Referral Bonuses - Good or Bad?

The battle for talent is heating up. Unemployment rates have been steadily declining over the past few years and we've reached that point where I'm hearing, "we're having a hard time finding people" even from my clients who hire low skill workers.

One temptation during times like these is to add a referral bonus incentive or increase the one already in place. I've heard of companies offering as much as $4,000 for an employee referral!

Here are some things to think about when considering an employee referral bonus program:

1. If you have a healthy culture, you don't need one. Employees will refer people they want to work with for no referral at all if they consider your place to be a good place to work. If your culture is lousy, they won't refer people they like, but they may refer people they don't care about if the bonus is tempting enough.

2. The higher the bonus, the weaker the referrals get. Good employees will refer "A" players whenever they get the chance. However, they'll also screen out people they don't think would be a good fit or whom they'd be embarrassed to be linked to. However, the higher the bonus, the easier it is for them to convince themselves that "Bob" who they know is lazy and has never been able to hold down a job, might just work out this time. I remember one of our supervisors took a bunch of application forms, wrote his name in the "referred by" space, and went down to the local mall and handed them out like fliers. Not exactly what we had in mind.

3. Referral bonuses can weaken your employment brand.  Research recently published by Applied Psychology suggests that candidates, upon learning that the company has a referral bonus, may question the motives of the referring employee and change their perception of the hiring organization.

4. Too much dependence on employee referrals can increase discrimination risk. People tend to refer people like them (same race, age, gender, etc.). So bragging that 100% of your vacancies are filled by employee referrals could result in a discrimination claim by someone who doesn't look like the rest of your employees. 

This is not to say that you should trash your employee referral bonus altogether. There are some benefits. Positions filled by referral tend to be filled more quickly and those referred tend to last longer and perform better (on average). But make sure your bonus is a token of gratitude, not an incentive to refer every bum they know or distribute applications like a ticker-tape parade. When the candidate finds out the employee referring them is getting something, it shouldn't be large enough to bring into question the referring employee's motives nor make it look like your organization is desperate and willing to settle for just about anybody.