Top performers have an incredibly high ROI
Articles from academics don’t always provide practical lessons, but there have been two recent ones that everyone in talent management should pay attention to.
The results of the first one focus on the output differential produced by top performers. This study published in February in Personnel Psychology which cut across several industries, revealed that the top 5 percent of the workforce at the researched firms produced 26 percent of the firm’s total output. The top-performing 5 percent produced 400 percent more than you would expect (26 percent rather than 5 percent).
That means that top performers have an incredibly high ROI because they produce more than four times more; however, they are generally paid less than 20 percent over an average worker in the same job.
Just like on the business side of the enterprise where the 80/20 rule prevails (80 percent of your profit comes from 20 percent of your products) there should be a similar 80/20 rule covering employee performance. This disproportional impact means that despite the fact that many in HR are enamored with the practice of “treating everyone equally,” it turns out that that approach may be well-intentioned but misguided because in business, just like sports and entertainment, top performers have a significantly higher business impact than the average. Top performers need to be prioritized.
Prioritization Is Also an Essential Element of Referral Programs
Prioritization is slowly becoming more acceptable in employee referral programs. For example, firms that have won ERE Recruiting Excellene awards for their outstanding employee referral programs have often included a prioritization component (including Accolo and Aricent), and other firms prioritize jobs for all of their hiring in order to increase their business impact (Zynga).
In my list of essential design elements for a world-class employee referral program, I always include the prioritization of referrals. That means that rather than assuming that all employees have the same potential for making great referrals, instead you focus your efforts on obtaining referrals from employees who:
- Work in that specific job family
- Have the most connections
- Have a successful referral track record at your firm
- Are top performers
Unfortunately, until recently I have only seen internal corporate data that revealed what most of us would have intuitively assumed, which is that top performers would naturally produce higher-quality employee referrals. The converse rule is that “Homer Simpson” knows people also (i.e. weak ones) and that he would likely refer them “just for the money.”
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Top Performer Referrals Have a Significantly Higher Business Impact
Fortunately, a recent research study covering several industries demonstrated that top performers do in fact make higher quality referrals. The University of California/Berkeley study, “The Value of Hiring through Referrals” highlighted the output and profit impact differential between referrals that emanated from high, average, and low-performing employees. The study allowed for a ROI calculation because it included both the added costs of the referrals as well as the positive business impacts created by more effective hires. Conclusions that I have drawn from this research include:
- Referral hires produce more — Hires from referrals produce approximately 25 percent more profit impact than hires from other sources.
- Top performer referrals produce three times more — A referral from a top performer who is hired will produce nearly three times more profit impact for the firm compared to the referred worker from a below average performer. A top performer referral who is hired will have a 90 percent greater profit impact than the average referral.
- Higher retention — Referred workers are between 10 percent and 30 percent less likely to quit than workers hired from other sources.
Other Research Has Demonstrated the Power of Referrals
If you’re still skeptical about the power of employee referrals, be aware that many different organizations have revealed their impact. For example CareerXroads has revealed that referrals produce the highest volume of hires from any external source; Staffing.org has revealed that referrals are No. 1 in quality of hire; Jobvite has shown that although only 7 percent of applicants come from referrals, they produce 40 percent of all hires; and SilkRoad demonstrated that referrals have the highest interview ratio, where 17 percent of referral applicants are interviewed and 25 percent of those interviewed from referrals are hired.
Recommended Action Steps for Improving Employee Referral Programs
Clearly this new research data should convince you that you should find out where within your own firm the highest quality referrals come from, and how much more the referrals from the best employees/sources produce.
Some other recommended actions that are needed to modernize most referral programs include:
- Prioritize key jobs — work with the CFO and GMs to identify and then prioritize the jobs, that when filled with a great hire, have the highest business impact.
- Identify sources accurately — use the onboarding process to determine which sources had the most impact on a new hire’s job acceptance decision.
- Measure quality of hire — begin measuring the on-the-job performance and the retention rates of new hires in key jobs so that you can determine which sources produce the highest-quality hire.
- Identify high-quality referrers — use this quality-of-hire information to identify which individuals and groups of employees produce the highest quality referrals.
- Proactively approach the best — proactively seek out the employees who produce top referrals to learn from their approaches and to get fresh referrals. Also make sure that you recognize them for their contribution.
- Offer a performance bonus — consider paying a delayed follow-up bonus to employees who refer new hires who turn out to be top performers after 6–12 months on the job.
- Expand the program’s scope — if you really want to increase the impact of your referral program, start by realizing that the same basic concept of “great people know other great people” can be expanded into other areas. That means expanding eligibility for who can make a referral by accepting referrals from former employees, vendors, those who provide job references, and sometimes even customers. It also means that you should expand the use of referrals in other talent areas including college recruiting, executive recruiting, and internal movement.
Now that we have more hard evidence that top performers produce more output as well as higher quality referrals, referral program managers learn to prioritize and focus on what works. They must find the time to proactively seek out and then to process more quickly the referrals from those who are most likely to produce recommendations that result in high-performing hires.