If you want your business to thrive in a challenging labor market, you need to get creative with your recruiting strategies. And one creative—and effective—way to find (and hire!) the people you need to take your business to the next level?
Offering referral bonuses.
Implementing an employee referral bonus program can be a great way to tap into your current workforce to continue building and growing your team.
But what, exactly, are referral bonuses? How do they work? And how can you leverage these bonuses to hire high-quality talent for your business?
What Is a Referral Bonus?
A referral bonus is an incentive given to an employee for referring someone to an open position at your company. These incentives are often paid in cash, though you can structure your referral bonus program however you'd like (more on that next).
An employee qualifies for this type of bonus when they refer a candidate to a position at your business—and the candidate achieves a defined milestone, completing their interview, training o probationary period.
Technically, you can use referral bonuses for any role you need to fill—including different types of roles (like a full-time, part-time, or independent contractor position) or roles with different seniority levels (like entry-level, mid-level, or senior positions).
But offering bonuses for every new hire referred by a current employee can get expensive—which is why many companies reserve these bonuses for highly specialized and/or hard-to-fill roles.
What Are the Different Types of Referral Bonuses?
You can structure your employee referral program in different ways based on what works best to incentivize your workforce. Some of the different types of bonuses for referring candidates include:
- Cash bonus payments: What better way to reward an employee for referring a qualified candidate than with cold, hard cash? With this type of bonus, you can give a referring employee a lump-sum cash bonus at any stage of the hiring process. You could even spread out the bonus payments as the new hire achieves different milestones (like rewarding 25% of the bonus if the candidate interviews, 25% if the candidate is hired, and 50% if the new employee remains at the company for 90 days).
- Paid time off: Extra PTO is another great incentive for employees. With this kind of bonus structure, in exchange for referring a qualified candidate, you would offer additional PTO to team members—whether that's an extra personal or sick day or a full week or more of time off. (One thing to keep in mind? This type of bonus might seem lackluster if your employees already get a significant amount of PTO or you allow unlimited or flexible time off—so only consider it if it makes sense for your team).
- Gift cards: An alternative to cash, you can also offer gift cards as a referral bonus (for example, a prepaid gift card or a gift card to your employees' favorite restaurants or stores).
- Charitable donations: If you (and your employees) are committed to giving back, you can structure your bonuses for referred candidates as a donation made in the employee's name to their favorite charity.
- Raffle: If you're working with a limited budget for bonuses, a raffle system could be a great way to incentivize employees to refer talent to your company. Each time an employee successfully recruits a new hire over a certain period, enter their name into a raffle. Then, at the end of that time period—at the end of a quarter or year, for example—pick a winner from all the raffle entries and award them with a prize (which can include a cash bonus, vacation, or another reward).
- Recognition: Not every employee referral will warrant a bonus (for example, you might not feel it's necessary to offer a bonus for an entry-level, unspecialized position). But you want to encourage your employees to continue to refer top talent to your company—so, at the very least, for every referral, make sure to thank the employee and recognize their contribution to building the team (for example, with a certificate of appreciation). Taking these kinds of steps to let employees know they're valued and appreciated can also help you keep top talent with your company.
Mix and Match Bonuses
Struggling to choose a referral bonus that works for your small business? Not to worry! There's no need to choose just one. Come up with your own ideal bonus structure by mixing and matching the types of bonuses available.
For example, you could put together a tiered structure that combines different bonuses and rewards, like:
- A $50 gift card for initially referring a candidate who interviews for a role and receives an offer
- Three days of PTO if the candidate is hired and completes onboarding
- $1,500 if the candidate finishes training and remains employed for six months
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Benefits of Referral Bonuses for Your Business
An effective referral incentive program—no matter the type—can benefit your small business in multiple ways. But what, exactly, are these benefits?
Fill Roles Quicker
The average time to fill a role from its initial posting is 36 days. And too many unfilled jobs can lead to all sorts of issues within your organization—like staff restructuring, missed deadlines, reduced growth, and lower workplace morale.
The good news? Referrals can help shorten your time to hire. For example, according to research outlined in Forbes, hiring through employee referrals can be anywhere from 10 to 26 days faster than hiring from job boards or career sites.
So, by incentivizing your employees to refer talent to your company through a bonus program, you can fill your open roles faster—and avoid all the issues associated with too many unfilled positions.
Reduce Recruitment Costs
Recruiting a new employee is expensive. There are serious labor costs involved with actively searching for and reaching out to potential candidates; in fact, recruiters spend an average of 14.5 hours per week sourcing candidates for just one position.
Getting referrals from your employees can cut down on the time it takes recruiters to source, qualify, and hire candidates—saving time, energy, and labor costs.
Attract Passive Job Seekers
Over a third of workers are passively looking for work—but because passive job seekers aren't actively searching for new gigs, it can be hard to get your opportunity in front of them.
Incentivizing your employees to share open positions with great talent in their network can often help you reach these hard-to-reach passive candidates—one of which might be the perfect person for your new position.
Improve Employee Engagement and Retention
Empowering employees to refer talent to your company—and rewarding them for doing so—can give them a sense of ownership in how your organization is growing, which can help increase engagement. And because the new hires are people your employees already know (and, in most cases, like!), it can improve their experience at work—which can, in turn, lead to better employee retention.
And that improved retention isn't limited to your existing employees—research shows that referral hires stay employed for 70% longer than non-referrals.
How To Set Up an Employee Referral Program
You know what a referral incentive program is. You know how it can benefit your business. Now, let's talk about how to actually set up one of these referral programs at your company.
- Decide What Type of Incentive to Offer
Before you start putting together your incentives, you need to decide what type of motivators work well for your company. Consider:
- Which employees are likely to refer—and what kind of incentive they'd want: Your employees are motivated by different factors—so take those into account when offering bonuses for new employee referrals. For example, a part-time employee who isn't eligible for benefits might not be motivated by a PTO bonus for referring a candidate—while extra PTO would likely be a great bonus for full-time employees with children.
- How difficult the role is to fill: As mentioned, some positions (like an entry-level customer service role) don't necessarily require added incentives to fill—so if you want to save yourself some money, consider making these roles ineligible for bonuses.
- How much to offer: In order to incentivize your employees to refer candidates for an open position, whatever incentive you offer needs to have real value. Or in other words, make sure that how much you're paying as a referral bonus will make referring talent worth your employees' time and energy.
1. Establish Rules
In order for a referral bonus program to work, it needs to be clear, fair, and structured—and that means laying down some ground rules.
While rules might vary, some rules you'll definitely want to think about when creating your bonus program include:
- Employee eligibility: Who is eligible for a reward under this program? And, just as importantly, who is not eligible? (Because they're responsible for hiring decisions, executives, hiring managers, and HR are usually excluded from bonus eligibility.)
- Candidate eligibility: Not every candidate referral will qualify for a bonus—but it's important to establish those exceptions from the get-go. For example, you might want to restrict past employees or recent applicants from counting as a referral.
- When a referral qualifies for a bonus: As mentioned, most referral bonuses are contingent on the new hire hitting certain milestones—so, to avoid any miscommunication over when an employee will receive their bonus, make sure to clearly outline those milestones.
2. Check Legal Requirements and Compliance Guidelines
You want to make sure that your referral program abides by any relevant employment laws and compliance guidelines—so as you're building out your program, make sure to do your research and adjust your strategy accordingly.
For example, California has pay transparency laws that require companies to include salary ranges in job postings—so when arranging interviews with referrals, you'd want to be sure to share the role's salary information along with a job description.
3. Engage Your Employees
For this type of bonus to be effective, your employees need to know about it. Call meetings or hand out guidelines that outline your referral process. Make sure to highlight how you plan to reward employees to get their buy-in, and make yourself available to answer any questions your workers might have.
Best Practices for Paying Out Bonuses for Referrals
When it comes time to actually pay out your bonuses, there are certain things you'll want to keep in mind to avoid any potential tax, administrative, or employee-related issues, including:
- Tax withholding: Bonuses are taxed. Make sure you withhold the correct amount of taxes for each bonus payout your employees earn.
- When to pay out bonuses: In addition to determining what milestones a new hire needs to hit before an employee is eligible for a bonus, you need to decide when those bonuses pay out to ensure your payroll, PTO, and bookkeeping are accurate.
Referral Bonus FAQs
Still have questions about employee referral programs? These frequently asked questions have you covered.
What Is the Best Referral Bonus?
The best motivator to encourage employees to recommend recruits is a cash bonus. You can also ask your employees about which type (or types) of bonus they prefer.
How Do You Get a Referral Bonus?
Employees can earn a referral bonus for referring a new candidate to an open position—who then gets an offer or is hired. Some companies require that new hires stay with them for a certain length of time before you can cash in on your bonus.
Every business is different, so check with your human resources department or hiring manager to learn what your specific bonus program looks like—and what other incentives might be available for referring talent to the company.
How Much Referral Bonus Do You Get?
The average bonus for referrals is $1,000 to $2,499, but the value of a bonus can vary depending on the open position; companies can pay anywhere from $250 (or less) for an entry-level role to $25,000 (or more) for an executive position.
Reward Employees for Helping Fill In-Demand Roles
Filling open roles can be challenging—especially if those positions are in-demand or highly specialized. An effective referral bonus program is a win/win for your small business and employees; you can more easily recruit new candidates while engaging your employees and rewarding them for their time and recommendation.
And now that you know how to create an employee referral program, all that's left to do? Get out there and start leveraging your current workforce to build your future workforce.