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Home / Blog / Does Your Company Need an Employee Referral Program? (Cost, Benefits, and Set-Up)

Does Your Company Need an Employee Referral Program? (Cost, Benefits, and Set-Up)

An employee referral program is a cost-effective way to recruit and hire qualified candidates.

Jodie Sandell PHR and SHRM-CP
Consultant, project manager, writer, and process improver with over 15 years of HRM experience
Contributing Experts
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Employee referrals are a cost-efficient avenue to hiring qualified candidates.
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According to PR Newswire, it takes an average of 44 days to recruit and hire. This represents valuable time when existing employees are covering the vacant position’s duties–or when those responsibilities are not managed at all.

Open positions can lead to burnout and high turnover rates, which is why a solid recruiting strategy is so important. HR needs to know where to find qualified, available candidates for their organization’s vacant roles.

Recruiters need to network in-person, use social media, actively recruit and passively recruit. They need to work all angles, including recruiting current employees to pitch in. Some of the best hires made are those that have been referred by existing employees. They know the company, and they know the referred person. Matchmaking with this additional background knowledge can prove positive for both sides.

This article will cover:

  • What is an employee referral program?
  • How are employee referrals incentivized?
  • Comparison of a referred candidate to an “outside” candidate
  • Is a referred candidate a more likely hire?
  • Is a referred candidate a better employee?
  • Cost/time benefits of an employee referral hiring pipeline
  • Where to start building an employee referral program
  • How employee experience feeds into employee referrals

What is an Employee Referral Program?

When an existing employee recommends a friend, colleague or former colleague for an open position in their company, this is an employee referral. The current employee may or may not have deep knowledge of the referred person’s work experience and skill set, but they likely can vouch for the job seeker’s values and work ethic if they are making the recommendation to consider them.

The current employee understands your organization’s mission, values, industry and hiring needs. The advantage seen with these kinds of matches is a cost-effective way to fill a job opening. But the benefits go well beyond just locking in a candidate, as you’ll see later in this article.

Some organizations have formalized and encouraged employee referrals by implementing an employee referral program. An effective employee referral program typically has a defined process to clarify participation rules and avoid unintentional hiring bias. An effective program also offers benefits to those submitting candidates for consideration.

How are Employee Referrals Incentivized?

A cash bonus seems like the most logical way to incent current employees to refer candidates to hiring managers and recruiters, and referral bonuses can average $1,000-$5,000 per employee hired. However, Zippia research shows that only 6% of employees participate in referral programs for financial incentives, and states that “[o]ffering large cash rewards isn’t the key to a successful program.”

Most team members are referring friends or professional contacts to help their contacts who are seeking work. Existing employees are also motivated to help out their company to fill open positions because vacancies typically create more work for retained teammates. People also tend to like to work with people they know. Working together to fill those open positions is a win for everyone.

While money may not be the primary driver, employee referral programs are designed to reward employees for referring quality candidates. Incentives can include extra time off, gift cards, happy hours, or recognition in an organizational newsletter. The rewards are positive for company culture, and are also a good way for the HR team to market the program and recruit more participants.

Incentivizing employees to refer friends and colleagues makes for an efficient employee referral program.

Comparing a Referred Candidate to an “Outside” Candidate

We can generally assume that an existing employee would not refer a potential new hire to your organization if they had concerns about the referred person’s performance, work ethic, or trustworthiness. It is always possible your employee doesn’t have a long history with the referred candidate, or, if they are referring a friend, they may lack experience with that person in a professional context.

A hiring manager may start out knowing less about an “outside” candidate, but at the point of decision-making, they should have a solid understanding of all potential hires’ experiences, skill sets, and values.

Regardless of how the job seeker was recruited, the interview process should still be followed. HR will still audit the candidate’s resume and social media for alignment with the job description. They will perform due diligence and call references in both cases.

A hiring manager should continue to use their standard interview questions. And if they assign a task or activity to one interviewee, they should continue to assign that to all of them.

A referred candidate benefits from getting their resume put on the “top of the pile.” However, the integrity of the interview, hiring, and offer process should remain the same. Companies shouldn’t be skipping steps just because a current employee recommended someone from their network.

Is a Referred Candidate a More Likely Hire?

While the interview process should be equitable for all candidates, a referred candidate will be extended an offer more often than a “cold” candidate. Zippia’s data shows that referrals are 4x more likely to be offered a job than website applicants. In addition, referred job searchers are 2.6% to 6.6% more likely to accept job offers than their non-referred competition. This makes hiring the referral more attractive.

Is a Referred Candidate a Better Employee?

Referred new hires undoubtedly have a better candidate experience than job seekers applying online. Forbes illuminates that job seekers “face many pain points, such as opaque hiring procedures, intense competition, frequent rejections, and lack of experience.”

A less stressful application experience creates positivity with both the new hire and the current employee who referred them. But starting a new job feeling happy is just one factor that leads to referred candidates generally being better employees.

Referred employees, because they had inside information from their friend or colleague, are typically good culture fits. They mesh with their new teams more easily. Zippia research shows that referral employees have lower turnover rates and that they tend to perform their work more efficiently.

Cost/Time Benefits of an Employee Referral Hiring Pipeline

According to SHRM, the average cost per hire is nearly $4,700, “but many employers estimate the total cost to hire a new employee can be three to four times the position's salary.” The employee referral recruitment strategy is cost-effective. Companies may avoid job posting costs, and HR will save countless hours screening applications, scheduling interviews, coordinating with hiring managers, calling references, and decision-making.

Additionally, the shorter amount of time a position is vacant, the less impact there will be on productivity. Employee morale will be salvaged by avoiding too many days of additional responsibilities.

The largest financial benefit of hiring a referred candidate might be the retention rate. “Referrals stay 70% [longer] on average. 45% of referral hires stay longer than four years, compared to only 25% of job board hires,” according to Zippia.

This Zippia graphic shows improved retention rates for referral employees vs. non-referral employees.

Where to Start Building an Employee Referral Program

Building an employee referral program is not an overnight process. That said, it’s likely one of the easier changes to communicate to staff. The program will not only benefit current employees, it could also positively impact their friends and colleagues if they are referred and hired. Ultimately, it will increase morale and productivity. Below are the key steps to implementing an employee referral program.

1. Get buy-in from management. They need to understand the program’s value and sponsor the incentives, as well as encourage and celebrate employee participation.

  • Bring data to support the benefits of an employee referral program
  • Show management the current openings and how long they’ve been open
  • Provide examples of incentives to be offered
  • Outline the hiring/retention thresholds for an employee earning the reward
  • Outline what a successful employee referral program looks like

2. Determine how existing team members will submit a referred candidate. Options to consider include:

3. Decide what information the existing employee must provide about the referred job seeker:

  • How much do current employees need to know about this person?
  • Is a professional connection required or preferred?
  • Does the employee need to confirm the referral is a qualified candidate?
  • Do they need to submit the job seeker’s resume with their referral?
  • Has the referred person already expressed interest in the open position? In the company?

4. Be clear about the rules for earning incentives:

  • Does the referral itself warrant a reward?
  • Does the candidate need to be hired for an employee referral bonus to be granted?
  • Does the candidate need to stay with the company for a certain period of time for the current employee to be gifted?
  • What specific incentives will be offered?
  • Can the employee select which reward they would like?

5. Communicate to employees:

  • Announce your new employee referral program
  • Share the referral process and protocol
  • Add information about the program to onboarding resources and your Employee Manual
  • Explain how employees will learn about new job openings in the company

6. Recognize employees who refer candidates:

  • Share the celebration in a company newsletter
  • Post the success story on social media
  • Send a company-wide email applauding the employee and touting the streamlined recruitment process
  • Explain the connection in the company email that is sent introducing the new hire to the organization

7. Track metrics:

  • Share data with management to support the continuation or expansion of the program
  • Share success stories with staff to encourage their participation and support company culture
  • Metrics can include:
    • Total number of referrals made
    • Number of referrals hired
    • Number of positions filled through employee referrals and non-referrals
    • Number of employees who made referrals
    • Average number of days positions remained vacant
    • Retention rates

How Employee Experience Feeds into Employee Referrals

Qualtrics defines employee experience as everything a worker learns, does, sees, and feels at each stage of the employee lifecycle. It makes sense that an employee with a negative experience would not refer the company or position to a friend or colleague.

So how do companies know if their employee referral program will fail due to poor employee experience? They should measure employee engagement with a survey.

In the anonymous and confidential survey to all team members, ask: “How likely are you to refer a friend or family member to this company?” Results will reveal whether you have work to do within the organization before spending time launching an employee referral program.

Engaged employees who feel valued at work are key to launching a successful employee referral program.


The benefits of an employee referral program go beyond making quality hires more efficiently. Any costs associated with the rewards (be they gift cards or happy hours) are certainly worthy of the benefits of employee referral.

Data shows that you can maximize your employee retention by implementing an employee referral program (or enhancing an existing program). You can also contribute to a positive company culture and increase employee engagement. Plus you can create a more productive workforce by filling your open roles with top talent. Now that’s a win-win!

Jodie Sandell PHR and SHRM-CP
Consultant, project manager, writer, and process improver with over 15 years of HRM experience
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Jodie Sandell holds a BA in Sociology from the University of Michigan-Ann Arbor, a paralegal certificate and both PHR and SHRM-CP certifications. She has spent most of her career working in legal, education, and HR - writing, managing projects, and improving processes. 

She recently founded All In Project Services LLC to pursue her passion for this work. In her free time, Jodie can be found reading, hiking, paddling or traveling with her family.

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