy’s Law: The more effective your employee referral program is, the more time it takes to administer it. At some of the larger companies I’ve worked with, there are dedicated employee referral recruiting teams designed to address this issue. One company here in Seattle used such a team to respond to and interview every single employee referral they received. But throwing more people at the problem is not a viable solution in these leaner economic times, when budgetary belts are tightened and the number of resumes being received has increased dramatically. For this reason, many companies are content to let a highly effective recruiting tool like their employee referral program continue to exist under the radar of most of their employees. Improving Your ERP Improving your ERP should be part of a larger strategy to allocate your budget dollars wisely towards investments that generate higher returns. When planning your recruiting expenditures for the year, look at investing a proportional amount in making your recruiting program more successful, and tracking the additional return on investment over time. Here are some proven tips for upgrading your program: 1. Set measurable goals up front. Ensuring that metrics for success are well defined is crucial to the success of your ERP. Use numbers like “increase the percentage of hires from employee referrals from 25% to 35% in year one,” or “increase employee retention by thre to five percent,” and stay away from vague goals like “increase participation” or “improve morale” – unless you can back it up with tools like satisfaction surveys. The most important metric, however, will be how the gains from your investment compare with your investment in other sourcing options, from ad placement to search firms. A company here in Seattle did a great job tracking their costs-per-hire by source in 2001. Their Internet cost per hire (CPH) was $220, print advertising CPH was $1,800, and search firms CPH was $6,800. The numbers also revealed that they made over 5,000 hires without investing a cent in their ERP, which accounted for approximately 25% of their hires. If they invested $75,000 in a company-wide ERP and referral site, with an expected increase in participation to 35%, they would achieve a cost-per-additional-hire figure of $37.50 plus referral bonuses. Chances are great that their quality of hire would likely increase significantly as well (although at this writing, it is currently not being tracked), with time to hire decreasing proportionately. Now that’s a justifiable investment! The figures above represent a very large-scale example, but the same logic can be applied on any sized company. The important thing to note is that tracking traditional statistics like quality of hire, cost per hire and time to hire will help you make informed, apples-to-apples comparisons of comparative ROI, and allocate your budget dollars in the most effective places. 2. Better living through automation! Several areas of your ERP can be automated without sacrificing the personal feel of your program. Putting the details of their ERP online – including rewards, rules, and referral forms – resulted in an over 50% increase for one of our healthcare clients, whose nursing audience is not traditionally thought of as heavy Internet users. On the back-end, relatively low-cost systems can be implemented that increase participation, allow candidates to check on referred employees’ status, track the number of referrals, and greatly reduce the time necessary to administer the program. Such a system can also be designed to trigger email reminders to top referrers or past referrals, or even automate payment processing. Our clients who have implemented such systems have seen some astounding results: they’re often able to double the number of referrals being made. 3. Don’t just focus on cash. Although important, money is not the sole reason employees make referrals. Your employees also want to see their friends get great jobs. So in effect, there’s something in it for them. That’s why upping the amount of money you give away will not necessarily increase the number of referrals you get over time; eventually, you see decreasing returns in this type of investment. A very small company gave away T-shirts, pens, and other items as part of their program, and still saw a big increase in their results. Other companies successfully use points-based systems similar to frequent flyer miles that add up to prizes like a ski vacation or a whitewater rafting adventure. Adding fun rewards to your program is a great way to increase participation without significantly increasing expenses. 4. Immediate and ongoing promotion. To create ongoing awareness, an employee referral program needs an initial kick-off phase, followed up with continuous promotion. This does not necessarily mean you have to upgrade the theme of your program every year, although elements of it should be refreshed from time to time. Ongoing promotion can be as simple as an email, an online newsletter, or a mention in a company publication. Other ways of continuous promotion include job search agents for your employees to receive new job openings that fit their friends’ qualifications via email, quarterly meetings, online postcards, and full-scale email marketing campaigns. New hires can also be an excellent source of referrals, since they typically come with a network of potential referrals from their last employer. There are several barriers towards implementing an efficient employee referral program, not the least of which are a lack of communication and tracking and the administrative time necessary to ensure a successful program. But establishing detailed success metrics, automating elements of your program, focusing on unique rewards, and promoting the program on a continual basis can successfully break down these barriers and yield results. So what are you waiting for?

Dave Lefkow is currently the CEO of talentspark (, a consulting firm that helps companies use technology to gain a competitive advantage for talent, and a regular contributor to ERE on human capital, technology, and branding related subjects. He is also an international speaker on human capital trends and best practices, having spoken in countries as close as Canada and as far away as Malaysia and Australia. His consulting work has spanned a wide variety of industries and recruiting challenges with companies like Starbucks, Boeing, HP, Microsoft, Expedia, Washington Mutual, Nike and Swedish Medical Center.