Employee referrals: A powerful tool for finding – and keeping – top talent

What if we told you there was a way to source candidates that not only attracts top talent but also keeps them around for the long haul? 

Employee referrals are a great hiring strategy to boost retention rates in your organization. They help identify candidates best suited for a role, create a positive work environment, and make your existing employees feel respected – all factors contributing to employee loyalty. 

But there’s an important caveat. While employee referrals are a great candidate source, you should never use them in isolation or as a replacement for a robust hiring process. When used haphazardly, employee referrals can negatively impact your organization.

In this article, we look at using employee referrals to boost employee retention, plus some common pitfalls to avoid.

What are employee referrals?

Employee referrals are a recruitment method that involves relying on your employees’ social and professional networks as a source of candidates. Sometimes referred to as “network-based hiring,” a referral occurs when an existing employee recommends someone they know for an available role in your organization. 

This hiring approach is popular. Recruitment and talent platform Radancy’s Employee Referral Benchmark Study 2023 surveyed 335 organizations worldwide. It found that 74% of companies use an employee referral program as part of their hiring strategy, with 25% generating 15% or more of their hires through referrals.  

Employee referrals can be formal or informal. Informal referrals are word-of-mouth recommendations that occur independently of structured referral programs. Formal employee referral programs (ERPs) take a more strategic approach, setting out standard processes for making referrals and often involving financial incentives for successful referrals. 

For instance, say an employee refers a friend for an open role through a referral portal on their company’s intranet. The employee may receive a referral bonus or extra paid time off once the new hire passes their three-month probation period. 

Regardless of whether employee referrals are formal or informal, using them to source candidates offers a range of benefits. 

Employee turnover expert and author of several books on the topic, Richard Finnegan, highlights, “Employee referrals are four times more likely to be hired, save companies over $7,500 per hire, perform their jobs better than their peer employees … and most importantly, for our purposes, stay longer.”

As a result, organizations are willing to invest significant amounts in employee referrals. For instance, in 2016, the global accounting firm Ernst & Young paid its staff over $8 million in referral bonuses. 

How referrals improve retention

Richard Finnegan’s comments are backed up by research. A 2019 article in the Journal of Psychology conducted a literature review of 86 articles containing 101 referral hiring studies. It noted, “In general, the research reveals a robust positive connection between referred workers and retention.” 

Several factors explain this phenomenon - both in terms of the referred employee and the employee who referred them. Let’s take a look.

1. Connect with best-fit candidates 

Employee referrals increase retention because you end up with a pool of pre-vetted candidates. They don’t just have the right skills for the job – they can also enhance your company culture.

We reached out to Ola Krawiec, office manager at Linkhouse, a link-building and content marketing platform that uses employee referrals as one of its recruitment strategies. Ola explained the connection between employee referrals, culture add, and retention: “Existing employees understand our company culture and are likely to refer individuals who align with these values and work ethics. This cultural alignment often translates into higher job satisfaction and, consequently, longer tenure.”

2. Build a positive workplace culture

Employee referrals contribute to building a positive and cohesive work environment. Employees work alongside people they know, creating a sense of camaraderie and harmonious work culture. This promotes the social well-being of your employees and their job satisfaction. 

Liftstar Gmbh, a Germany-based stairlift and home lifter business, experienced this first hand after introducing its employee referral program using a digital platform. Not only did this initiative improve recruitment outcomes – it also “fostered a culture of teamwork, fun, and voluntary participation among employees.”

3. Make employees feel valued

In a groundbreaking study, researchers conducted a randomized controlled trial involving over 10,000 employees in a large European grocery store chain. Over 13 months, they tracked and compared various metrics – including employee turnover – between the stores that implemented ERPs and stores that didn’t. 

The findings were striking. The study concluded an ERP led to a 15-20% reduction in employee turnover, reducing the attrition rate for referred hires and existing employees. 

The main reason the attrition rate was reduced for existing employees was that they liked being involved in the hiring process and saw it as a sign of respect from their employer.

As the Thunderbird School of Global Management in Arizona highlights, “When employees feel heard, valued, and supported… they’re more likely to remain loyal to the company.” Actively involving employees in recruitment connects them to the organization’s success, fostering a sense of ownership and loyalty to the business. 

4. Build better teams

Employee referrals can also help you build better teams. At a base level, people who have existing relationships are likely to work well together in a team. They understand each other’s strengths, weaknesses, and work preferences  and can allocate tasks and collaborate effectively.  

Interestingly, a meta-analysis of 26 different studies by researchers at Ohio State University found that in teams with friends, “friendship has a significant positive effect on group task performance” compared to teams with acquaintances or non-friends. This was especially evident in larger teams focusing on maximizing output. 

Referring employees are also an invaluable resource for new recruits, providing them with familiar faces and support during the onboarding process. This personal connection helps new hires integrate into the organization, setting the stage for long-term success. 

5 common employee referral mistakes and how to steer clear of them

Employee referrals can be powerful tools for sourcing candidates and ensuring staff retention. But you shouldn’t: 

1. Rely excessively on employee referrals

2. Forget to tailor your referral strategy to your company’s goals

3. Skip hiring stages

4. View your referrals through rose-tinted glasses

5. Over-rely on monetary bonuses

Below, we discuss these pitfalls in more detail – and provide . 

1. Excessive reliance on employee referrals

Relying too much, or exclusively, on employee referrals as a candidate source can lead to a lack of diversity in your workforce. Using employee referrals alone can – at a minimum – reinforce unconscious bias and. Worse, it can deliberately exclude candidates with less social capital or diverse backgrounds. 

We spoke to legal writer Kate Stacey to ask her if exclusive reliance on referrals has ever led to legal issues. “No specific cases come to mind where employee referrals alone were found as grounds for a discrimination claim,” she said. “But they can certainly be a contributing factor. For example, in a race discrimination case before the Equal Employment Opportunity Commission, part of a settlement required the employer to not exclusively use employee referrals and word-of-mouth recruitment methods. This move was intended to prevent future discrimination.”

Aside from any legal issues, a lack of diversity in the workplace has a direct impact on staff retention. According to workplace culture consultancy Great Place to Work, an inclusive and diverse workplace leads to 5.4 times higher employee retention. 

Solution: Use various candidate sources

In our conversation with Ioana Andrei, an HR expert and social entrepreneur with over a decade of experience in the private sector, she emphasized the importance of using a mix of candidate sources to reduce the risk of this issue. “While there’s nothing wrong with a few team members having similar backgrounds, HR leaders must recruit from an array of sources – beyond referrals – to foster independent thinking in their businesses.” 

Alternative candidate sources you might use include job boards, networking events, and social media. 

Also consider building safeguards into your employee referral program to support diversity proactively. For example, tech company Intel doubled its bonus incentives for employees who referred women, minorities, or veterans to address the lack of diversity in its workforce.

2. Not tailoring your referral strategy to organizational objectives

Before introducing employee referrals, consider how they fit into your broader organizational objectives and business strategy. If these factors are misaligned, your intentions could have the opposite of the desired effects. 

Mitchell Hoffman, Associate Professor of Strategic Management and one of the authors of the grocery store chain study, illustrates the importance of ensuring your approach to employee referrals supports business objectives. 

If your company is using a lot of relative performance competition (employees are compared amongst one other), then using referrals could backfire because people will be tempted to refer people who are worse than themselves – they don’t want to compete against someone better.  If your company uses root performance bonuses (incentives given when teams meet targets), then referrals might be advantageous because employees are incentivized to refer people who could be good for their personal bottom line.

Solution: Strategically customize your approach

When preparing your referral program, you must be strategic. First, ensure that a referral program will actually work for your company. Will employees want to refer suitable candidates? 

Then, define your program’s objectives clearly. Are you aiming to increase the number of applicants for each job opening, attract talent with the right technical skills, or improve employee retention? With the goal in mind, you can tailor your incentives to support it. 

For example, if your goal is increasing employee retention and you want to include financial rewards, consider offering incremental referral bonuses. Most companies pay employees a bonus for a successful hire. But you could stagger bonuses, paying employees for certain milestones their referrals reach – like six-month and one-year anniversaries. This approach incentivizes employees to refer candidates who are likely to remain at the organization longer term.

3. Skipping stages of the hiring process

Employee referrals can offer a valuable shortcut when sourcing potential hires. But they shouldn’t outweigh or replace other steps in the hiring process. While a referral speaks volumes about a candidate’s potential fit, you must verify their suitability for a role independently. Otherwise, you could end up hiring an ill-suited candidate who remains with the company for a short time only. 

Solution: Always use talent assessments 

Don’t ever skip the candidate assessment stage. 

Talent assessments that include objective pre-employment skills testing, personality tests, structured interviews, and job trials are perfect for assessing candidates’ skills, qualifications, and cultural alignment. This helps ensure you find the right candidate for the role and your organization. 

It also helps keep your referral program fair. Employee referrals are highly subjective. Using them alongside tools that offer more objective insights adds balance to the process. 

4. Viewing referrals through rose-colored glasses

As we’ve discussed, employee referrals are a great way to pre-vet candidates with the right skills and values. But this can create a “rose-colored glasses” effect or a tendency to prefer referred candidates over candidates from other sources. 

This may prevent you from properly assessing a candidate’s suitability for a role. Assuming that a referred candidate has the necessary skills and qualities – and values similar to the employee who referred – them can lead to mis-hires and associated costs. These include increased employee turnover. 

Solution: Build objectivity into your hiring process – the right way

Some organizations rely on “blind referrals” to address this issue. They remove any evidence of the referral from a candidate’s resume and application during the resume-screening phase, hoping this will prevent them from unfairly favoring referrals. 

We interviewed HR expert Yashna Wahal about this. “In my experience, this defeats the entire purpose of referrals,” she said. “If you’re assessing resumes blindly in the referral process, you might reject a referred candidate whose suitability for the job and company comes vetted by one of your employees.” 

Yashna emphasized that this is especially problematic since resume evaluation is flawed. Resumes list qualifications and previous job titles, but they don’t demonstrate those things that make candidates suitable for positions: their actual skills and competencies. 

We completely agree. Our advice? Skip resume evaluation altogether. It’s a broken system with a better alternative. Give all interested candidates – including referrals – an equal chance with talent assessments. 

This way, it won’t matter if you’re aware of which candidates are referrals and which aren’t. You’ll measure them all against objective criteria and move forward with the one who’s most suitable for the role.

5. Over-reliance on monetary referral bonuses

Monetary bonuses are the go-to incentive for many employee referral programs. But there’s conflicting evidence on their effectiveness. A recent study surveyed 256 nurses in Belgium and looked at the effect of bonuses on referral likelihood and quality. The study found that a promised referral bonus didn’t generate a significantly higher referral likelihood or quality. 

Ultimately, the effectiveness of referral bonuses likely depends on your industry and workforce. By relying on monetary bonuses as the only incentive under your referral program, you risk overlooking other motivational factors that drive employee engagement with your program. 

Solution: Offer a rewards menu

Consider using a combination of rewards rather than relying solely on financial incentives. For example, Sentient Digital, a technology solutions provider, uses bonuses and public recognition as part of its referral program. It announces new hires on its intranet, including the names of the people who referred them. 

Consider creating a rewards menu where employees can choose their reward for referring candidates. Your menu could include financial bonuses and other rewards, like extra paid time off, gift cards, experience vouchers, or donations to their preferred charity. These rewards are often more memorable than financial incentives, creating more buzz around your referral program. Plus, you’re letting employees choose options that best motivate them. 

Using a digital rewards program is a great way to create a rewards menu. Radancy’s survey found employee participation in referral programs is higher when a digital program is used.

Using employee referrals to foster staff loyalty

When it comes to skills-based hiring, referrals are a great way to complement other hiring strategies. They’ve been shown to improve staff retention among new hires and those who refer them. 

To get the most out of employee referrals, don’t make the mistake of relying on them as an exclusive source of candidates or not aligning them with your organizational objectives. 

Instead, use them strategically alongside other hiring practices, like talent assessments, to help find quality employees who’ll stay with you for the long run.