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What are the advantages and disadvantages of employee referrals?

Using internal referrals as a part of your overall recruitment strategy
Two employees working in an office space, based on an employee referral.

Sourcing quality candidates is a huge piece of the employee staffing puzzle. So it’s fitting that there are many ways to go about finding the right person for open roles. Social recruiting, job board outreach, reviewing applications, and networking events are just some of the ways to go about finding external candidates. But looking inward is another way to bulk up your hiring efforts. Now we’re not just talking about internal promotions, but also about leveraging your existing talent in another way. Your employees’ personal connections can make for a great resource.

So what are the advantages and disadvantages of employee referrals? Eighty-two percent of employers rated employee referrals above all other sources for generating the best return on investment. Spending time and money on recruiting is inevitable—but it’s money well spent when a quality candidate is hired and retained. Still, there are some employee referrals disadvantages too. Here, we’ll take you through both the advantages and disadvantages of employee referrals so that you can decide how best to utilize them as a part of your overall recruitment strategy.

Employee referrals advantages

It can speak volumes for a candidate-in-question when they are referred by an existing employee. Not only will the current employee, the referrer, likely want to add to—and not detract from—company culture, but they’ll also vouch for required skillsets and competencies. Here are the top advantages of employee referrals:

1. Your company will save time and money.

Sourcing candidates requires a lot of effort, which means it can cost a company both time and money. It was found in one study that referred candidates are 55% faster to hire, compared with employees sourced through career sites. An advantage of employee referrals is that your current team member makes the connection and saves the recruiter that initial time of sourcing the candidate. Further, the candidate could be a better match compared to other candidates who apply externally. This will also help expedite the process and cut back on the need to find alternative options.

2. Your company will receive qualified, quality candidates. 

Employees will want to work with someone who will improve their own output and day-to-day workload. So, in most cases, you can have more confidence in the candidate’s ability to perform the necessary tasks. Further, according to research done by Zao, nearly three in ten employers have caught a fake reference on an application. So, a personal recommendation that is already within the company can instill confidence that the reference is in fact valid and reputable.

3. Retention rate is typically better. 

After two years, retention of referred employees is 45% compared to 20% from job boards. Employee referrals tend to stay around longer, perhaps because they are personally connected to their peers. That’s not to mention that the referrer themselves may feel more respected and valued too after their company takes their recommendation. And when an employee feels respected and valued, they can become more dedicated in turn. You may also want to give an employee referrer a bonus to show your appreciation.

Employee referrals disadvantages

To properly answer “What are the advantages and disadvantages of employee referrals?,” we must now also look at the disadvantages. The disadvantages of employee referrals do not outweigh the benefits, but there are still some to consider. Here are three employee referrals disadvantages to keep in mind when making a hiring decision:

1. You may get a recommendation based on bias.

While in most cases an employee’s motives should be “pure,” there may be circumstances where a person wants to just work with their friend or receive the referral bonus. This can result in the candidate not being as qualified as either the referrer or referee said they were. The referrer may think that they can make up for the candidate’s shortcomings or give them a crash course to level-set their skills. This can impact their own production in a negative way. And now your company may have two underperforming employees—and you may have to look to fill both of these positions in the not-so-far-off future.

2. Employee referrals can invite opportunity for negative company politics. 

While an advantage of employee referrals is that they can positively impact peer morale, they can also cause unnecessary tension. The twosome can be negatively received by their peers especially if the external hire was chosen over an internal promotion. Further, the referrer may be afraid to offer critique to the person they referred. This kind of dynamic can negatively impact their work.

3. Your company could end up losing both the referrer and the referee. 

When one goes, the other may follow. Whether one decides to leave because of company politics, personal reasons, or a better opportunity, there is a risk that their counterpart will follow suit. This chance may heighten if problems with team dynamics aren’t addressed and resolved. So, it’s important to stay involved with a new hire, beyond any initial onboarding and ensure they are connected to the company and not just the employee who referred them. 

An advantage AND disadvantage of employee referrals

When considering hiring an employee referral, you’ll likely attract a like-minded staff member. This can seem like an ideal scenario. A like-minded team member can acclimate faster and therefore be productive faster too. But it’s important that teams not lack cognitive diversity. Cognitive diversity can boost employee performance and the absence of it can limit creative thinking and detract from problem solving situations.

As you can see, there are both advantages and disadvantages of employee referrals. If your employee referral works out, it can be great for all parties. But if it doesn’t, it can impact the team, the employee, and the new hire in a negative way. While it’s good to ask yourself “What are the advantages and disadvantages of employee referrals?,” it’s important to know that you’ll need to lean on other tactics too, as an employee referral program isn’t an end-all solution. Consider looking to utilize some social recruiting tactics as a part of a well-rounded strategy. And even look to Reddit for recruitment efforts. Never rest on one strategy and always be willing to exercise new ways to source quality candidates and build diverse, dynamic teams.

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