Despite Success, There Are Reasons to Be Wary of Referral Programs

By Gina Ruiz

May. 21, 2008

Employee referral programs consistently are recognized as among the most effective methods for attaining talent. Candidates are usually strong cultural matches with an organization who tend to hit the ground running and have a low likelihood of early departure.

    According to a 2007 CareerXroads survey, employee referrals are the No. 1 external source of hire—accounting from almost 30 percent of new talent. Twenty percent of survey respondents said one out of two employee referrals result in a hire.

    But for all the good that employee referral programs can yield, they also cause problems. It’s simple human nature; people often gravitate toward individuals with similar tendencies and characteristics. Employees tend to know—and recommend—candidates who resemble them in some way, whether it’s the same college degree, comparable professional background or the same country club.

    With that in mind, it becomes important for companies to realize that referral programs are not always the best recruiting approach.

    In fact, referral programs can sometimes thwart such objectives as changing corporate culture, assembling a workforce with a new set of skills or bolstering diversity, says John Sumser, a recruiting consultant and author.

    “If companies are trying to get out of a rut or rehabilitate a dysfunctional workforce, referral programs are going to hamper those efforts because all they will do is produce more of the same type of worker,” he says.

    Companies also should remember that employees may not always make sound decisions when it comes to referrals, basing a recommendation on family or a friendship rather than objective criteria like professional experience. This is a precarious situation because it can erode the quality of a referral.

    What’s more, employers unfamiliar with referral programs can inadvertently create an HR phenomenon known as inbreeding, which occurs when companies continuously recruit candidates that are virtual clones of the existing workforce population. It stifles the flow of fresh talent with new ideas, says Peter Weddle, CEO of recruiting consultancy Weddle’s.

    It’s a situation that can create insularity and complacency and harm an employer’s competitive edge, says Paul Rowson, general manager of WorldatWork in Washington. What makes the misuse of referral programs damaging is that given a positive reputation, companies often fail to recognize when these initiatives are hindering their efforts.

    “Sometimes companies will blindly push these initiatives forward without first determining whether it makes strategic sense,” Rowson says.

    There are safety measures to ensure that referral programs build a healthy and diverse pipeline of candidates, says Cathy Henesey, president of the Dallas-Fort Worth Recruiters Network. First, a company must determine whether such an initiative is suitable.

    “Companies that have a lot of workers who are similar to each other may want to emphasize other types of recruiting tools instead,” she notes.

Mitigating the potential for inbreeding
   AmTrust Bank’s employee referral program hit an impressive milestone thanks to an overhaul last year. Almost 80 percent of hires are now derived from referrals, up from 28 percent three years ago, says Ron Bower, director of talent sourcing at the Cleveland-based financial institution. Bower offered the statistic during a speaking engagement at April’s ERE Expo in San Diego.

    While some eagerly listened to Bower’s recruiting techniques, others thought such a heavy reliance on employee referrals could hinder workforce diversity. That hasn’t been the case at AmTrust, where diversity actually increased since the program was revamped, Bower notes.

    “We wanted to ensure that we would continue to receive a healthy pool of diverse candidates,” he notes.

    Workers learned about the bank’s job groups and were counseled on the types of professionals who would make good referrals based on education or experience. Throughout the process, AmTrust continuously reinforced the importance of diversity in the workplace.

    “It goes into every aspect of our corporate life,” Bower says. “We live by this principle.”

    Employees are encouraged to think beyond family and friends when recommending talent. Bower wants workers to think of every social setting as a potential opportunity for recruiting—whether it’s a trade conference, a restaurant or a baseball game—so they will scout for talent in varied locations and organically increase the diversity of referrals.

    Recruiters also play an active role by training employees, sharing tips on places to find talent and initiating a conversation with a potential referral to elicit their professional experience.

    “These are people who don’t recruit for a living, so we have to give them the tools to be successful,” Bower notes.

    Employees aren’t taught a recruiting pitch, but instead are encouraged to share their story about working at AmTrust—likes as well as dislikes.

    “The important thing is that they are genuine and honest with potential candidates,” he says. “Otherwise people are going to get turned off.”

    Bower says the company relies on its applicant tracking and talent management systems to keep tabs on recruiting efforts to ensure diversity.

    Tracking the demographic component of the existing workforce and whether employee referral programs are providing candidates who reflect diversity is important for compliance, says Dianna Johnston, assistant legal counsel with the Equal Employment Opportunity Commission in Washington.

    The EEOC issued a compliance manual in 2006 warning companies with homogeneous workforce populations against relying too heavily on employee referral recruiting tools.

    “Employee referral tools by themselves are not a problem,” she notes. “What creates an undesirable situation is when companies that lack diversity use them.”

    There have been cases in which companies were burned for misusing employee referrals, such as Carl Buddig & Co., a large meat processor in the Chicago area. The company had to pay $2.5 million and overhaul its recruiting process in September 2004 to settle a lawsuit that accused the company of systematically excluding black job candidates through its employee referral program.

    Johnston says companies should adopt steps that promote diversity throughout the entire recruiting process. Some best-practice measures include explaining to their external recruiting vendors that diversity is a key objective within the organization. They can also post job advertisements that encourage women and minorities to apply.

Protecting the quality of referrals
   When companies launch an employee referral program, they are essentially allowing workers to make talent selection decisions that may not always produce stellar results.

    For one, employees may not be objective recruiters. There are times when they refer the people they know best, not necessarily those who are the best qualified, Weddle says.

    “Employee referral programs become the employment equivalent of a ‘family and friends’ exercise if companies are not careful,” he notes.

    There are steps that companies can take to ensure they are receiving the highest-quality employee referrals.

    They should encourage workers to forward the best people in the field, regardless of whether they know them personally. Eli Lilly and Co. applies this talent acquisition strategy to its employee referral programs, he says.

    Another approach is to create an initiative that identifies the top-performing workers within the company and spend extra effort to raise awareness about the employee referral program among this group.

    “Instead of sending mass e-mail blasts to the entire workforce, there may be cases when companies want to pinpoint their efforts,” says John Hassett, senior consultant at Aon Consulting’s human capital practice. “Star performers tend to hang out with people who are as hardworking and motivated as they are.”

    Employees who make referrals typically receive a bonus for their efforts in finding talent. But companies that want to protect the quality of the referrals should put a cap on the amount they dole out, Henesey says.

    “If you offer too much money for referrals, your employees will basically turn into recruiters,” she notes. This is more likely to happen among low-wage earners, she explains.

    If an employee’s monthly wage is about $3,000 and they receive close to that amount for making a referral, there may be problems on the horizon, she explains.

    “They’ll want to recruit as many people as possible because it gives them a huge bump in their monthly income,” Henesey notes. In most cases, referral bonuses should not exceed the $1,500 to $2,000 range.

    In addition, companies can raise the bar on referral quality by asking employees to think critically before submitting a recommendation. One way is to ask them to write a short essay—only a couple of paragraphs—that explains why the candidate would make a good hire for the company.

    Shelly Peterson, a consultant at Mercer, agrees that employee referral programs should be structured and managed carefully. She also stresses that companies should continually evaluate their return on investment.

    “As with any other initiative, companies need to validate its existence,” she says.

    Determining the success of an employee referral program is difficult for many companies, according to Weddle, in part because organizations measure its success by looking at the levels of early attrition among referrals. It’s important, but ideally they should be looking at their job performance, he notes. Weddle says this level of in-depth analysis is rare because assessing performance and tracing it back to the source of hire requires a lot of time and effort.

    Another challenge is that companies could let the positive hype about employee referral programs get in the way of an objective evaluation. Companies occasionally adopt practices because they think it’s what they are supposed to do or because they heard it worked well for another firm, not because they have evidence of its effectiveness.

    Though it may be grueling, Weddle says it’s critical for companies to probe as deeply as possible when assessing their recruiting practices. The findings could debunk some of their preconceived notions about the efficiency of their talent acquisition approach, he explains.

    “You never know what you’ll discover,” he says. “You could wind up making significant changes to your mix of recruiting tools.”

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