Small businesses often look for new employees through job boards, social media, and professional networks. But some potential candidates may already be connected to the people working for them.
An employee might know a former colleague who is looking for a new position, a specialist with the right experience, or someone whose skills match an open role. A referral program gives employees a way to introduce those people to the company.
It also gives employers another recruitment channel. The challenge is making sure recommendations lead to suitable candidates rather than simply giving friends and acquaintances an advantage.
1. Set the Rules Before Inviting Referrals
Decide which positions are included in the program, who can recommend candidates, and how recommendations should be submitted.
A simple online form or dedicated email address is usually enough. Employees can provide the candidate’s name and contact details, identify the vacancy, and briefly explain why they think the person would be suitable.
Consider a few situations in advance. Can employees recommend former colleagues? What happens if two people recommend the same candidate? Are managers eligible for rewards when they refer someone to their own team?
Put the answers in a short document and share it with everyone. Employees should not have to guess how the process works.
2. Decide Whether to Offer a Reward
Some employers offer cash bonuses for successful referrals. Others provide gift cards, extra time off, or no financial reward at all.
If you choose to offer a bonus, make the conditions clear. You could pay it after the new employee joins or wait until they complete their probation period. Another option is to divide the payment between those two milestones.
The amount should reflect the company’s budget and the difficulty of filling the position. There is little reason for a small business to copy the reward structure of a large corporation.
Research also suggests that bigger bonuses do not automatically produce better hires. In a 2023 study published in the Journal of Political Economy, Guido Friebel and his co-authors examined a referral program in a grocery chain. Higher bonuses generated more referrals, but the average quality of those referrals declined. The program also reduced employee attrition in the stores studied.
For employers, this is a reason to look at the results of referrals, not just how many people employees recommend.
3. Explain What You Are Looking For
Employees need more than a job title to identify someone who might be suitable for a vacancy.
Share the job description and explain the essential skills, experience, responsibilities, working hours, and location requirements. If the position is remote, mention any time zone restrictions or expectations around availability.
For example, a business looking for a remote customer support specialist might need someone with strong written English, experience handling customer inquiries, and the ability to work independently.
Make the vacancy easy to find. An internal newsletter, staff communication channel, or dedicated referral page can help employees see which positions are currently open.
4. Give Every Candidate the Same Assessment
A referral can introduce a candidate to an employer, but it should not decide who gets the job.
Someone recommended by a trusted employee still needs to demonstrate that they can do the work. Use the same interview questions, skills tests, and selection criteria for referred candidates as you would for other applicants.
There is another reason not to rely entirely on referrals. Employees tend to know people from their own professional and social circles. Those networks may not represent the full range of people who could do the job.
A 2021 working paper by Conrad Miller and Ian Schmutte examined referral hiring and racial inequality in Brazil. Their research illustrates how personal networks can influence who gets access to employment opportunities.
Employers should continue advertising vacancies through other channels and consider applicants who do not have an existing connection to the company.
5. Let Employees Know What Happens Next
After receiving a recommendation, confirm that it has arrived. If the candidate enters the recruitment process, employees can be given a brief update, provided the candidate’s privacy is respected.
There is no need to share interview notes or confidential details. Employees simply need to know that their recommendation has been considered.
Candidates should also receive timely updates. Being referred by someone inside the company should not leave them uncertain about who will contact them or when they can expect a decision.
Communication should continue after an offer is made, too. If a candidate accepts the offer but then stops responding, here's what employers can do when a candidate accepts an offer and then goes silent.
6. Do Not Pressure Employees to Recommend People
Some employees have large professional networks. Others may not know anyone who is currently looking for work. Neither situation says anything about how well they do their jobs.
Avoid referral quotas or making recommendations part of performance reviews. Employees should be able to participate when they know someone who genuinely fits an open position.
A referral made just to collect a bonus is unlikely to be as useful as a recommendation based on direct knowledge of someone’s skills and experience.
7. Check the Results
After the first few hires, look at how the program is performing. The number of recommendations alone will not tell you whether it is worth continuing.
Track:
- Referral-to-interview rate: How many recommended candidates reach the interview stage?
- Referral-to-hire rate: How many are eventually hired?
- Retention: How many referred employees stay for at least six or twelve months?
- Time to hire: How long does it take to fill a position through referrals?
- Cost per hire: How much does the company spend on rewards and recruitment?
- Performance: Are new employees meeting the expectations of their roles?
Compare these figures with results from job boards and other recruitment sources. If referrals bring in many candidates but few reach the interview stage, employees may need clearer information about the vacancies. If people are hired but leave quickly, review the selection process and the expectations discussed before hiring.
An Additional Source of Candidates
Employee referrals can help small businesses reach people they might not find through job advertisements alone. They also give existing employees an opportunity to introduce people whose work they know.
The process does not need to be complicated. Set clear conditions, explain each vacancy, assess every applicant fairly, and check whether referred employees are staying and performing well.
Referrals can sit alongside other recruitment channels, giving employers more ways to reach people interested in a new position.
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Sources
- Friebel, G., Heinz, M., Hoffman, M., & Zubanov, N. (2023). What Do Employee Referral Programs Do? Measuring the Direct and Overall Effects of a Management Practice. Journal of Political Economy, 131(3), 633–686.
- Burks, S. V., Cowgill, B., Hoffman, M., & Housman, M. (2015). The Value of Hiring through Employee Referrals. The Quarterly Journal of Economics, 130(2), 805–839.
- Miller, C., & Schmutte, I. M. (2021). The Dynamics of Referral Hiring and Racial Inequality: Evidence from Brazil. NBER Working Paper No. 29246.
- Schlachter, S. D., & Pieper, J. R. (2019). Employee Referral Hiring in Organizations: An Integrative Conceptual Review, Model, and Agenda for Future Research. Journal of Applied Psychology, 104(11), 1325–1346.