Out of all recruitment methods, employee referral programs managed to reached the top when it comes to the return on investment aspect. Whether you are contemplating if you should implement the program or you reached the dilemma of how to do so, we invite you to read the article and get blown away with numbers behind this recruitment method!
Employee referral programs are one the biggest recruiting trends everyone keeps talking about. Not only have they been cited as the best source of hire, but also as a way for companies to improve time, cost and quality of hire. For that reason many are arguing that every company should develop 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.
However, there are some challenges when it comes to setting up the program which is why we asked our self the ultimate questions:
What is the real truth about employee referral programs? Do they really have the highest annual return on investment or is it a myth? And ultimately, is the amount of effort and time that takes to set up such a program really worth the hassle?
The practice has shown that employee referral programs are the most efficient way to deliver consistent and highest ROI of all recruitment methods. Research by Career Builder showed that 82% of employers rated employee referrals above all other sources for generating the best return on investment (ROI).
In addition to that, LinkedIn showcased that candidates who come through referrals are four times more likely to get hired by the company which saves them over a 7500$ per hire!
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 investment gains of your own employee referral program, you first need to gain a deeper understanding of this concept.
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.
Here is how you can make your exact ROI calculations:
Check out our checklist of the most important hiring metrics.
To calculate the ROI of your employee referral program, you need to:
Important:
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.
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.
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:
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 and ultimately, higher ROI.
Another research reports that employee referral programs can save companies $3,000 or more per hire!
Finding a good fit candidate to work for your company is always a challenge. According to LinkedIn’s research, employee referrals are a top source of quality hires.
This finding has also been confirmed by employers:
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:
Retention also increases for employees who refer candidates.
Research shows that employees who make successful referrals stay longer at the company.
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.
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.
Research shows that employees who were hired through referral programs produce 25% more profit for their companies than new hires hired via other sources (such as social media or company career site).
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!
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.
Besides many benefits, employee referral programs also require certain initial investments.
Referral costs boil down to the costs of creating and maintaining the employee referral program.
These costs include:
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.
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.
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:
Of course, these number can vary greatly across different industries, locations and specific positions.
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.
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.
What is the ROI of an employee referral program, and why is it important?
The ROI of an employee referral program refers to the return on investment from implementing such a program, typically seen in the form of reduced hiring costs, faster time-to-hire, and higher quality candidates, making it a crucial aspect of recruitment strategy.
How can organizations measure the ROI of their employee referral program?
Organizations can measure the ROI by tracking metrics such as the number of hires through referrals, the cost-per-hire compared to other sources, the retention rate of referred employees, and the overall satisfaction rate of the hiring process.
What factors contribute to the success of an employee referral program?
Success factors include a clear and easy-to-understand referral process, attractive incentives for referring employees, regular communication about the program, and recognition of successful referrals to encourage ongoing participation.
Can employee referral programs help in improving company culture?
Yes, employee referral programs can improve company culture by bringing in candidates who are likely to fit well with the team, reinforcing a culture of collaboration, and fostering a sense of value and trust among employees.
What are some best practices for optimizing an employee referral program?
Best practices include ensuring clear communication about the program, offering meaningful incentives, providing feedback to participants, regularly reviewing and updating the program based on performance, and integrating the program
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