Build a Stronger Employee Referral Program

Build a Stronger Employee Referral Program

by Kate Gautier and Lalith Munasinghe - May 26, 2020

You’ve probably heard that internal referrals result in better hiring outcomes. Research has found that referred candidates are of higher quality than applicants from the general public and are more likely both to receive and accept an offer, stay at the job longer, and perform better. This all adds up to spending less time on the hiring process, reducing turnover, and increasing overall productivity. But not all referrals are equal.

Our recent research finds that employee referrals are significantly better when the referrer and candidate know each other well, compared to when they have a weaker connection. In fact, when the two know each other only through social media, the hiring outcome is not any better than that of candidates with no referral at all.

Referrers as Matchmakers

Consider a typical hiring process, in the absence of a referral: A candidate may have some information about a job, from the published description of the open position, materials about the company available online, etc. Similarly, the company will have some information about the candidate, from their application, resume, references, etc. An interview may entail more detailed discussions of the role and the candidate’s prior experience as well as softer assessments of their social skills and priorities. Throughout the application and interview process, the candidate and the company ask themselves mirror images of the same question: “Would this job be a good fit for me?” and “Would this candidate be a good fit for the job?” respectively.

In other words: they both aim to predict the quality of the match based on the information that they have. Some predictions are good. Others aren’t. Reducing the errors in these decisions is in the interest of both the company and the candidate, however some aspects of match-relevant information can be difficult to ascertain during the traditional screening process. This is where referrals typically serve both companies and applicants well. While the goal of hiring remains the same, with referrals both parties have access to a third party that has key insights about the job and the candidate.

The referrer, as an employee of the company, can give a genuine perspective on the culture, the processes, the company leadership, and the job duties - much of which may be difficult to discover in a more formal recruitment process. She can also, as someone who knows the candidate, share information about what kind of employee the applicant may be. She may know their skill set, work ethic, goals, and other information that is hard to glean from an interview and resume. This is why referrals are so valuable; they bring privileged and hard to observe information into the hiring process.

Weak vs. Strong Connections: Evidence from a Call Center

In our research we tracked the outcomes of referrals at a global contact center. This company had introduced an internal referral program and had technology for tracking referred candidates and hires. They also used a bonus program for employees who made referrals that resulted in a hire who stayed for at least ninety days. As a part of the referral process, candidates were also asked a few simple questions about the nature of their relationship to the referrer.

At first, we looked at the group of people who came through internal referrals compared to those who came through other channels. Consistent with prior literature, referrals did better than non-referrals: For every 100 applicants, referrals generated 70% more good hires than non-referrals. However, when we looked more closely at the nature of relationships in the employee referrals, there were clearly some connections that were stronger than others and that relationship strongly correlated with the quality of the hire.

At one end of the spectrum we identified “strong connections.” These people were former coworkers who had known each other for more than one year. At the other end of the spectrum were referrers connected only through social media. We found that the strong connections were nearly three times as likely to result in a good hire than the online connections. In fact, the online connections were no more likely to result in a good hire than people who weren’t referred at all.

Building the Right Process

Because referral programs today have no systematic way of sorting out weak from strong connections, low-quality referrals are at risk of crowding out the high-quality referrals, meaning that you waste effort in screening, and can even miss out on hiring the best matches.

There’s a simple way to address this issue. Because the value of referrals is really in the information they bring to bear, job applicants and hiring teams need to ask key questions of referrers. Job applicants should know how long their contact has worked at the company and whether they’ve worked in a similar role to the open position. Hiring teams should ask referrers if they’ve worked with the candidate in the past, how they know each other, and for how long they have known each other. This information can be incredibly valuable to the hiring process. And ultimately, it will enable your employees to reach their full matchmaking potential, resulting in faster screening, lower turnover, and better hires.

Companies should also consider how effective their referral programs are in light of this research. Many referral bonus programs incentivize nothing more than sharing job posts on social media, where people often have hundreds or even thousands of connections, followers, or friends. While this may certainly be a reasonable supplement to job boards in terms of reaching a larger audience, it must not be mistaken for the kind of quality referrals that employees can make when they recommend someone they know for a job they know.

Finally, remember that referrals are indeed valuable to your company. Our research is not meant to suggest that referrals aren’t useful. In fact quite the opposite. The stronger the referrer’s connections to the company and the candidate, the better a matchmaker the referrer should be. And, by extension, the more valuable the employee they are recommending.

Kate Gautier studied mathematics at Barnard College, Columbia University and is a founding member of Talenteck, a human capital analytics company.

Lalith Munasinghe, Ph.D. is a professor of economics at Barnard College, Columbia University and the founder of Talenteck, a human capital analytics company.