Budgeting for a World-Class Employee Referral Program

by Dr. John Sullivan & Master Burnett

It’s no secret that employee referral programs are proving themselves around the world to be a highly effective and efficient channel for sourcing quality candidates. While many employers are drawn to the source based solely on attractive cost-per-hire predictions, those savvy enough to measure the impact post implementation are finding out that candidates sourced via referral are more apt to:

  • Meet job requirement expectations.
  • Accept offers more often.
  • Meet minimum standards of productivity faster.
  • Perform better long-term on the job.
  • Turn-over less often.

While on average only 1:3 firms measure the economic impact of these factors, those that do can easily attest that employee referral programs produce one of the highest ROIs in the HR function and possibly even the enterprise.

Past experience with ERPs, success stories in the media, and unrelenting demand for top talent has led nearly every major company competing for talent on a global level to either initiate a new program or reinvigorate an existing program in 2008. One question that nearly everyone is asking is “How should we budget for a world-class employee referral program?” It’s a great question.

World-class programs elevate program execution to an art form with scientific precision, and carry out a number of activities that average programs often overlook or discount.

Those activities have a cost associated with them, some of it fixed, some of it variable. Our research found that the average-performing program, one that produces approximately 26% of all hires, had a cost per hire (inclusive of bonus amounts paid) of $2,306. The top-40 performing programs invested more, paying out nearly $5,855 per hire on average, and that difference had nearly nothing to do with the reward.

In 2006, it took hiring 38% of all hires via employee referral to make the top-40. By 2007, that percentage had grown to 46%. If early statistics prove indicative, by year’s end it will require hiring more than 62% of all hires via employee referral to rank among the best in 2008.

$3,549 Well Spent

Some people see the added cost-per-hire to run a world-class program and immediately think it would never work in their organization. Other, more strategic recruiting professionals, see the added cost-per-hire and start to wonder what return warrants the added investment.

In 2006, Booz Allen Hamilton surveyed 73 major employers, and 88% found that hires made via employee referral performed better on the job than candidates hired via other sources as measured by their companies’ performance appraisal systems. If those systems were valid, that performance must be worth something, right?

Based on that statement, we looked at the companies with top-40 ranked employee referral programs and asked them to complete a statistical analysis of their programs’ performance, looking in particular at the factors mentioned in the opening of this article. While not all 40 completed the analysis, those that did found some startling numbers.

The following chart presents the minimum and maximum observed data points between employee referral program hires and hires by all other sources combined with respect to each of the measures previously mentioned.

If you have ever spent time as a line recruiter, a few of these data points should have jumped out screaming at you! At the very least, applicants via the ERP were 13 times more likely to meet job requirements, and 17% more likely to accept an offer. Immediately that should register a recruiter time savings, but think of the time savings for all managers and employees involved in the assessment process!

Article Continues Below

Start tacking on the savings related to decreased turnover and increased productivity and you can easily see why companies with top-performing programs are not pinching pennies.

How Top-Performing Programs Spend the Extra Money

  1. Applies dedicated resources. Every one of the companies with a program in the top-40 had a dedicated program manager in place to drive the strategy and execution of the employee referral program by the end of 2007. The smallest company in the top-40, employing just over 3,000 employees, has a dedicated team comprised of a program manager, communication specialist, and full-time recruiter. The average number of dedicated ERP staff per employee in top-performing programs is 1:1,390.
  2. Has a documented strategy. Most employee referral programs are managed in an ad-hoc employee opt-in manner. Such approaches limit the strategic value of the program by failing to incorporate program drivers that create activity when needed most in the most needed areas. World-class programs coordinate program execution with the overall staffing strategy and workforce plan to drive the volume necessary into the process to create the output volume of hires needed based on traditional yield model analytics. Our research demonstrates that programs that lack the proactive management element are more apt to fill the ERP pipeline with candidates who approach employees asking to be referred versus employee sourcing and selection of top talent.
  3. Has specific goals and objectives. Because most programs lack formal management, it is not uncommon for the average program to have no specific goals. The absence of such goals leave program communications, reward structure, and program evaluation baseless. World-class programs determine probable participation rates by various demographic strata; set targets for program performance; establish tracking metrics; and leverage the data to drive decision-making around participant experience.
  4. Places emphasis/priority on mission-critical jobs using differentiated communications and rewards. It’s great when an employee refers a friend who they would like to work alongside, but that doesn’t mean the company has a need for that person at that time. Truly strategic referral programs attempt to drive traffic into the program by leveraging demographically targeted custom communications and differentiated rewards. While they may still leverage companywide communications from time to time, the bulk of ERP-authored communications in top-performing programs is directed at the team/department level and frequent in nature. Most top-performing programs deliver targeted messages weekly regarding hot jobs, tips for identifying talent, sharing success stories, etc.
  5. Prioritizes referrals. This is based on three elements: quality of the referral source; the position being referred for; and competitive intelligence drivers. Remember: Homer Simpson knows people, too! World-class programs prioritize response to referrals based on what is needed most by the company. If Employee A has a phenomenal track record for referring candidates the org hires, then his referrals should be fast-tracked. Likewise, if Employee B has referred 100 candidates, none of which the org has ever hired, he/she should be banned from the program! However, at times the org may also want to prioritize response based on competitive intelligence needs. Candidates often give up lots of info during interviews, info which when aggregated can have significant strategic value to senior leaders.
  6. Periodically adjusts communication strategy based on employer brand and positioning strategy. Most programs communicate stale, generic messaging and do it for long periods. The human mind is insanely powerful at filtering out patterns. How long after a new billboard is installed along the freeway do you continue to notice it? Communication approaches should last no longer than 90 days and be tied to the audience. A few messages can be organization-wide, but most should be department/function/location centric.
  7. Uses a viral marketing engine to drive engagement and disseminate selling stories. You could pretty much take messaging from Company A and put Company B’s name on it and no one would know the difference. Messaging that originates in HR is often so generic that it is immediately ignored by the educated masses we seek to influence in recruiting. World-class ERPs coordinate their efforts with the employment branding program to develop an inventory of “Wow!” stories that are so compelling they spread virally. Such stories truly differentiate an organization in such a way most competitors cannot compete. These stories provide an arsenal of things for employees to share in social settings and to leverage when approaching a potential recruit. (If you can’t think of any such stories for your organization, you should quit!)
  8. Uses a combination of push/pull techniques to manage flow of inbound referrals. Some percentage (between 12% and 23%) of employees will voluntarily refer someone at some point during their tenure with the organization even if the organization doesn’t have an ERP. The secret is to manage the process such that at least 25% of the organization is participating annually.
  9. Provides extreme customer service. Employees are special people, we already know them and can evaluate their performance, yet we treat their friends and colleagues like crap, often just like we treat applicants walking in off the street. All referrals should receive a custom response within 72 hours of submittal. The referring employee and the referral should receive status communications at every step in the process, including a communication upfront to establish the process and likely timeline so as to set expectations. Our research shows that more than 72% of employees who have participated in their companies’ ERP program found the experience unpleasant. More than 68% were not likely to participate again.
  10. Uses existing information to minimize assessment steps. ERPs are all about the perception of special treatment. World-class programs leverage any and every piece of existing information about a candidate to minimize the assessment steps needed, making it look like the organization is skipping steps in their otherwise tedious process.
  11. Uses technology wherever possible to provide 24/7 service. While a few of the top-40 programs are purely human-powered, many are leveraging home-grown technology systems and customized ATS systems to enable customer-service 24/7. If you have turned off the module that allows employees to track referral status in your ATS, turn it back on and start populating it with real feedback. The one caveat to using technology: DO NOT UNDER ANY CIRCUMSTANCES FORCE EMPLOYEES TO USE THE REFER-A-FRIEND FUNCTIONALITY IN MOST ATS SYSTEMS THAT DOES NOTHING MORE THAN SEND A URL ASKING A REFERRAL TO TORTURE THEMSELVES BY COMPLETING THE SAME GENERIC APPLICATION AS EVERYONE ELSE! Instead, make it easy. Use a simple form asking for contact info, how the employee knows the candidate, what makes them think the candidate would be a good fit for the role/company, and whether they would be willing to vouch for the candidate as a quality hire. (Nothing will reduce the amount of chaff in the referral system more than asking that last question!)
  12. Has extensive metrics to monitor/diagnose the process and program. Self explanatory!
  13. Rewards all activity. Most programs send a generic, automatically generated thank-you note upon submission. Unless a hire is generated, that is often the only communication a referring employee will ever get. World-class programs seek to drive program participation and that translates into rewarding all activity in such a way that employees are not motivated to refer for reward sake, but feel valued by the process.
  14. Has open participation to all stakeholders. Lots of stakeholders related to the organization can source top talent, but most organizations limit participation to existing employees. World-class programs allow former ee’s, consultants, contractors, shareholders, etc. to refer.

Putting a Final Figure Down on Paper

As consultants, we learned a long time ago that what one company can do with $100,000 would take another organization five times as much (think government). The secret to budgeting for a world-class ERP is working backwards. Ask yourself the following:

  • How many hires are projected for the next budget cycle (growth + attrition)?
  • What percentage of hires would we like to generate via the ERP: 35%, 46%, 70%, or more?
  • To realistically be capable of delivering the experience outlined in the section about what top-performing programs do differently, what resources would be required in your organization?
  • Estimate the cost for each resource identified and total them up.
  • Now add about 20% to cover things you might have overlooked and you’ll have a decent budget for year one.

Final Thoughts

Most organizations really miss the mark when it comes to managing their employee referral program. The biggest mistake they make is trying to do it cheap and thinking that employees will understand when they never hear anything back.

Managed correctly, ERPs can have significant impact on an organization’s capacity and capability to achieve their strategic objectives, two things anyone who has ever spent time in operations will tell you are key. Sure, it may seem like managing the program well will make recruiters less necessary, but in reality, it proves that recruiters can work smarter and demonstrate strategic-level contributions.

About the Author

Dr. John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high-business impact; strategic Talent Management solutions. He’s a prolific author with over 900 articles and 10 books covering all areas of talent management. He has written over a dozen white papers, conducted over 50 webinars, dozens of workshops, and he has been featured in over 35 videos. He is an engaging corporate speaker who has excited audiences at over 300 corporations/ organizations in 30 countries on all six continents. His ideas have appeared in every major business source including the Wall Street Journal, Fortune, BusinessWeek, Fast Company, CFO, Inc., NY Times, SmartMoney, USA Today, HBR, and the Financial Times. In addition, he writes for the WSJ Experts column. He has been interviewed on CNN and the CBS and ABC nightly news, NPR, as well many local TV and radio outlets. Fast Company called him the "Michael Jordan of Hiring," Staffing.org called him “the father of HR metrics,” and SHRM called him “One of the industry's most respected strategists." He was selected among HR’s “Top 10 Leading Thinkers” and he was ranked No. 8 among the top 25 online influencers in talent management. He served as the Chief Talent Officer of Agilent Technologies, the HP spinoff with 43,000 employees, and he was the CEO of the Business Development Center, a minority business consulting firm in Bakersfield, California. He is currently a Professor of Management at San Francisco State (1982 – present). His articles can be found all over the Internet and on his popular website www.drjohnsullivan.com and on www.ERE.Net. He lives in Pacifica, California.

  • Keith Halperin

    An ERP should be set up as an expectation of employees’ duties to refer suitable candidates; it is as much part of their duties as hiring managers’ deliverables including bringing aboard quality candidates on time and within budget. It seems reasonable that if a firm is prepared to pay an external recruiter a 20-30% fee, it should be willing to pay 1/4-1/3 of this amount on an ERP bonus. Therefore, a sizable percentage of the typical employee’s bonus compensation can be provided through the ERP, with savings and benefits to the organization as a whole.

    Cheers,

  • Craig Campbell

    Good content John…

    I think one of the steps that we’re all challenged with at times, is how do we make the simple but compelling case to get the $$$$ for a program?

    Is it as basic as what I outlien below or showing something more..
    1. We spent 50% on the web as a source and it got us 10% of our hires
    2. We spent 10% on ERP and it got us 25% of our hires
    3. We want to spend x% more or reallocate from the web spend for ERP and project increasing the hires from that source from 25% to 35%

    Having that simple ROI tool to show the cost savings, efficiency of spend and productivity can make all the difference. This might be a great next article if you haven?t written it already. This is also a tool I recommend to vendors to help potential clients make the case internally.

  • Jonathan Hefferlin

    I am guessing the biggest % of ERPs of their total hiring parallels the better-companies-to-work for lists.

  • Kevin Fallon

    Some companies tie the success (or failure) of a referral to the referring employee during the referring employee’s performance review the following performance review cycle. This helps ensure highest quality referrals

    Of the programs I studied I also found that most companies only pay referral award dollars to more junior employees. The more senior employees are EXPECTED to refer talent and it is one of the metrics used in their annual evals

  • Jim Cargill

    Kevin,

    You stated, ‘Some companies tie the success (or failure) of a referral to the referring employee during the referring employee’s performance review the following performance review cycle. This helps ensure highest quality referrals’

    Maybe I’m not understanding this completely. I would think that would be a sure way to reduce the number of referrals, as the failure of a referred person will be a black mark on the employee’s review.

    This is another case of misplaced responsibility.
    How can the person who referred the candidate guarantee their success?

    If I don’t get to participate 100% in the hiring process of the person I referred, I surely would not allow myself to be held accountable for a hiring mistake.

    When in this lifetime are we going to return to a process that gives Hiring Managers the credit or blame for the hires they make??? Corporate America is stuck in this absurd mode of pointing fingers at HR, or the test the candidate took, or the illustrious panel that condicuted the interviews (and which could never agree 100% on the candidate). And now, they are going to blame the person who referred the candidate, when all they are trying to do is help the company?

    When one owns a small business, one quickly learns how to accept responsibility. Not surprisingly, well-run small businesses minimize their mistakes. The owner is more careful because he/she is on the hook for decisions made. Give that same responsibility to Hiring Managers, and you will find out who your best performers are, and will ultimately make fewer mistakes.

  • Mark Hornung

    The pushback we get from many clients is the complexity and costs associated with administering employee referrals outweigh (in their minds) the cost and performance benefits ERPs accrue. This article is an excellent rebuttal, but I am wondering if there is any data in Dr. Sullivan’s study that specifically looks at the administrative costs and compares them to the savings.

  • Joshua Letourneau

    Craig, great comments about the challenges of getting budetary approval for certain recruiting initiatives. I commend you on breaking out each tactic/initiative with its own ROI profile. I always recommend clients utilize this type of portfolio mgmt approach instead of blindly allocating $$$ in which they can not draw a straight line to results. Ironically, this thought process does not come from my experience in the recruiting world; rather, it comes from my experience on the early-stage tech sales/mktg arena, where you’re namely trying to convince an Angel or Investor Group to pour more of their funding into your operation.

    If I may, I’d like to further recommend that you keep an eye on ROI for what it is: an elementary concept, or at best, a good starting point. What I have seen on the Recruiting and Sales/Mktg side of the fence is that many vendors and managers make cases in and only of ROI, which is deceiving (and not truly indicative of the whole picture). This is why I say that: Because there are 2 major factors that must also be weighed if you want to knock the socks off of those with budgetary approval:

    a. Payback Period (i.e. ROI isn’t always positive if the projected returns are 3 yrs out, and/or can’t be discounted back to Net Present Value (NPV) A rudimentary Discounted Cash Flow tool on the web will help you determine the NPV of projected ROI).

    b. The COST OF CAPITAL (This is so important that my minor reference here doesn’t do it justice. This is why Cost of Capital (CC) is critical: If your projected return % is not greater than the CC, then you’re destroying value.

    ROI does not account for the cost of capital . . . when you do account for this, the concept becomes EVA, or Economic Value Added. This is a brainteaser to an extent, because while ROI can be positive, EVA can be negative).

    So the next time you head to a budgetary approval meeting, talk about EVA and show them on the fly that you discounted the projected ROI to current Net Present Value, upon which you accounted for the Cost of Capital.

    You might get a promotion on the spot! 🙂

    Joshua Letourneau
    Mg Director
    LG & Associates Search / Talent Strategy
    BLOG: http://www.lgexec.com

  • Max Wallingford

    Mark,

    When I am talking to clients about calculating the ROI on a given program I try to get them to accept that an employee is worth more than their actual salary, and that every day that a position goes unfilled the company is losing that amount of money. A CFO gets this instantly. If our monetary value to an organization was exactly what we earn there would be no profit.

    Once you have established a multiplyer then it just becomes a math problem. If you can hire a position through an ERP, you not only (hopefully) reduce the cost per hire, but you increase the revenue of the organization by the employee’s salary times the multiplyer. If you can show that your average fill time is reduced, this number can get big, fast.

    It can get even bigger if the company is filling a position through a contractor or outsourcing.

    I hope this helps.

    -Max Wallingford

  • Master Burnett

    Glad to see so many discussing this article.

    Keith — We too like to stress to organizations the importance of building a recruiting culture in which an expectation is set that it is everyone’s responsibility to help build the organization via talent recruitment. As far as paying them to do so, some organizations achieve phenomenal referral rates and offer no monetary reward, other offer huge bonuses and achieve only minimum success. Our research found that the average bonus among top performing programs was not significantly greater than that awarded by the average organization, and was actually less in organizations recruiting large volumes of non-exempt hires.

    Craig — Your portfolio approach to budgeting and seeking funds for the ERP is practical, and one that a number of organizations use, but we prefer an approach that positions funds allocated to the ERP as an investment, one in which a real ROI will be calculated at some point.

    Jonathan — We thought we would find your hypothesis true when we started the research, but the data didn’t support the hypothesis. There are a lot of truly great companies out there that never apply for recognition such as FORTUNE’s Great Place to Work list, many of which had both participation rates and hire from ERP rates significantly higher than firms earning such designations. That said, the bulk of the companies on the GPTW list do fairly well when it comes to garnering referrals, but they by no means lead the pack!

    Kevin — Your experience is one commonly manifested in the policies of programs performing at the average level. Our research found that opening the program up and allowing nearly all levels of management and tenure’s of ee’s to participate was a key factor in driving program performance. Many of the top performing programs allow managers all the way up to the senior level executive to make referrals for positions outside their line organization and earn a reward. Most of those programs also make it possible for such managers and executives to elect to donate the reward to the organizations charity of choice.

    Mark — We get that pushback all the time too, most often from people who don’t have an analytical bone in their body! We did look at the observed performance differential among ERP hires versus non-ERP hires in our top performing program sample as mentioned in the article. While I cannot disclose organization names, one well known brokerage firm found that retooling the program to cover the administrative basics mentioned netted a return in productivity valued at $13.7M. The cost of the retooling…$136,000. Because not all of the top performing programs had full sets of data, we were not able to do the analysis across the entire sample, but of those firms that were willing, the results were all similar. We calculated the approximate ROI of all firms participating in the detailed analysis at roughly 2700% ROI.

    Max — Great comment on communicating with CFO’s, we too have found that most get it immediately when the scenario is expressed in their terms versus HR speak.

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