written by | November 1, 2022

Understanding Employee Referral: Concept And Advantages

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Table of Content


A word-of-mouth campaign is one of the best forms of publicity there is. Using your employees' positive word-of-mouth effectively and productively is one of the best ways to hire the most successful candidates. You can gain countless benefits from word-of-mouth recruitment, mainly if you recruit through employees from the referral program

Did You Know? Recruited workers on job boards have a two-year retention rate of only 25%, while employees referred by colleagues have a four-year retention rate of 45%.

What is Employee Referral?

Referrals from existing employees or external partners (such as clients) are considered employee referrals. Typically, referred candidates do not follow a traditional application process but instead submit their resumes to a company they know via someone who knows them. In the next step, the hiring team will review their outlines and professional backgrounds, assess their performance on role-specific assessments, and interview them to determine whether they're a good fit.

Also Read: Basic Salary - Basic Salary Calculation, Salary Deduction, Formulas

Importance of Employee Referral

Employee Referrals are a way to find the correct candidates for open positions. Rather than leveraging traditional methods of hiring such as classified ads or job boards, you could ask employees to recommend new hires.

The following facts denote the importance of Employee Referrals:

  • Candidate participation in the recruitment process has changed fundamentally over the last few years.
  • One country's leading HR firm recently found that candidates drive almost 90% of job openings. 
  • The company no longer selects the talent; instead, the talent chooses the company.
  • As a result of this trend, many companies have rethought their recruiting strategies and put more emphasis on including their existing employees in the hiring process to increase their chances of finding a reliable long-term candidate.
  • As a result, referrals from employees can assist employers in finding the best candidates with the required skills for in-demand roles, which are difficult to fill, time-consuming, and expensive.
  • For this reason, modern recruiters increasingly involve existing employees in sourcing and retention. 
  • It has led to the creation of Employee Referral Programs, which are now among the most productive and beneficial methods of finding and retaining talent.

What is an Employee Referral Program?

Organising, asking for, and receiving employee referrals from existing employees is defined as an employee referral program. Employees can still recommend qualified candidates for open positions without an employee referral program. 

While this strategy is effective for short-term recruitment, it cannot be relied upon for long-term recruitment. You can enhance your hiring strategy by running a comprehensive employee referral program. As a result, your chances of hiring the right person increase.

Benefits of the Employee Referral Program

The following are the main reasons why you should build an employee referral program for your company:

1. Ability To Recruit

Faster and more efficient recruitment is made possible by employee referrals. Employees who refer candidates know them and vouch for their skills and qualifications. Moreover, they will ensure that the candidate meets the job's eligibility requirements. You could therefore skip the initial phases of job advertising, job listings, and resume screening and contact the referred candidates directly for interviews. According to leading job portals, referrals have a 6% higher likelihood of accepting employment offers than those who are not.

2. Higher Conversion Rate

The interview process tends to progress more quickly with job applicants whom employees refer. An employee referral boosts the chances of job matching by 2.6 - 6.6 percent, according to Glassdoor interview data.

3. Highest ROI

It costs a lot to recruit. The hiring process is costly for companies, and indirect and direct costs are involved. Recruitment agencies receive commissions as a direct cost. You would quickly pay the recruitment agency 10-20 per cent of your annual employee salary, but you only need to pay 2-3 per cent as a referral bonus. These direct fees include those born to job boards, career websites, and any recruitment marketing-related activities. Indirect costs include resources such as time, logistics, etc.

In most cases, however, you can save these costs by implementing an effective job referral program. Employee referrals require less investment than other recruitment channels since employee referrals attract more relevant profiles and have a higher conversion rate.

4. Referred Hires Stay Longer

A referred hire stays with the firm longer than a regular hire, one of the most prominent benefits of employee referrals. The result is a higher employee retention rate. Recruiting through job boards, recruitment agencies, etc., results in candidates who stay at least a year with the company, according to a JobVite study.

5. Culturally Fit Candidates In Employee Referrals

Employees almost always introduce their friends and acquaintances. There will be a clear understanding among the employees as to which types of work, skills, and people are needed. A team member would see the sort of team member required if, for example, your team needs support at odd hours or if they are working on a business-critical project.

6. Enhancing the Employer Brand

LinkedIn research shows that 75% of job seekers research a company's brand and reputation before applying.

Your employees will go out there and say only nice things about you and your Employee Value Proposition when you ask them to recommend a candidate (and provide a good bonus).

It is a great way to attract talent even for future job openings since candidates and job seekers trust employees more than employers. Building your talent pool with these people will make your hiring process faster and more effective.

Also Read: How to Calculate Your In-Hand Salary Based on Your CTC?

Disadvantages of the Employee Referral Program

There are some disadvantages to employee referrals. Here are some drawbacks and ways to overcome them:

1. Lack Of Diversity

Generally, employees recommend candidates who are similar to them. Human nature dictates that, and those with similar thought processes and actions to our own are more likely to associate with us. Employees would prefer to recommend people they know - people from similar backgrounds, who went to the same college, and with whom they hang out. As a result, the team will become homogeneous and exclusive rather than diverse and inclusive.

Referrals are one of the many sources of recruitment that you can use to bring more diversity and inclusion into your team, not the only one. Additionally, give equal consideration to candidates from other informal sources, which will help diversify your workforce.

If your employees are aware of qualified candidates professionally but do not know them personally, you could encourage them to refer to them. You might have a data specialist on your team, but they might be familiar with a good developer from their previous employer. By engaging employees, you can effectively hire diverse candidates.

2. Lack Of Transparency

Employee referral programs often lack transparency when conducting recruitment drives. Suppose an employee recommends a candidate for a job opportunity and describes the company's and job's benefits to the candidate. In that case, the candidate becomes excited and eager for the new job opportunity, and the company does not respond after a few days. Inquiring about the status, the employee discovers that someone else has filled the position.

In addition to crashing the candidate's expectations, this lack of information also discourages the employee from recommending future candidates.

Employee Referral Policies

Employee Referral Policy outlines the procedure for making such referrals, the employee's return, and other rules and regulations the employee must follow. The company can use this policy to assure employees that the organisation trusts their judgment. Employee referrals are system companies, and organisations discover talented people by asking their existing employees to recommend candidates.

Referring selected and employed applicants to the company will result in a bonus for a current employee. Employee referral programs increase internal resources and networks to find unique job candidates.

The following are the criteria covered in the employee referral policy

  • The organisation allows employees to refer to individuals who suit the job description.
  • As with all candidates, the referred candidate must undergo the same recruitment process.
  • Employee involvement is limited to submitting resumes. No other process involves him.
  • Have to follow specific rules and procedures for employee referrals.
  • Based on particular policy guidelines, employees will get referral bonus points.

Also Read: Salary Revision in Jobs and Recovery of Arrears

Employee Referral Examples

An employee knows about the job opening through the mail or a colleague. He may then refer that particular job to his known member. An example of referral mail is given below:

Subject: ₹ 30,000 Bonus for Finding a Full-Time Java Developer 

Hi, team!

We're always looking for highly qualified programmers to join our team at Infoware Inc. Currently, we are looking for a Java developer to report to Sanjay, our Project Manager. It is a full-time, salaried position. Let us know if you know someone who'd be a good fit for the role and our company. 

Upon hiring the candidate you referred to and keeping them at our company for six months, you will receive ₹ 30,000 as a referral bonus! Applicants must not be previous employees. 

Reply to this email with the person's name and contact information. Send them to our careers page, and we'll keep an eye out for them! In case of questions, please let us know.

Thanks and Regards,

Anuj Pandey

Conclusion

Recruiting the best talent from employee referrals is possible if utilised effectively and tactfully. Focus on hiring the most qualified candidates, even in difficult-to-fill roles, without sacrificing diversity or transparency in the recruitment process. 
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FAQs

Q: Is a referral bonus taxable?

Ans:

The short answer is generally "yes." Referral bonuses are subject to state and local taxes as well as social security and Medicare taxes.

Q: What is the purpose of paying for referrals?

Ans:

You can reward individuals who consistently bring you, new customers, by paying them referral fees. Your business will benefit from their experience and connections that are otherwise unavailable.

Q: What is the value of referrals?

Ans:

Candidates with such referrals are more likely to have their resumes read, get interviews, and receive offers. In the US, 30% to 50% of hires come from referrals.

Q: What is the effectiveness of employee referrals?

Ans:

The odds of advancing in the interview process are higher for job applicants whom co-workers refer to. A 2.6–6.6% increase in the likelihood of a job match resulting from employee referrals.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.