The Advantages & Disadvantages of Using Employee Referrals

by Shelley Frost; Updated September 26, 2017

Referral programs reward employees for recommending acquaintances for job vacancies at the company. Programs vary from employer to employer, and the specifics of each affect their success. but they generally include a cash bonus paid to the referring employee once the candidate has been with the company for a certain period of time. While such programs may seem like win-win propositions, they do have drawbacks. Understanding the pros and cons of referral programs will help you develop a successful program for your company.

Reduced Recruitment Work

The more employee referrals you receive for open positions, the less work you'll have to do during the initial recruitment phase. Depending on the quality and frequency of referrals you receive, you may fill many of your positions from internal referrals. An employee referral program may also complement your other recruitment efforts, such as attending job fairs or posting job openings. Using a referral system allows you to see resumes from candidates who may not otherwise have applied or made it to the top of the pile.

Quality

Employees are more likely to refer qualified candidates for two reasons. First, they know that their reward is conditional on the referred candidate being hired and remaining with you for a certain period of time, so they generally won't refer candidates who cannot do the job. Second, referred candidates reflect on the referring employee, and most employees will want to develop a reputation for referring good candidates. In addition, because employees generally refer fiends and acquaintances, there's higher likelihood the candidate will fit in well with the existing employees.

Cost

The cost of a referral program is variable, depending on how you reward your employees for their referrals and any amounts saved by relying less on other approaches. For an effective program, you need a reward that's attractive to your current employees. A monetary bonus is the typical reward for a referral who's hired and stays with the company for a predetermined amount of time. Although the employee handles the legwork for you, the company ends up paying out a potentially large sum. However, traditional recruiting methods are also costly, as is leaving a job unfilled while seeking a replacement. If referrals wind up representing a significant portion of your new hires, you may experience net savings in your recruitment efforts. If you implement a referral program and don't experience a decline in your other recruitment costs, you may wind up spending more.

Diversity of Candidates

The diversity of the candidate pool is often limited when relying on employee referrals, especially if your current staff lacks diversity. Your employees are likely to refer candidates with similar backgrounds, so you may miss out on a diverse candidate pool. In addition, if you hire a large number of referrals, you may contribute to the creation of cliques in your workplace. To diminish this possibility, some employers limit the number of referral bonuses an employee may earn per quarter or per year.

About the Author

Based in the Midwest, Shelley Frost has been writing parenting and education articles since 2007. Her experience come from teaching, tutoring and managing educational after school programs. Frost worked in insurance and software testing before becoming a writer. She holds a Bachelor of Arts in elementary education with a reading endorsement.