You've heard the adage. You've probably even uttered the proverb, "employee referrals make the best hires." Maybe, you've gone one step further and offered this supporting "fact" circulating the interwebs, "employee referrals are 25% more profitable than non-referred employees."
Tell me, how do you know this to be true? Do you track the performance of referrals against non-referred employees? What metrics are you using to confirm this platitude is accurate for your organization?
I'm here to challenge your thinking - maybe, the tired proverb about employee referrals is nothing more than recruiting folklore. Read on to learn about the 3 serious disadvantages of referred hires and how your referral program may be wreaking havoc on your overall HR objectives. Furthermore, we will highlight new ideas to improve your hiring and augment employee referral programs.
1) Employee Referrals Lack Diversity
Employee referrals have their merits, no doubt. They can be a valuable tool for tapping into existing networks and uncovering potential candidates. However, relying solely on employee referrals can perpetuate homogeneity within your organization. We've all read the studies that diverse teams (diversity of thoughts, backgrounds, demographics, experience, job history, etc.) perform better than homogenous teams. It is in the organization's best interest to build and retain a pipeline of diverse talent.
When employees refer people from their personal networks, it can lead to a lack of diversity in terms of background, experiences, and perspectives. This limited pool of candidates may hinder innovation, creativity, and problem-solving. Not to mention, if you rely heavily on employee referral hires, your DEI initiatives are going to struggle to gain ground.
2) Referrals Promote Groupthink
No leader worth their salt wants a company full of "yes people." Growth and innovation require team members willing to challenge the status quo and think outside of the box. Referred hires can inadvertently promote the exact opposite - groupthink, the death knell to creativity within your organization.
When employees refer their friends, family, or former colleagues, there is a higher likelihood of hiring individuals who share similar backgrounds, demographics, experiences, and viewpoints. While team cohesion is important, an excessive concentration of homogeneous perspectives can stifle innovation, impede problem-solving, and limit the ability to adapt to new challenges. To ensure a thriving and dynamic workforce, it is essential to bring in fresh perspectives from a wider talent pool.
3) Cliques and Politics
An unintended consequence of relying heavily on employee referrals is the promotion of cliques and office politics within your organization. When a significant portion of your workforce is comprised of referrals, it can create an "inner circle" mentality, where employees not part of the referral network may feel excluded or disadvantaged. This can lead to complaints of favoritism, isolation, and an unhealthy work environment.
Additionally, employee referrals can inadvertently perpetuate existing office politics. If influential employees have the power to refer candidates, they may use this leverage to further their own agendas or strengthen their networks within the organization. This can result in a biased selection process, where qualified candidates who are not part of the referral network are overlooked or disregarded. Or, tensions could arise among other employees who feel the referee and referrer got special treatment. A sense of unfairness can hinder the overall motivation and engagement of your workforce.
Debunking the Stats
Faster & Cheaper
Yes, hiring metrics typically show referrals are hired faster than non-referred candidates. Plus, their hiring cost is lower than other sources. If fast and cheap are your motivating factors, then employee referrals are the best candidate source for your company. I'm willing to be though, fast and cheap aren't as important to you as productivity and profitability.
Longer Tenure
Before we get to production and profit, let's discuss tenure. Many studies show employee referrals stay with a company for a longer time span. Again, is this a sign of a better hire? Not necessarily. Perhaps they stay out of loyalty to their referee or because they have a close friend at work or because they have special treatment (see above on cliques and politics). So, it is possible your retention stats look great but you aren't keeping the right people.
Productivity & Profitability
Now, let's examine the productivity and profitability of referred hires. This is where the research gets interesting. There's a floating "sub-proverb" on the internet claiming that employee referrals generate 25% more profit than non-referrals. Sounds appealing, right? It suggests that referrals are indeed better for employers. However, let's take a closer look.
Upon investigating this statistic, I found myself spiraling through a sea of unverified claims. Most articles repeated the stat without providing a credible source, and the few that did link to a data source led to dead ends with missing pages. It became clear that this tired proverb was mindlessly spread without fact-checking.
Finally, I came across an original study making the claim of a 25% profitability bump. But, here is what all those other articles failed to mention:
- The profit study was based entirely on the trucking industry. If you are in the trucking industry, this could be highly relevant. Are you in the trucking industry?
- The profitability metric used in the study was adjusted for recruiting costs. Since referrals generally cost less to recruit, their profitability would naturally be higher. For an apples-to-apples comparison, if using profitability metrics in your organization, remove the recruiting costs from the equation.
- Profitability is measured for the entire tenure of an employee. As mentioned, referrals have a longer tenure, thus a longer time to generate profit. Again, adjust your in-house formula to compare profit over a fixed time period. Apples-to-apples.
- Combining this study with data from Payscale, we see wages of referred employees are, on average, $1600 less than non-referred employees. Again, the profitability formula is skewed in favor of the referred group.
Well, you might be thinking, if the profitability numbers are bunk, then employee referrals must be more productive. Another dead end:
- The study specifically states, referred candidates "score no higher on standard productivity.
Recruiting Improvements
If the proverb "employee referrals are the best source of hires" isn't supported by evidence, what alternatives can improve the talent pool? Consider the following avenues:
- Strategic Partnerships:
Collaborating with external organizations and diversity-focused groups can significantly enhance your candidate pool. Establishing partnerships with educational institutions, community organizations, and professional networks allows you to tap into talent pipelines that are often overlooked. These collaborations can provide access to candidates with diverse backgrounds, experiences, and skill sets, enriching your team and fostering an inclusive workplace culture. - Niche Job Boards:
To access a broader range of talent and increase diversity, organizations need to cast a wider net. By leveraging multiple sourcing channels, such as diversity job boards, professional networks, and social media platforms, you can tap into a broader talent pool. Find a list of diversity job boards here. - Employee Resource Groups:
Harnessing the power of employee resource groups (ERGs) can contribute to a more inclusive and diverse workplace. ERGs provide a platform for employees to connect, support one another, and contribute to the company's diversity and inclusion goals. Encouraging ERGs to actively participate in recruitment efforts, provide feedback, and advocate for diverse talent can foster a sense of belonging and ensure diverse perspectives are heard throughout the hiring process. - Cold ATS Candidates:
Don't overlook the gold mine of candidates already present in your applicant tracking system (ATS). The best candidate might already be in your ATS, having applied to a position several years ago. Revisit your ATS and reevaluate these potential hires. - Implement a Skills-Based Recruitment Model:
Instead of solely focusing on candidates with the exact job title you need, broaden your search to include candidates with the required skill set. This approach allows you to consider candidates from different backgrounds, industries, and roles who possess the skills necessary for success. By prioritizing skills over specific job titles, you can expand your talent pool and increase the likelihood of finding diverse and highly qualified candidates.
Summary
While employee referrals have their advantages, such as tapping into existing networks, they also come with significant disadvantages. They can limit diversity, promote groupthink, and foster cliques and office politics within your organization. Therefore, it's crucial to explore alternative sourcing strategies to enhance your talent pool and achieve your HR objectives.
By leveraging strategic partnerships, niche job boards, employee resource groups, cold ATS candidates, and a skills-based recruitment model, you can access a more diverse range of candidates and foster an inclusive and innovative workplace culture. Remember, challenging the traditional proverb about employee referrals opens up opportunities for improvement and helps you build a stronger, more dynamic workforce.
