Managing: Starting an employee referral bonus program: Jobs - Resources

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This story was printed from ZDNet Australia.
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Managing: Starting an employee referral bonus program

By Eric Walter, 0
September 10, 2001
URL: http://www.zdnet.com.au/jobs/resources/soa/Managing-Starting-an-employee-referral-bonus-program/0,130056675,120107723,00.htm

Let them do the work for you.

Employee referral programs are becoming increasingly popular as employers battle the tightening labour market, according to US-based employment law firm of Wessels & Pausch.

Referral bonus programs are indeed a favored recruitment strategy for many. "Absolutely the best employees come from employee referral programs," says recruiting manager Jerry Holt. Holt works for Dazel, a Hewlett-Packard software division. In his 24 years of recruiting, he says that employee referral programs are "the first line of defense for any company that knows what it's doing."

What companies do
The meat and potatoes of every company's plan is essentially the same. An incentive is devised to get folks to think about their friends who may be qualified to fill a cubicle at the company. The particulars, from company to company, can vary widely, however.

A quick survey of several companies' referral programs indicates that the typical bonus in the neighbourhood of couple hundred or a couple thousand dollars. The money is doled out to the employee as a supplemental check, or part of the paycheck, either when the referred candidate is hired, or after the referred candidate has worked at the company for a number of months. Some companies will give referring employees one check if their referrals make it to the interview stage, and another bonus if the candidates are actually hired.

Some companies distribute thank-you cards, Holt says. Some distribute cash. It all depends on the hiring needs of the company and the values of the employees, he says. Whichever method the company uses, though, it has to be something to get the employees' attention.

When Holt was working with Apple Computer in the '80s, he says, employees were rewarded with gift certificates for the company store. Getting a free Apple t-shirt was a big deal for employees who were interested in being identified with the young company.

Dazel offers bonuses to its referring employees after the referred hire has been with the company for three months. The company also deposits a separate amount into a pot. At the end of the year, the accumulated pot gets split between three lucky referring employees, 50 percent, 25 percent, and 25 percent. If enough employees make qualified referrals, that pot can get to be a pretty nice size.

"It won't get you a Porsche," Holt says, but it might help you out with a Mustang.

Also, at the annual company meeting, the employee who referred the most qualified candidates is presented with a gift certificate.

Effectiveness
Holt sees employee referral programs as being the No. 1 most effective strategy. Wessels & Pausch outline some of the chief benefits of employee referral bonus programs on their Web site:

The quality of referrals is generally good.

The referrals usually do not need to relocate.

The cost is generally lower than the fee charged by an employment agency or a search firm.

Referring employee often support their referral to succeed.

Employee morale and commitment increase when an employee referral bonus program is used.

The second-best strategy, Holt says, is college recruiting, because you can get some young, energetic employees and buy into some early loyalty.

Print and media advertising is the third most effective method, according to Holt. The fourth best is job fairs. And No. 5 is hiring through recruitment agencies.

When it comes to Internet-based strategies, Holt is not convinced. The concept of hiring through the company's Web site is "overstated," he says. Dazel posts job openings on its own site, but in 1999, the company hired only one person who submitted a resume in response to those postings.

Measuring success
"[Dazel's] is a great program. It gets the attention of employees to think for five minutes a day about who ... would like to be a part of the team," Holt says.

You know your employee referral program is excellent if it's your major source of new hires, Holt says. At Dazel, it is.

Cost-effectiveness
Another measure of a program's success is how cost effective it is. Taking costs such as recruiter salaries and advertising into consideration, the industry average cost per hire is more than US$8,000 per person, says Holt. Whatever strategy companies use for recruiting, the objective should be to reduce the cost per hire to something below that industry average. Dazel's average cost per hire in 1999 was around US$4,000, Holt says.

If your company's annual budget allows for 100 hires in one year, you need to shoot for a plan that lets you spend less that US$800,000. Set your target per-hire cost, says Holt, and extrapolate for that year how much you can afford for a referral program.

"The bonus [amount] needs to be big enough to provide an incentive to participate but small enough to keep cost down. US$100 [to] US$200 [is] lots cheaper than newspaper ad or agency fees," writes one recruitment message board contributor.

Chances are good that any company's referral bonus will cost less than that industry average.

With referral programs, says Holt, turnover rates are much lower than with other forms of recruitment. Dazel lost only one employee out of all the people who came out of employee referrals. This saved hiring cost is remarkable when amortised over the length of the employee's retention.

Just say no
In Holt's experience, he says, large companies that have been around for a long time tend not to use employee referral programs. The prevalent attitude at many of these firms is: Why reward employees for bringing someone new on board, when the current employee should want to go the extra mile himself and fill in the labor holes?

Some companies get nervous about distracting their employees, too, Holt says. For example, engineers should be engineering, not taking company time to think about how they can get their hands on some extra dough. But Holt says such attitudes are "short-sighted," adding that some "forward-thinking" large companies have realised the benefits of referral bonus programs

Tips on using referral bonuses
Wessels & Pausch provides a set of guidelines to consider when implementing an employee referral bonus program:

Lessen administrative headaches with a simple program.

Don't limit the pool of candidates by accepting referrals for only certain departments or job types.

Maintain interest in the program by publicising it continually.

Make sure employees know how the candidates they refer must prepare themselves.

Keep the referring employees and their referrals in the loop with regard to your final hiring decision.

Follow every referral with a response telling the employee that their referral was appreciated.