The Value of an Employee Referral Program

Jim Buchanan | October 15th, 2020


Even during a pandemic, there is a battle to attract and hire hourly employees. More than 80 million Americans, representing nearly 60% of the U.S. workforce, are paid on an hourly basis. Despite the high numbers of people, employers with a high concentration of hourly workers cope with high turnover rates. They're always challenged with filling open positions.

The Real Value of Employee Referrals

Often, an overlooked weapon in this war is the employee referral program. The evidence is overwhelming that employees hired through employee referrals consistently outperform hires from other sources such as job boards, walk-ins, or even career websites. Numerous studies have shown that employee referrals are hired up to 50% faster and remain employed up to twice as long. Even a simple employee referral program can be an effective way to recruit and retain employees.

Despite the compelling evidence that they work, many organizations' referral programs are undervalued and weak. They fail to utilize current employees to drive candidate engagement. Ideally, in an increasingly socially connected world, all the company employees should act as ambassadors for each job opening.

The Benefits of an Employee Referral Program

At Cadient Talent, we specialize in distributed hourly hiring. We help companies with geographically diverse operations conduct their talent acquisition program through the local manager consistently and effectively. For many of our clients, candidate referrals are a statistically significant source of hires. There are numerous benefits, but just to name a few:

  • Applicant to hire ratio is significantly lower
  • Reduction in time to hire
  • Onboarding and training are faster (referrals already have a good idea what the job is like)
  • Workplace morale is often improved
  • Referred employees tend to turnover less often and perform better

 A Closer Look at One of the Benefits:  Reduced Turnover

Let's take a closer look at one of the benefits – reduced turnover. Everyone knows that turnover is costly, but what is the real economic cost? Many people think it's the cost to advertise the job or pay a recruiter. It is that, but it's much more. Local store managers handle many functions; serving customers, managing suppliers, operational issues, motivating and training employees, and yes, recruiting. Turnover means that managers must spend more time interviewing candidates and less time with other matters. Once you've hired a candidate, you must train that employee. Sometimes the required training period is extensive – maybe 40 hours or more. You're paying for that training period, and you're also paying another employee to oversee the training. If the new employee isn't on board yet, you may be paying overtime to cover open shifts. Don't forget the cost of a uniform and equipment. Anyway, it's expensive. It's not a stretch to say that turnover can cost $1,500 per new hire or more for an hourly employee.

In our experience, an employer can achieve a 20% reduction in turnover or more relative to employees hired through an effective employee referral program. Suppose you implement an employee referral program and hire 30% of your replacements through that program. In that case, your turnover rate should decrease by 6%, absent any other changes in the environment. Even after paying a nominal referral fee to your employee, that's a fantastic return on investment. Besides, you'll enjoy the benefit of improved customer satisfaction through a more experienced and engaged workforce. 

Employee Referrals – A Key Part of Your Talent Acquisition Strategy

The bottom line is that each employer needs an effective talent acquisition strategy. An employee referral program should play a key role in the program. A best practice is for employers to maintain a workforce where hiring managers source 30% or slightly more of their employees through employee referrals. Going below that threshold is missing an opportunity to control costs better and hire better employees. Going above the threshold could risk missing your diversity goals and thwarting innovation due to like-mindedness in the organization.  

In Conclusion

There is a sweet spot, and successful organizations gain significant advantage from implementing an effective employee referral program. It saves you time, money, and energy throughout the hiring process and helps you keep an effective and productive workforce.

Interested in creating or revamping an employee referral program? Visit our Text2Refer page to learn how quick and easy it is to start or upscale a program.     

Jim Buchanan

CEO