Referral Programs: The Highest Return for a Dollar Spent

Referral Programs inherently have a compelling value proposition: hire better people who will stay longer, and have higher job satisfaction, reduce your recruiting expenditures and create more value for employees. Most of you already know that referrals are your best and most cost-effective source of acquiring new employees. Many of the recruiters I talk with prefer to source candidates through referrals more than any other method. But what I find to be ironic is that less that 2% of all recruiting budgets are allocated toward referral programs. A recent survey from Remark Solutions, a Referral Solutions Company, found a direct correlation between allocation of resources and effectiveness of an organization’s referral program. Respondents who spent 10% or more of their recruiting budget on their referral program yielded 30% or more of their new hires this way. This may sound obvious, “more money and more time spent will produce better results,” but why do so few companies focus on enlisting all of their employees into the recruiting effort. Companies should learn from Cisco, PricewaterhouseCoopers, SRA International, Akamai Technologies and others that hire nearly half of their employees this way. There is no greater ROI. Let me explain. Why focus on referrals?

  1. Reduce cost. According to the EMA Cost Per Hire Survey 2001, referrals are the least expensive method to acquire new employees. Compare the average referral bonus of $640/hire versus $18,374/hire for contingency search. Now, these are figures are national averages. Do your own math. What do you typically spend to hire a candidate per channel? I am confident that you will find that every hire that comes through a referral is a direct savings. Not to mention that a referral bonus is only paid when a candidate is hired. Try getting a pay-for-performance from a classified ad or job board.
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  3. Save time. As a recruiter, you get evaluated by your superiors much like a salesperson does. You get judged by the number of people you hire or deals you close. You don’t see the recruiter or salesperson of the year award going to the person who had the most interviews or appointments. How do referrals help? Candidates that come through referrals have higher interview to conversion rates. According to Remark, the best referral programs hire one in four candidates that make it through the initial screening process. Why? With a referral, there is a relationship that is half formed between the company and the candidate. The candidate is in many cases pre-screened and understands the nature of the job opening, as well as the culture of the organization. How many times have you identified the ideal candidate and extended an offer only to have it turned down? When a candidate comes to you from a referral, the employee who made the referral is often a great asset in the recruiting and negotiating process. Bottom line: fewer offers get turned down. You waste less time.
  4. Create more value for employees. What other recruiting method can also claim to be a preemptive retention strategy? Referral programs can. Referral bonuses and contests are an additional perk or incentive for employees. I know many firms that publicize it that way. For many employees a $1,000 referral bonus, a trip or even PTO (personal time off) can be a great incentive for people.

So referral programs have been around forever. Sure they have… but the next generation of referral programs is on the rise. The “next generation” includes web-enabled programs for more efficiency and third-party software solutions for more intelligent referral solutions. Just ask Ronin McCann from Intel. Intel web-enabled their employee referral program and integrated it with their HRIS system. The goal was 24/7 access, a streamlined referral process and employee self-service. The result was taking referrals from 36% of their total hires to more than 50% in just a few months after implementation. Not to mention the reduction of the administrative burdens commonly associated with referral programs. Through web-enablement, few employee referrals at Intel will fall through the cracks. If you don’t have the IT staff willing to dedicate time to automating your recruiting needs (you’re not alone), then there are options. Companies such as SRA International, Blackstone Technology, Prudential Insurance and others have turned to third-party vendors. I like jobTAG from Remark Solutions. Their approach includes a mix of strategy, services and technologies dedicated to referral programs. Their partnership with branding experts such as JWT Specialized Communications creates a one-stop shop for employers looking to beef up referrals both on and off-line. Hire.com has partnered with Angami Systems to offer their clients a Referral Management System. And I predict you will see other vendors teaming up. In the end, I believe the employers who are successful in enlisting their people in the recruiting effort will have a significant advantage in the war for talent. Which by the way is far from over. We may be in a quiet period, but don’t be fooled. Your competitors are using this time to lick their wounds, and rest up for the next battle. The spoils will go to those companies that bring the most soldiers and best weapons into battle. <*SPONSORMESSAGE*>

Kevin Wheeler is a globally known speaker, author, futurist, and consultant in talent management, human capital acquisition and learning & development. He has founded a number of organizations including the Future of Talent Institute, Global Learning Resources, Inc. and the Australasian Talent Conference, Ltd. He hosts Future of Talent Retreats in the U.S., Europe, and Australia. He writes frequently on LinkedIn, is a columnist for ERE.net, keynotes, and speaks at conferences and events globally, and advises firms on talent strategy. He has authored two books and hundreds of articles and white papers. He has a new book on recruiting that will be out in late summer of 2016. Prior to his current work, he had a 20+year corporate career in several San Francisco area tech and financial service firms. He has also been on the faculty of San Francisco State University and the University of San Francisco. He can be reached at kwheeler@futureoftalent.org.

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3 Comments on “Referral Programs: The Highest Return for a Dollar Spent

  1. Great article and I believe that referral programs are a worthy component in a recruiting strategy. An element that I would like to improve upon is developing strategies for reducing the number of low value referrals, those that are not posting or position specific. So often the referrals are for individuals that don’t have the proper skillset or background. How can quality, targeted referrals be increased?

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  2. Kirk raises a good point about ill-advised referrals that clog up the system.

    Maybe have the referring party categorized their referral in one of the following ways for the recruiter –

    High priority referral ? ?Referral has specific skills, which are relevant for an open position within my department.?

    Medium priority referral ? ?Referral has specific skills, which are relevant for an open position outside of my department.?

    Low priority referral ? ?Referral has relevant skills, but no position exists currently.?

    MARK

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  3. This is the best information I have seen on the power of referrals. It has meat with referenced material and systems. I hope it’s ok for me to have forwarded to about 50 HR professionals. I couldn’t pass up the opportunity to get some meaty information to those who can use it now. jim

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