Is Your Employee Referral Program Acting as a Disincentive?

Like many of you, I always thought employee referral programs were great for myriad (I love that word) reasons. Just a few of those reasons are:

  • You get to interview candidates someone inside the organization knows.
  • You don’t have to pay any agency fee for the candidate.
  • You can build real excitement around the program to get more referrals. (If you are really creative, you can use it to enhance internal communication, tie it into your website, use it for PR, and generally create some very positive buzz.)
  • Someone in the company gets a check for turning over a name.
  • Studies have shown that referred employees acclimate and become productive at a rate that is higher than non-referred candidates.

The following is, of course, a gross oversimplification, but virtually all ERPs work in a way that resembles this:

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  1. A candidate is presented for an open position to the person within the company who handles the ERP. (As an aside, large companies look at candidates who come recommended even if there is no “open” position. The reasoning is you can always find important work for exceptional candidates.)
  2. The referred candidate is brought into the organization for a series of interviews and goes through whatever process is in place that facilitates this endeavor.
  3. The candidate is accepted or rejected.
  4. If the candidate is rejected, a “sorry” letter is generated. (Please, don’t ever ask the referring employee to call the candidate and tell them they have been rejected. That’s in poor taste.) If the candidate is accepted, an offer letter is generated and the candidate accepts or rejects the offer.
  5. Let’s assume that the candidate accepts the offer. The company pays the referring employee the employee referral bonus according to a predetermined schedule, which varies with each company. Usually, companies wait for a period of time to pay the referral bonus (or else they pay in installments). In the event the candidate leaves the organization, the organization of course does not want to make the payment if the new employee has only been there a short period of time.

That, my friends, is the very nature of the problem at hand! There was a time that I agreed with this line of thinking. I believed that ERPs should pay referral fees for the reason that your ERP most probably pays them: for the hiring of a new employee that was referred by an existing employee. That seems simple enough, and there is generally very little discussion around this almost universally accepted precept. However (you knew it was coming didn’t you?), I now believe this widely accepted principle is fundamentally flawed. Here is why: The fatal flaw lies in the fact that if the referred candidate is hired and leaves before a specific time period, very often the referring employee does not get paid for the referral. Your question at this point should be as follows: Why should a referring employee get paid if the new employee they referred leaves? Good question and the answer is simple. You are not paying them to find employees. You are paying them to refer candidates whom the organization, through the machinations of your organization’s employment system, decides to hire or not hire. If that new employee is hired and leaves, for any reason, it has nothing to do with the referring employee. They did their job by referring a candidate that the organization thought well enough of to hire. There is no reason they should be penalized for whatever went awry from an organizational standpoint resulting in a bad hire. That was not their responsibility and they should not be held accountable. Truth be told, the organization did something wrong in either the assessment phase, the interviewing phase, or some other aspect of the hiring process. It is the organization that should be held accountable and suffer for its collective failure, not the referring employee. If an employee refers a candidate, that employee should be paid right after the candidate starts and there should be no penalty or delay in the distribution of these funds. If you pay the employee referral bonus only if the referred employee stays with the company, then you do not have an employee referral program. What you have is some type of employee finding program ó which might not be a bad thing, but I personally have never heard of one and am not sure how I feel about it in the first place (probably because your employees are not in the employee-finding business in the first place, unless you are a third-party search firm). An effective ERP should pay employees for referring candidates who interview with the company and are hired by the powers that be within the organization. End of story. Furthermore, once the connection and introduction of the referred candidate has been established, the referring employee should back off and completely remove themselves from the process. The referring employee should under no circumstances be involved in the interviewing process as this can appear to be a conflict of interest. The referring employee should be brought into the process only if the referred candidate specifically asks to talk with the employee about some facet of the organization. (Even this level of involvement makes me uneasy, but it is not a good idea to tell the employee referral that they can’t talk to the very employee who referred them because that looks like you have something to hide at best and silly at worst.) Still not convinced? Look at the logic from this angle. If the referring employee presents a viable candidate in an ERP, it then becomes the organization’s responsibility to do all it can to interview the candidate effectively, sell the candidate on the company, communicate with the candidate as to the nature of the organization’s mission, explain the position for which they are interviewing, and, in general, do the job of hiring the candidate if they feel the match is good. If the candidate joins the organization and leaves in, for example, 45 or 60 days, why should the referring employee suffer a financial loss? They did nothing wrong. They referred the candidate and went through the proper channels in terms of getting them plugged into the employment/hiring system. That is all that is expected of them. If the candidate leaves the organization, that has absolutely nothing to do with the referring employee. The candidate might have left because of poor leadership, a change in position overview, a project that fell through or a thousand other reasons that are no fault of the referring employee. If you do not pay out the referral bonus, you are sending a message to the referring employee saying that they are, in some way, responsible for the candidate leaving the organization and as a result will not be paid the referral bonus. This is a dangerous and irresponsible message to send. Behavior modification 101 say actions that are not reinforced positively will extinguish themselves. I have spoken with many referring employees who have adopted a stance of what is called “learned helplessness” (a condition that exists when you are in a situation where no matter what you do, you lose) because the candidate they referred did not stay and, as a result, they had the referral bonus pulled from under them. It is a lousy feeling and does nothing to help the effectiveness of your ERP, because money is an emotional issue. Do it a few times and they will stop referring candidates because it is just not worth the hassle. Not only do they lose out on the referral bonus for reasons that have nothing to do with them, but also they are made to feel they are somehow responsible for the new employee leaving the company. Slice and dice it any way you want, it is a bad scene. If you are sophisticated enough to have a well thought-out ERP, then you should pay the referring employee for doing just that: referring a person who becomes a new employee. Let’s look at the other side of the coin, the short-sighted view of the world. The question many will ask is, “Why should I pay out a referral fee for a new employee who may not stay for a given period of time? Am I not paying out good money for ROI that is non existent?” Conceptually, this is a good question, but it is the wrong question. The correct question here is, “What is wrong with an organization that creates a scenario where a candidate is hired and than leaves in a short amount of time?” Is it the interviewing methodology? Is it a cultural problem? Is it a management drawback? Organizations are highly complex and there are a constellation of things that can go wrong and result in this unfortunate and costly incident. It is the responsibility of senior management to do a post mortem on the candidate, determine the cause of the problem and move forward to resolve it. Pulling the referral fee from the employee who did what they were supposed to do in the first place (refer qualified candidates for employment) is clearly not the answer and will by no stretch of the imagination fix the problem. Furthermore, this type of behavior will result in a less effective and watered-down version of what an ERP, one of your most powerful and useful methodologies for identifying new employees should really be. Please don’t let this happen in your organization. To paraphrase Einstein, we cannot solve our problems by thinking at the same levels that created them. Fixing your ERP does require thinking at a new and higher level. The reward for such thinking will be an ERP that is fundamentally sound and best of breed. Now doesn’t that sound like the kind of ERP your company needs?

Howard Adamsky has been recruiting since 1985 and is still alive to talk about it. A consultant, writer, public speaker, and educator, he works with organizations to support their efforts to build great companies and coaches others on how to do the same. He has over 20 years' experience in identifying, developing, and implementing effective solutions for organizations struggling to recruit and retain top talent. An internationally published author, he is a regular contributor to ERE Media, a member of the Human Capital Institute's Small and Mid-Sized business panel, a Certified Internet Recruiter, and rides one of the largest production motorcycles ever built. His book, Hiring and Retaining Top IT Professionals/The Guide for Savvy Hiring Managers and Job Hunters Alike (Osborne McGraw-Hill) is in local bookstores and available online. He is also working on his second book, The 25 New Rules for Today's Recruiting Professional. See if you are so inclined for the occasional tweet. Email him at


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