Employee referral programs are known to have the highest ROI of all recruitment methods. In this blog post, you will learn everything you need to know to calculate the return on investment (ROI) of your own employee referral program.
The ROI of your Employee Referral Program
What’s all the fuss about employee referral programs?
Employee referral programs are one the biggest recruiting trends everyone is talking about.
Employee referrals have been cited as the best source of hire that can improve time, cost and quality of hire.
This is why it has been argued that every company should have an employee referral program.
Actually, according to John Hollon, the editor of Recruiting Daily, the #1 online media resource for the recruiting world, employee referrals are the best source of new hires:
If you aren’t getting at least 25-35 percent of your hires this way, you’re simply hurting your organization and ensuring that your recruiting will be a lot more costly, and time-consuming, in the months and years to come.
On the other hand, we have also been warned about the dark side of employee referrals.
So what is the real truth about employee referral programs?
Are they just another currently popular HR buzzword or a must have recruiting strategy worth your attention?
Employee referral programs have the highest ROI: Truth or a myth?
Setting up an effective employee referral program is not as easy as posting jobs on job boards.
It takes a significantly greater amount of time and effort.
So is it worth it?
What is the Return On Investment (ROI) of the employee referral programs?
It seems that employee referral programs are the most efficient way to deliver consistent ROI.
According to research, employee referral programs have the highest ROI of all recruiting methods.
This has been also been confirmed in practice:
- 82% of employers rated employee referrals above all other sources for generating the best return on investment (ROI). (Source: CareerBuilder)
It seems that employee referral programs work great for most companies.
But how can you be sure that employee referrals are a good choice for your company as well?
In order to calculate the ROI of your own employee referral program, you first need to gain a deeper understanding of this concept.
What is a “Return on Investment (ROI)”?
Return on Investment (ROI) is a performance measure, used to evaluate the efficiency of your employee referral program.
Basically, ROI is the cost/benefit ratio. As such, it is one of the most important hiring metrics.
Check out our checklist of the most important hiring metrics.
How to calculate the ROI of your employee referral program?
To calculate the ROI of your employee referral program, you need to:
- Divide the benefit (or return) of your employee referral program by the cost of it (investment).
The result is typically expressed as a percentage, so you need to multiply it by 100.
Here is the return on investment (ROI) formula:
Let’s proceed by examining the benefits and costs of an employee referral program.
Benefits of employee referral programs
Here are the 9 main benefits of an employee referral program:
In the following text, we will explain each of these benefits and list the relevant industry benchmark statistics.
Benefit #1: Reduced time to hire
According to HR technologist, referred candidates are 55% faster to hire, compared with employees sourced through career sites.
LinkedIn's research highlights some more interesting data which shows how employee referral programs significantly reduce time to hire:
- Traditional hiring methods such as posting job ads, combing career sites and retaining an outside recruiter can take up to 55 days from start to finish.
- On average, it takes a company 29 days to hire a candidate who was referred by an employee.
Benefit #2: Reduced cost per hire
According to the previously mentioned LinkedIn's research, employee referral programs help you save money you would otherwise spend on job advertisements, agency fees or recruiter commissions.
For example, if an agency charges a fee of 15% of the new hire’s first-year salary, an employee who earns $100,000 hire would cost your company $15,000 to acquire.
This means that even if you offer a generous employee referral bonus to your referring employee, you can still enjoy significant savings.
Another research reports that employee referral programs can save companies $3,000 or more per hire!
Benefit #3: Improved quality of hire
According to LinkedIn’s research, employee referrals are a top source of quality hires.
This finding has also been confirmed by employers:
- 88% of employers said that referrals are the #1 best source for above-average applicants. (Source: Dr. John Sullivan research)
Benefit #4: Reduced turnover rate
Employees who are referred tend to stay at the company jobs longer than hires made via others sources, such as job boards and career sites.
According to research:
- After one year, retention of referred employees is 46% compared to 33% from career sites and 22% from job boards.
- After two years, retention of referred employees is 45% compared to 20% from job boards.
Retention also increases for employees who refer candidates.
Research shows that employees who make successful referrals stay longer at the company.
Benefit #5: Improved employee engagement
Another great benefit of employee referral programs is that they enhance employee engagement.
Both your employees who recommended candidates and those candidates who were hired through referrals feel more engaged at work.
By including your existing employees in your recruiting process, you are giving them an opportunity to choose the people they would like to work with and spend most of their days.
And by celebrating their contribution to your company, you’re sending them a message that they are valued and recognized for their efforts. This, in turn, results in a higher employee engagement.
Benefit #6: Strengthened employer brand
What could be better for your employer brand than having your own employees telling their friends, families, colleagues and other people they know how great is working at your company?
According to Edelman Trust Barometer, employee voice is 3x more credible than the CEO’s when it comes to talking about working condition in a company.
Having your employees act as your employer brand ambassadors sends a credible message that your company is a great place to work.
Benefit #7: More profit generated
Research shows that employees who were hired through referral programs produce 25% more profit for their companies than new hires hired via other sources.
Benefit #8: Improved offer acceptance rate
A study by Glassdoor’s Chief Economist Dr. Andrew Chamberlain showed that referred candidates are more likely to accept your job offer.
It makes sense since the job has been introduced to them and guaranteed for by a trusted source - your employee!
Benefit #9: Higher diversity
Although some concerns were raised about the possibility of employee referral hurting diversity, it seems that well-designed referral programs have no negative diversity impacts.
Moreover, employee referrals with an emphasis on diversity can actually increase diversity!
Dr. John Sullivan, the head of the Human Management Program at San Francisco State University and an expert in employee referral programs, says that:
Despite the old myth that referrals have a negative diversity impact, referrals were #1 as the “most productive” source for diversity hires, well ahead of major job boards, company affinity groups, and diversity career fairs.
Costs of employee referral programs
Besides many benefits, employee referral programs also require certain investments.
Referral costs boil down to the costs of creating and maintaining the employee referral program.
These costs include:
Cost #1: Development costs
Development cost is an upfront investment needed for setting up an employee referral program.
This process doesn’t require a dedicated budget, but it does take some time and effort from your HR team.
Cost #2: Marketing
Marketing costs of the employee referral program are the costs involved in promoting your employee referral bonus.
It is worth mentioning that these costs are minimal.
Since you’ll be promoting your employee referral program to your own employees these costs boil down to sending a newsletter, printing out an employee referral poster or paying or beer and pizza for your employee referral party.
Cost #3: Employee referral bonuses
Employee referral bonuses constitute the most significant cost of employee referral programs.
These are the costs of funding incentives and rewards for your employees who refer qualified candidates.
If you decide to offer cash bonuses, here is what you need to know:
- Generally, the value of referral cash bonuses ranges from $250 for entry-level positions to more than $25,000 for top executives. (Source: Worldatwork)
- 69% of companies offer cash bonuses that fall between $1,000 - $5,000. (Source: Meritage Talent Solutions)
Of course, these number can vary greatly across different industries, locations and specific positions.
Cost #4: Employee referral software
Of course, investing in employee referral software is not mandatory, but it is highly recommended.
This is because this software can automate and streamline the referral process, thus actually saving your time and money, especially in the long run.
There are many specialized employee referral HR software you can choose from.
However, most of the modern recruitment software, such as our TalentlLyft (wink, wink, nudge, nudge) already incorporate everything you need to create a structured, automated employee referral program at no additional cost.
The ROI of your Employee Referral Program
According to many different research, employee referral programs are generally rated as having the highest return on investment (ROI) of all other recruiting strategies.
When compared with other recruiting methods and sources., such as job boards, career sites, etc., employee referral programs come out as the most cost-efficient.
However, you can’t be sure if you don’t collect your own data and do the math.
Hopefully, the formula presented in this blog post will help you better understand all the cost and benefits of employee referral programs and calculate the return on investment (ROI) of your own employee referral program.