Metrics for Improving Referral Program Effectiveness

I recommend referrals as the foundation of any excellent recruiting program, followed by employment branding and then recruiting at professional events. However, I must warn the reader that referral programs are not all created equal, and a good number of them (well over 50 percent) provide no better than mediocre results because they have inherent design flaws. These design flaws occur because the directors of these programs invariably copy what others do as opposed to using metrics and data to tell them what works, why it works, and what doesn’t work.

Basic Characteristics of Excellent Programs

In order to gather the “right” metrics about a referral program, you need to know upfront what the critical design elements are that turn good referral programs into great ones. Next, you need to have metrics that cover each of these critical areas if you expect to continually improve your results:

  • On-the-job performance. The primary reason for using referrals is because they produce better performers (quality of hire). Metrics must be developed to compare the performance of referrals versus new hires from other sources.
  • Retention rates. Because referral programs produce hires who stay longer, you should compare the difference in retention rates between referrals and other hires.
  • Proactive referrals. Most referral programs advertise or launch themselves and wait for individuals to find the time to refer candidates. The optimal approach proactively seeks out top performers and key individuals and then directly solicits them for names of the best candidates. Thus it’s critical to measure the percentage of referrals that come from proactive efforts.
  • Employee perceptions of the program. Measure how employees perceive the referral program. If employees see it as a program that benefits them (in that it guarantees that they work with the very best team members), then the program will produce excellent results. However, if they perceive it just as a method of earning extra money, the program is in trouble.
  • Speed and responsiveness. Paramount to building program engagement is the speed and responsiveness of the referral initiative. Because employees enthusiastically respond and refer when they get immediate feedback and results, the actual response time of the program must be measured.
  • Focus on critical jobs. Because referral programs, like all recruiting programs, produce greater results if they are focused on critical business units and mission-critical jobs, metrics programs must assess not just the raw number of referrals but whether they are occurring in key positions and jobs.
  • Lack of administrative rules. A majority of ERP programs are saddled with restrictions on who is not permitted to refer and policies that delay full payment for months. As a result, include measures of employee satisfaction and the percentage of employees (especially managers) who are eligible to participate.

The Top Six Referral Metrics to Use

For those who are in a rush and want to “fast forward” to the short list of critical metrics, here they are. (However, please note that a complete listing of all possible metrics related to referral programs can be found below.)

  1. “On-the-job” performance of referral hires (performance differential)
  2. Retention/turnover rate of referral hires
  3. Program ROI or the cost/ benefit ratio
  4. Percent from proactive referrals
  5. Responsiveness of the referral process as measured by the average time to initial contact with the referred candidate
  6. Employee satisfaction with the overall process

A Long List of Possible Metrics

The best approach for selecting the right metrics for any organization is to develop a partnership with the finance department and then sit down with the CFO’s office in order to identify the metrics that they find be the most meaningful. This is critical because involving them early is the only way to ensure that your numbers are credible and that your metrics will even be looked at. Below is a categorized list of referral-related metrics that you can use to select the best metrics from.

Category I: “On the Job Performance” Metrics If you only do metrics in one area, this is the one:
  • “On-the-job” performance of referral hires (performance differential). Measure and compare performance appraisal ratings of referral hires to other sources of hires. If you have direct measures of performance (counting output), I recommend that you use them. Other good measures of the quality of the new hires work might include bonus and compensation rates or customer satisfaction ratings. Whatever you use, just be consistent.
  • Retention/turnover rate of referral hires. Measure the voluntary termination rate of “referral new hires” within six months and after one year. Then compare it to the voluntary turnover rate of hires from other sources.
  • Termination rates. The percentage of referral hires that must be terminated within the first six months compared to the termination rate of hires from all other sources.

Category II: Business Impact of the Program

  • Program ROI or the cost/benefit ratio. After you have calculated the performance differential of referral hires and the reduced turnover rates, work with the CFO to put a dollar value on these increased performance and retention rates. Compare that added value to the program costs to get the overall return on investment. Then compare that ROI to the ROI of other HR programs and then to other business programs to see which is superior.
  • Offer acceptance rates. Because referral candidates are already pre-assessed and presold by employees, they tend to have significantly higher offer acceptance rates. After determining if their acceptance rates are higher, you can then determine the dollar impact as result of not having to hire the “second choice” candidate (that would almost by definition be a lower performer) or the cost-savings of not having to repeat the search process all over again.

Category III: Responsiveness Metrics (Time)

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  • Average time to initial contact. Average time from when a referral is made until the applicant and referrer are both contacted (and thanked).
  • Total time to fill. As measured by the average referral time that it takes to make a referral hire (delays can cause you to lose top referrals).
  • Average time to first interview. Average time from when a referral is made until the candidate gets their first interview (or is told that they have been rejected).
  • Average time to offer. Average time from when a referral is made until an interviewed applicant is finally offered a job (or rejected).

Category IV: Program “Usage” Measures

  • Percent from proactive referrals. “Tag” all referrals so that is easy to see which ones came directly as a result of proactive program elements. Track the ratio to ensure that a significant percentage is coming from proactive referral efforts.
  • Percent of referrals from events. “Tag” referrals that result from employee attendance at professional events. This is critical because referrals from professional events tend to be not to be based on emotion or personal relationships. In addition, if employees are encouraged to seek out and identify diversity candidates, professional events can produce high rates of diversity referrals (because in most cases, the individual’s diversity can be more easily recognized because they meet in a person (as opposed to paper or Internet applications where identifying diverse candidates is more difficult).
  • Referral participation by division. Measure participation rates by department or business unit. This metric is used to determine if employee referrals are concentrated in priority or mission-critical departments or functions.
  • Percent of key jobs filled by referrals. Calculate the percentage of jobs “targeted for referrals” or actually filled from referrals (generally jobs with high referral success rates and/or mission critical jobs).
  • Percent of referrals from external sources. Great referral programs also use external sources for referrals (former employees, customers, vendors etc.). If you use them, it’s critical to measure what percentage of all referrals and referral hires come from these sources.
  • Overall employee participation rate. This simple metric measures the percentage of all employees who have participated in the referral program during the last period.
  • Percent of all employees who are eligible. Because restrictions on who can participate in referral programs significantly lessens their impact, assess what percentage of all employees and managers are eligible to make referrals.

Category V: Satisfaction-Related Metrics

Because it’s critical to keep everyone involved excited about the program, be sure to measure the satisfaction levels of all who are involved.

  • Referee/applicant satisfaction. Track and then calculate what percentage of the people who were referred are satisfied with the employee-referral-program process.
  • Referrer/employee satisfaction. Track and then calculate what percentage of the employees who referred individuals are satisfied with the process.
  • Hiring manager satisfaction. Periodically survey a sample of hiring managers to see what percentage are satisfied with or are frustrated with the process.

Category VI: Other “Quality” Metrics

  • Quality of referral candidates. You can’t make great hires if you don’t have great candidates, so periodically identify what percentage of all “very good” or “excellent” candidates (often identified as “candidates who should be interviewed”) came from referrals.
  • Percentage of unqualified referrals. What percentage of referrals are unqualified and thus are “system cloggers” (especially in management and key jobs).
  • Percentage of diversity referrals/hires. What percentage of all referrals and hires from referral sources are minorities (especially in management and key jobs).

Category VII: Program Administration and Effectiveness

  • Time until payment. The average number of days until the full payment of any incentive is completed (where immediate payment is the desired goal).
  • Incentives needed. Track the amount of money that it takes to incentivize employees to refer candidates. This metric measures the average dollar amount required to elicit a minimum number of referrals for a particular job category.
  • Percentage of applications submitted on the referral website. This is important because web-based applications are easier and cheaper to process than paper applications.
  • Cost per hire. Compare it to the cost from other sources.
  • Referral administration costs. Percentage of all program costs that go to program administration versus going to employee rewards.
  • Total number of referral hires. The gross number of hires from referrals made during the period.
  • Total number of referrals. The gross number of referrals made during the period.

Additional Actions to Improve Your Efficiency and Effectiveness

  • For the next couple of years, track referrals who became finalists and finalists who turned your offer down, in order to continue your efforts to recruit them.
  • See if there is a positive correlation between referral-program participation rates and employee engagement/satisfaction scores in business units to see if low referrals indicate low morale.
  • Survey employees who successfully refer high quality people to find out what drives them to participate.
  • Survey employees who successfully refer high-quality people to find out where (what source) and what methods that they used to find the best people (for the purpose of educating others).
  • Survey employees who don’t refer to find out why they don’t participate.
  • Periodically test your applicant screening process (applicant tracking system) to ensure it is identifying the best referral and other applicants.
  • Periodically test your bonus payout by raising/lowering it in a few jobs to see if it effects the referral volume and quality.
  • Do a side-by-side comparison between you and your competitors’ referral program to ensure that you maintain a competitive advantage over those firms (in features and incentive payout).
  • Track and report to HR executives the percentage of program improvement achieved each year.
  • Measure which different referral program element (regular, non-employee referrals, proactive referrals, and manager referrals) produce the best results and use the data for improvement purposes.
  • Quantify the dollar impact of the program; it’s liable to be millions.

Dr. John Sullivan, professor, author, corporate speaker, and advisor, is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high-business-impact talent management solutions.

He’s a prolific author with over 900 articles and 10 books covering all areas of talent management. He has written over a dozen white papers, conducted over 50 webinars, dozens of workshops, and he has been featured in over 35 videos. He is an engaging corporate speaker who has excited audiences at over 300 corporations/ organizations in 30 countries on all six continents. His ideas have appeared in every major business source including the Wall Street Journal, Fortune, BusinessWeek, Fast Company, CFO, Inc., NY Times, SmartMoney, USA Today, HBR, and the Financial Times. In addition, he writes for the WSJ Experts column. He has been interviewed on CNN and the CBS and ABC nightly news, NPR, as well many local TV and radio outlets. Fast Company called him the "Michael Jordan of Hiring," Staffing.org called him “the father of HR metrics,” and SHRM called him “One of the industry's most respected strategists." He was selected among HR’s “Top 10 Leading Thinkers” and he was ranked No. 8 among the top 25 online influencers in talent management. He served as the Chief Talent Officer of Agilent Technologies, the HP spinoff with 43,000 employees, and he was the CEO of the Business Development Center, a minority business consulting firm in Bakersfield, California. He is currently a Professor of Management at San Francisco State (1982 – present). His articles can be found all over the Internet and on his popular website www.drjohnsullivan.com and on www.ere.net. He lives in Pacifica, California.

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