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Employee Referral Programs – What, How & Why!

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Employee Referral Programs

We all know: Qualified workers, especially skilled workers, are rare. Companies are therefore increasingly resorting to a form of employee recruitment that is still only occasionally used in social recruiting: the recruiting of new employees by existing employees.

Employee referral programs replace expensive headhunters and are an effective way to find and retain new talent. Not only start-ups, who often acquire new colleagues from their circle of friends, are convinced of this, but also well-known companies such as Siemens, Deloitte and Vodafone. In the following article, you will find out how you can build up a referral network within your workforce by introducing an employee referral program.

Employee referral programs are based on the assumption that employees know people with similar skills and attitudes and that new employees who are hired through a personal referral show more motivation and loyalty than those who were recruited through traditional channels. These people can be inside or outside the company. In practice it works like this: Existing employees recommend specific people or share a job advertisement via their private network, for example via their social media accounts. In the event of a hiring, the employee who made the referral usually receives a bonus, which creates an incentive for him and other employees to continue making referrals in the future. Here you can find additional information on employee recruitment concepts. Under the following link, you can find out more about the special characteristics of employee referral programs.
Another reason to rely on the recruiting-employee approach: He is extremely successful. Deutsche Bahn alone has more than 1,000 new hires every year through its employee referral program. If you convert this number to the annual requirement of the group of 7,000 to 8,000 new employees, it shows that the employee recruitment program takes on 10 percent of the employee acquisition. In addition, studies show that potential applicants believe friends, acquaintances and relatives who recommend a company and speak positively about it much more than conventional forms of applicant marketing. This fact alone can serve as a good argument for using employee referral programs and employees as brand ambassadors. In addition, this special form of employee acquisition can be used in all industries, in large as well as medium-sized and small companies and for almost all positions. Employee referrals are also very helpful when it comes to filling niche jobs. After all, the employees already employed in the respective area know best the special requirements of the position as well as the skills of their acquaintances and are thus able to make tailored referrals. The applicant market has been scoured. Many industries are affected by an increased shortage of skilled workers. Classic recruiting methods reach their limits. HR departments are looking for new recruiting methods to address them. Involving employees in the recruiting process opens up new options. Talent scouts often have an extensive network. Whether in a circle of friends, from university visits or through previous employment relationships. Contacts are made for a lifetime and are often kept, especially while LinkedIn and XING exist. If employees recommend jobs in their network, you can reach a large number of people who may not be actively looking for a job. The passive labour market is addressed, which is increasingly important in times of a shortage of skilled workers. So one or another person will think about moving job, as long as they get authentic insights into the new company from someone they trust. The talent scout provides first-hand information so that the candidate can assess in advance, whether the position and the company are right for them. The talent scout also becomes a brand ambassador and speaks outside the company about the employer. Recruiters, in turn, benefit from professionally and culturally suitable candidates. The time to hire is also significantly shorter, as the applicant already knows more about the company. If the company also uses a digital employee referral program, this can be integrated into an existing applicant management system and there is no additional effort. On the contrary, the administrative effort is even reduced. Finally, employees are automatically notified of a new job. Recruiters keep track of incoming referrals and can reward and track them accordingly when hired.
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Employee referral programs save time and money: If your own employees make a pre-selection of suitable candidates, the company saves a lot of time and can deal directly with them instead of weaker applicants. Candidate screening and job interviews are less time-consuming, and the recommended people are often better prepared because their colleagues prepare them for the interview. The general recruitment costs are also lower, as there is no need to post expensive job advertisements or hire headhunters. The larger the pool of employee referrals, the more the company can do without external recruiting measures in the long term. The acquisition of new employees is more precisely tailored: If the hiring takes place through an employee referral program, the likelihood is higher that the candidate can identify with the company and its values. Experience in many companies shows that employees recruited in this way familiarize themselves more quickly and are therefore productive earlier. This is also due to the fact that the recommending employees feel responsible for their referral and therefore support their acquaintances more strongly from the start. Vacancies are filled faster. Greater potential for long-term employment relationships: According to the "Recruiting Trends 2020" study by the University of Bamberg, recommended employees are more loyal than other candidates and remain loyal to their new employer for longer. Their exit rate is very low compared to employees who came to the company through other recruiting measures. Positive influence on the working atmosphere: Employee referral programs have a positive effect on corporate culture - because friendly relationships promote a feeling of togetherness throughout the company. The opportunity to participate gives employees a feeling of appreciation and accordingly increases employee motivation and satisfaction. The team spirit also benefits from this - and not least the employer image, the employer brand. After all, having a lot of successful referrals bodes well for company branding.
Challenges employee referrals
Feelings of frustration in committed employees: One danger of employee referral programs is that employees who repeatedly recommend new colleagues but who are ultimately not hired will feel disappointed. Especially when the employee referral program is organized as a competition, these feelings can be very strong and lead to dissatisfaction - because there are winners, but there are always losers. A feeling of togetherness and team spirit suffer: When using employee referral programs, a sure instinct is required. Especially when a large number of employees are hired through personal relationships, this can have a negative impact on corporate culture and the working atmosphere. The danger is that cliques will form and a feeling of nepotism will develop. Less diversity: Especially companies that rely almost exclusively on the employee referral concept will find that they tend to hire more employees from the same age group and the same social class. Instead, you should pay attention to diverse teams in which representatives of different age groups and genders and ideally people from different cultures and ethnicities come together. Difficulties in measuring success: This raises the question of how the success of employee referral programs can be sensibly measured. Not that easy at all - meaningful KPIs (Key Performance Indicators) must be defined in advance for this too. These metrics - for example the hiring rate based on employee referrals or the termination rate - must be carefully monitored and adjusted if necessary. Our tip: Orient the measurement to your goals. If the employee referral program is to serve to retain employees as long as possible, the metrics should also reflect this objective.
The simplest version of employee referral programs is manual communication. These aim to encourage existing employees to recommend their employer to others. Such a request for referral can, for example, take the form of a social sharing button on the company's careers page. Such manual attempts to set up an employee referral program, however, quickly reach their limits. A digital referral program, on the other hand, saves the company an enormous administrative burden. In addition, with such a system one has the possibility of determining important key figures for measuring success in a very simple way. Important is: When introducing a digital employee referral program, rely on software that is able to work with your applicant management and human resources systems in terms of processes. There are several employee referral programs out there. The systems differ both in their specific application scenarios and in the processing of employee referrals. Depending on the program, you have the option of using gamification elements, anonymized referrals or interfaces to social media, for example. In addition, providers such as Firstbird offer onboarding advice, i.e. advice on the implementation of the program including the development of an individual bonus strategy and ongoing KPI calls. The needs can be very company-specific, a detailed preliminary research of the individual offers is recommended. For the success of the digital acquisition programs, the framework conditions in the company must be right. For example, job advertisements and referrals should run via an online platform, because only then will employees have the opportunity to share vacancies with their personal social network with just a few clicks - and to recommend you as an attractive employer. The software then automatically informs your employees about new job postings by email and also receives information on successful referrals and the bonuses paid. Before doing this, it is important to communicate the program throughout the company - regardless of whether it is via the intranet or the executives. Every employee should know that the program exists, how it works and how they can benefit from it themselves. Read here how you can best communicate the introduction of an employee referral program to your employees.

In this 10-step guide, you will find out what else you should consider when introducing an employee referral program.

An important question that companies have to ask themselves when introducing employee referral programs is introducing rewards for referrals. Because for the employee who recruits friends or acquaintances, a certain amount of effort arises, which should be rewarded in some form. The fundamental question of whether there should be any bonuses as incentives plays a role here. Isn't verbal appreciation enough, does it have to be a bonus in the form of a financial incentive? In fact, experience shows that bonuses stimulate and maintain the willingness of employees to recommend, but that it does not always have to be a financial bonus.
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You can also find inspiration for the right amount or type of bonus for your company in the Firstbird benchmark study.

Once you’ve decided to pay out rewards for employee referrals, you should ask yourself the following questions:

For which positions are there which incentives? Are they all rewarded equally or individually?

Are the employees paid proportionally (for example with a certain percentage of the monthly salary)? Are there partial or graduated payments?

What is the premium based on? For example, does the “value” of the position or the degree of difficulty of filling play a role?

When does the employee receive the bonus? For example, is it due when the new employee signs the employment contract or after the probationary period has expired?

Every company has to decide on these questions for itself. The questions of whether HR or the individual specialist departments budget the premiums and what needs to be considered when taxing pecuniary benefits must also be clarified individually.

The use of cash rewards as incentives is definitely controversial. On the one hand, monetary rewards create a high short-term incentive to make referrals. On the other hand, they can lead to employees only making referrals in return for payment of a bonus. In addition, the company must counteract the tendency for employees to aimlessly ask around in their circle of friends just to receive the bonus. Here you can find out how you can use bonus payments to motivate your employees to recommend suitable candidates for vacancies.

Of course, there is also the option of giving alternative premiums instead of cash benefits. Quite a few companies base their employee referral programs on non-monetary rewards. Below is a selection of alternative ideas:

Days off or additional vacation pay

free training

Fuel, travel or adventure vouchers

technical devices such as smartphones or tablets

Visibility in the company, for example a mention in the employee magazine

Donate for a good cause

There are practically no limits to your imagination. It is also conceivable, for example, to draw a high-quality prize among all employees participating in the referral program.

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