Understanding the employee referral bonus: What is it and how it works?

Employee referral programs and its working

An employee referral program or ERP is a hiring strategy in which companies ask their employees to provide talent recommendations for open roles. These are structured programs that are used to find quality candidates within the employees professional network.

Employees ask people, they think are fit for the open position, in their professional network to send their resumes or CVS and recommend them to the hiring managers or HR's.

ERP aims to recruit best candidates from the circle of their employees in minimum time and as a result, employees are rewarded with prizes, if their referred candidate gets hired.

What are employee referral bonuses?

Employee referral bonuses are benefits provided to employees for referring great candidates for vacant roles within the company. It is a reward, typically a cash amount for an employee when they try hard to refer qualified candidates to fill open positions. They are usually part of an employee referral program.

Why and when employee referral bonuses are needed?

When a company needs to recruit high-quality candidates for open positions, they ask their employees to refer candidates from their network. If the referred candidate is selected and hired, the referring employee is given a referral bonus as a reward.

How does an employee referral bonus work?

As soon as a position opens in a company, the HR or the hiring managers ask the employees to refer candidates, that they think, have the talent, and are culturally and potentially fit for the organization.

Different types of employee referral bonuses

There are many different types of employee referral bonuses that companies offer to their employees on a successful hire of their recommended candidate. Some of the types are:

Cash bonus

Usually cash value of a specific range is rewarded to employees who refer candidates, depending upon the demand and level of the open role.

Trips and Vacations

Trips and Vacations: Some companies offer a 2-day or an extra trip to employees. For example, they receive extra days of vacation, if their referred candidate is hired.

Gifts, vouchers, and prizes

Gifts, vouchers, and prizes: Gifts are typically less expensive and can be an attractive way to appreciate employees. Sometimes a food voucher is what an employee needs and it can motivate employees to refer candidates.

Social bonus

In this type of referral bonus, a social recognition and praise is given to the respective employee.

Charitable donation

What can be better than setting up employee referral bonuses to serve a good cause. For example, for each employee referred candidate, who is hired, a specific amount of donation is donated to charity of employee's choice.

Recognition

Sometimes a referral bonus don't have to be costly, just a simple appreciation, recognition or a thankyou with an applause is enough to encourage employees for referring candidates.

Education bonus

You can award a referral bonus to an employee completing their degree, by offering them reimbursement or an education stipend.

Raffle bonus

A raffle bonus program is a great option in which the names of employees who referred the candidates over a specific amount of time, are collected and then the company organized a monthly or quarterly raffle to pick one or more person's name to award bonus prizes.

Custom bonus

Instead of setting a defined referral bonus, motivate employees to decide what bonuses they would like to be treated with. This helps them get more motivated and happy because they can get exactly what they want.

The 5 benefits of offering referral bonuses

Some benefits of offering referral bonuses to employees include:

1. The employee gets public recognition.
2. Employees will feel more motivated to refer people and it can provide them a reason to stay with the company for the long term.
3. It can improve the candidate pool, as your employees may know people who are fit for the role.
4. Employee referrals saves hiring time and cost as your employees know people in their circle who do similar work, they refer them and as a result you spend less time searching for quality applicants.
5. Rewarding an employee with a referral bonus serves to be more less costly rather then hiring a staffing agency or opting for contingency recruitment.

Why give out employee referral bonuses?

By offering bonuses to employees for successful referrals, can have a great impact on employees retention and turn over rate. Employees, rewarded with bonuses feel more valued and acknowledged, they feel more engaged, are satisfied with their job and are likely to stay with the company for long-time period. They develop a strong sense of belonging to the workplace, leading to low turnover rate. On the other hand, employees know people in their circle that are great fit for the open roles and bring them forward, leading to better hires and saving the company cost and time.

Who is given referral bonuses and who is not?

They are typically given to employees whose referred candidates are successfully hired for full-time, permanent roles or if their referred candidate get to the interview stage. On the other hand, generally employees who's referred candidates are hired for a contract, part-time or a temporary role are not payed referral bonus.Similarly, in some companies HR employees or executives are'nt eligible for a referral bonus.

Tips for Designing an effective referral bonus program

Referral bonus programs are planned and developed to encourage employees to refer high quality candidates for the open positions within the organization. These programs are held on monthly or quarterly or yearly basis depending upon the opening of a position in organization.

The plan demands an announcement about the start, requirements and the end of the program.

A clear notice or an email is send to employees stating:

1. Explain them about what are the goals of the referral program, its strategies and what steps can be taken to improve it.

1. When will the referral program start.
2. What qualifies as successful referral, for example if an XYZ referred candidate passes the last interview stage of the process.
3. What bonuses or rewards can expect at the end of the program depending upon the position and nature of the role.
4. Provide them with the list of job openings and their descriptions to the employees.
5. What are the limitations of referring candidate, for example, two employees cannot refer the same candidate, etc.

Note: Make sure your tone in the announcement encourages employees to refer top talent, not just because of the bonus, but also to create a productive company.

Drawbacks to Offering Referral Bonuses

Employee referral bonuses are a great approach to encourage employees to refer quality candidates from their circle. However, the success of this bonus program is not granted. Sometimes they turn out to be time consuming as the referred candidates might not match the open role. In employee referrals, employees generally refer their friends or people they’re close with, which is not bad, but it can limit your company to a specific pool, minimizing the chances of diverse workplace.

Postface

Employee referral bonuses serves as a great strategy to motivate and retain employees, moreover they minimize the task of finding quality candidates, as employees refer candidates from their network, who they think are a good fit. But they do come a with some disadvantages as it is not obvious that what will be the consequences of this strategy.

‍