How employee referral schemes can help solve recruitment problems

At a time when many businesses have trouble finding the right people, staff are increasingly being given a role in hiring new employees.

Employee referral schemes are big in the US where up to 60 per cent of all vacancies are filled in this way. But over here the Chartered Institute of Personnel and Development (www.cipd.co.uk) estimates that only a third of UK firms have a referral scheme. It’s an area that’s being under-exploited and it’s one that’s worth investigating, especially when research suggests that hiring staff through referrals can save between £5,000 and £6,000 per hire.

How do the referral schemes work?

The concept is simple. Members of staff are encouraged to suggest potential job candidates to their employers. In return they’re given a reward or bounty (this could be cash, holiday, car etc…) for any successful recommendations. In most referral schemes the new staff member has to successfully serve a three month probation period before the reward is released.

The schemes are usually publicised through internal communication channels – intranet, management emails, the staff noticeboard and so on.

The bounty you offer doesn’t have to be cash and you might want to set different rewards for different types and level of referrals. It pays to understand what motivates your workforce before you decide on a reward; tickets to a big football match or Wimbledon finals will work well for some staff, while those with young families might value extra paid holiday.

If you do go down the financial route, don’t make the mistake of not offering enough bounty to encourage staff to suggest new employees. Some experts suggest that companies should offer bounties as high as 80 per cent of recruitment costs, or 10 per cent of the starter’s salary.

Here’s a checklist of other areas you need to consider when setting up an employee referral scheme…

• Make it clear at the outset – who is eligible to make referrals
• Make it easy for staff to find out about open vacancies
• Make the process of submitting referrals easy
• Track the referral process so you can work out the success rate of recruiting in this way · Make it clear whether you’re paying the bonus for the referral or the hire
• You might want to consider widening out the scheme so it’s available to your suppliers and former employees. However before you do, look into the tax implications of paying bonuses to those not currently on your payroll.

The advantages of referrals

Perhaps the biggest benefit of referral recruiting is that you’re much more likely to find staff who are a ‘cultural fit’ with your business.

“Cultural fit is an important benefit,” agrees John Wrighthouse, head of training and development at Nationwide where they run a successful referral scheme.

“If you like working at Nationwide, then the chances are that you are going to get the same thing from friends and family, who have similar sets of values,” he explains.

New recruits are also likely to settle in quicker and stay longer because they have an instant circle of acquaintances through the friend that suggested them.

Management will also be please to hear that this method of recruitment is relatively cheap. What’s more according to a report by pay and reward consultancy Income Data Services (www.incomesdata.co.uk) applicants tend to be of a higher calibre than those attracted using adverts.

The downside

There are potential downsides to referral schemes too. The most important being that it might run counter to equal opportunities policies and limit diversity. A largely young white workforce for example may well choose new recruits from their own background as existing employees tend to suggest candidates in their own image.

To avoid any discrimination claims referral schemes should only form part of a recruitment strategy. You could also weight your rewards towards plugging diversity gaps in your organisation. In addition make sure all your referred applicants go through the same interview and assessment process as anyone else.

Referral schemes also might not work for all kinds of jobs. Nationwide’s John Wrighthouse found that their referral scheme worked really well for attracting customer advisers but for more specialist jobs such as tax specialists they needed to cast the net wider and continue to use traditional methods of recruitment such as newspaper ads.

Referral schemes in action

Many of the UK’s biggest companies run successful employee referral schemes including Amazon, Nationwide, Sainsbury’s, Vodafone, Asda/Wal-Mart.

Wrighthouse is convinced the Nationwide referral scheme has helped cut staff turnover by rewarding employees. The Nationwide’s annual staff turnover rate is less than 10 per cent and that compares very favourably with an industry average of 16 per cent for the banking sector as a whole.

A referral scheme was used very successfully by Selfridges when it was faced with the task of recruiting 1,000 staff for its Birmingham store.

Selfridges’ HR manager, Pete May, tasked line managers to find new staff and offered them a financial bonus if they achieved their targets. In a good bit of lateral thinking line managers in the sporting department headed off to the Armageddon skateboarding park in Birmingham to track down potential staff for the skateboarding section.

“As a result of their initiative,” Mr May says, “we took on five people. Had we not given line managers ‘ownership’ of recruitment’ then arguably we may not have attracted those people”.

Supermarkets are also big fans of referral scheme.

“We are all head-hunters now” says Philip Horn, head of resourcing at Asda/Wal-Mart. Its referral scheme helps fill the 40,000 new jobs that typically come up at the supermarket every year. Meanwhile last Christmas Tesco asked its checkout staff to help identify and recruit 12,000 temporary Christmas staff.