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Employee Referrals: Key Source for Talented Workers
Business Journal

Employee Referrals: Key Source for Talented Workers

by Brandon Rigoni and Bailey Nelson

Story Highlights

  • The hunt for talented employees is on in some parts of the U.S.
  • Recruiting a large number of strong candidates is key
  • Internal referrals can be a talent gold mine

In some parts of the U.S., the hunt for talented employees is on.

Here's just one example. A recent New York Times article -- headlined "In Iowa, Jobs Are Plentiful but Workers Are Not" -- noted that the state's official unemployment rate of 3.4% is among the lowest in the U.S., and it's leaving many local businesses at a loss for finding good employees. According to Matthew Rizai -- chief executive of Iowa-based Workiva, a cloud-based software firm that Fortune magazine recently named as one of the top 10 large technology workplaces in the U.S. -- "We always have openings."

The temptation for companies that are searching for talented employees -- whether in Iowa or elsewhere -- may be to fill those openings by relaxing standards and hiring below-average or average candidates.

However, according to one estimate, the cost of replacing a bad hire is as high as 150% of a mid-level worker's annual salary and 50% of an entry-level worker's annual salary. This estimate underscores a need that all businesses share, regardless of the size of their candidate pool: to master the attraction and selection process and hire the right people the first time.

Though a stellar interview process is crucial for hiring the right people, the most effective human capital strategy starts with recruiting a large number of strong candidates. And talented workers are worth the effort it takes to hire them. Gallup's State of the American Manager report suggests that when companies select the top 20% most-talented candidates for a role, these companies, on average, realize a 10% increase in productivity, a 20% increase in sales, a 30% increase in profitability, a 10% decrease in turnover and a 25% decrease in unscheduled absences.

Percent Profitability Increase When Companies Pick Top Candidates

Gallup has studied many different businesses that use a variety of tactics to find highly talented candidates. Companies often use various media -- including websites such as LinkedIn, newspapers and other print advertisements, television commercials and radio announcements, for example -- to find candidates when the role doesn't require specific skills or when a company needs to reach a large audience in a hurry. External headhunters -- third-party agencies that do the recruiting for companies -- also can be helpful when businesses are searching for specific, highly sought-after candidates for leadership positions, or when companies are recruiting for a niche role or a new position with which the company has limited recruiting experience.

But one frequently overlooked method involves developing an internal referral strategy. Gallup has learned that encouraging referrals from current employees can be an efficient and useful approach, and executing this strategy can cost a fraction of the price of other sourcing methods.

Internal Referrals Are More Likely to Interview Successfully

Internal referrals can be a rich recruiting source because many employees maintain large social networks, such as classmates, colleagues from previous jobs, neighbors or professional connections. Employees not only understand their organization's culture, but they are often familiar with a role's talent demands. Therefore, the chances are good that they will know someone who might be the right fit for an available position.

Employees also have a personal incentive to suggest strong candidates if they perceive that their recommendation places their reputation on the line. And engaged employees are likely to be motivated to refer the right friends or former colleagues because they want their company to succeed.

Gallup has learned that -- depending on the role -- the most effective referral systems can involve requesting recommendations from a particular group of employees. For straightforward administrative roles, email blasts and referral bonuses can work well; leaders or hiring managers can cast a wide net and ask a broad group of employees if they know someone who would be a good fit for the company. However, for higher-level or niche positions, leaders should encourage the best referrals by contacting employees who are most familiar with the role. For such positions, leaders could consider asking high-performing employees in the role -- or those who work closely with people in the role -- if they know a star candidate who should go through the interview process.

One multinational company that Gallup studied has developed many of its top performers through a prestigious summer internship program for college students. This company's sourcing strategy has historically included both media campaigns and internal referrals. Gallup's analyses -- conducted after almost 19,000 people had completed the program -- showed that internal referrals were more than 40% more likely to interview successfully and be offered a spot in the program than candidates who applied through the company's media channels. This finding helped the company become more efficient when recruiting for the program by placing more emphasis on internal referral efforts.

Here are some tips for introducing an internal referral sourcing strategy into a company:

Ensure that the interview process maintains objectivity and does not favor internal referrals. To sustain the integrity of the system and get the best results, separate sourcing from interviewing to mitigate any bias.

Ensure that referring employees understand the interview process. These workers will likely be the first to communicate with candidates. Consistent messaging among recruiters and referring employees is vital for clearly establishing candidates' expectations.

Keep referring employees informed on how their referrals are progressing through the interview process. Workers likely will be curious about this -- especially after putting their reputation on the line. They may also receive questions from the candidate they referred.

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