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What Are the Hidden Costs of Employee Referrals?

A hiring professional weighing the cost and benefits of employee referrals.

Employee Referrals: Golden Ticket to Recruiting or Fool’s Gold?

Employee referrals are touted as the golden ticket to successful recruiting, and for good reason too. Studies have found that referrals offer:

  • -Higher quality candidates
  • -Higher retention rates
  • -Reduced time-to-hire
  • -Cheaper acquisition costs

For these reasons, at Newton, we believe that a well-thought-out employee referral program is an essential piece to the success of any recruiting department.

The Extra Baggage of Employee Referrals

However, our recommendation for employee referrals comes with a grain of salt. Why? Too often, organizations view employee referrals as the panacea to their recruiting ills, a magical well of candidates that can be relied upon to fulfill their hiring dreams. It is this belief that encourages employers to go all in on employee referrals without accounting for the additional responsibility that comes along with them. The following must be considered when implementing an employee referral program at your organization:

  • -Every referral that you pass on demands personal follow-up (additional time and resources that you must account for)
  • -Employee referrals can cloud the judgment of hiring decision makers
  • -Employee referrals can alter team dynamics

The reality is that with employee referral programs, it’s a balance . When managed effectively, employee referrals provide incredible benefits but you must factor in the extra baggage that they come with. Failing to plan for this, will come back to burn you in the long run.

1. Every Referral that You Pass on Demands Special Attention

We’ve all heard the numbers. Employee referrals have the fastest time to hire at 29 days. Sure, this may be true for those employee referrals that end up working out. But how about for all of those referrals that you end up passing on? You also need to factor in the time that it takes to follow-up with all of them.

Think about this. If you review a referral’s resume and decide to pass on them, is it acceptable to simply send them a standard no thank you letter? Absolutely not! With referrals, your colleague has gone out of their way to recruit someone that they have a personal relationship with. The last thing that you want is to shrug this off by treating the referral as if they were any other applicant. Not only can this be taken as a slight and deter future referrals, it may also throw a wrench in the referrer-referral relationship, which can bring tension to the workplace.

Following-Up with Passed on Referrals Takes 6Xs Longer than with Regular Candidates

Every candidate deserves acknowledgment and timely communication, but when dealing with referrals, you must personally reach out and provide closure to every individual . This means investing time and resources into a candidate that you already know you won’t be hiring. At Newton, the average time spent managing passed on referrals is broken down as follows:

  • -15 minutes to review the resume and touch base with the referrer
  • -15 minutes to personally reach out to the referral and let them know that you will be passing on them at this time

This is half an hour invested into a candidate that you already know won’t be working at your company (for non-referrals, this process takes no more than 5 minutes total). We’re all nice people but time is money! At this rate, passing on just eight referrals has already set you back half a day. And our time calculations are modest to begin with! As more coordination and different lines of communication become involved, this number could easily creep up to an hour per referral.

To Follow-Up with Every Referral, You First Need to Be Able to Identify Them

But we are getting ahead of ourselves. In order to properly follow-up with every referral, you first need to be able to identify them. In theory, this may sound simple, but you would be surprised. Lucky for you, Newton’s applicant tracking system comes equipped with a smart employee referral program, where referred candidates are automatically flagged for you. This means that you never have to worry about dropping the ball with one of your referrals again. If you attempt to send a referral your standard “no thank you” email, Newton will not process the request without first giving notice that you may potentially damage a referral relationship. Pretty cool right?

2. Employee Referrals Can Cloud the judgment of Hiring Decision Makers

Many employers praise employee referral programs for their cost-effectiveness, and we hear you. Recruiter fees are no joke and advertising jobs online can get expensive. Offering incentives for referrals is often the most affordable way to find great candidates. But, when setting up incentive-based referral programs, you must tread lightly. The last thing that you want is to introduce ulterior motives or bias into the hiring process. After all, a bad hire is THE #1 most costly mistake in all of recruiting.

How Can the Judgment of Referrers Become Clouded?

What would you do for $10,000? Heck, even $1,000? Chances are, the list is quite expansive and includes some things that you would never consider under normal circumstances. That’s the thing about money- it makes people do funny things. For this reason, incentivizing employee referral programs must be handled with caution because a few red flags become pretty easy to ignore when there is money on the table!

If your work environment is enjoyable, your employees will already be inclined to refer great candidates. A little extra motivation is great to get the ball rolling, but you don’t want to apply so much pressure (cash-based, competition-driven, or the like) that employees are swayed to recommend otherwise unqualified candidates.

Quick Tip: Great Non-Cash Incentives for Employee Referrals!

Need some advice on how to effectively motivate your employees to make referrals? Below are some great ideas to get you started!

  1. Above all else, emphasize that referrals are for the benefit of the team and the success of the company!
  2. Offer non-cash prizes such as referral swag, free lunches for a month, a weekday vacation sponsored by the company, free gym membership for a month, tickets to a sporting event, etc.
  3. Rather than giving the cash directly to the referrer, let them donate a specified cash amount to a charity of their choosing.
  4. Publicly recognize those who have brought in good referrals.
  5. Let referrers choose from a selection of pre-determined prizes.
  6. Publicly display job openings around the office to keep it top of mind.
  7. Include good referrals as part of an employee’s performance review.

How Can the judgment of Hiring Decision Maker’s Become Clouded?

Those making the referrals aren’t the only ones whose judgment can become clouded. Those in charge of making hiring decisions are also susceptible. If a team member recommends someone, naturally there will be an underlying bias supporting their candidacy. This is fine, but what happens if the candidate is simply not qualified? Your bias may cause you to overlook potential red flags or place that candidate ahead of others who in reality, are a better fit for the role.

3. Employee Referrals Can Alter Team Dynamics

As you are hiring new employees, it is important to reflect on what makes a team successful. Although many factors play into team dynamics, studies have found that the diversity of a team is a leading indicator of success. Contrasting personalities can sometimes bring tension, but these differences in opinion also foster creativity and outside the box thinking.

Consider this when dealing with employee referrals. Sure your team may be great, and you want more of that greatness, but remember that people often gravitate toward those who by and large think the same way that they do. You don’t want a team full of people who think the same way! This can be detrimental, especially when dealing with complex problems that require a multifaceted solution.

Remember, the beauty of teams is the fact that they allow you to gather different individuals with unique thinking styles and skill sets. This should be in the back of your mind as you are evaluating employee referrals.

Another funny thing about friends- they like to stick together. Starting your first day of work already knowing someone is awesome, but it can keep candidates from branching out. Rather than an inclusive culture, this can result in a more “exclusive” culture, which inhibits the natural relationship building needed in a healthy work environment.

With Employee Referrals, It’s a Delicate Balance

At Newton, we are strong proponents of employee referral programs. So much so that we built an entire app to manage the employee referral process. Despite this, we always warn employers that running them the right way takes a balance. If you are planning to rollout out an employee referral program at your organization, be sure that you have prepared for the issues raised above.


Newton’s Applicant Tracking System Helps You Manage Employee Referrals

With Newton’s ATS, you have the ability to create an employee referral program that’s social, mobile, and engaging. What’s more is that Newton’s employee referral program comes preset with smart features that simplify the hiring process. For example, Newton automatically marks referrals and reminds you to communicate with them in an appropriate manner.

Interested in learning more about how Newton can help you manage employee referrals? Get in touch with a Newton Expert today!

HR Technology

 

About Danny Madigan

I am the Marketing Associate at Newton Software. At Newton, our mission is to simplify the lives of Recruiters, HR professionals and Hiring Managers everywhere through our industry-leading applicant tracking software for small and medium-sized companies.