According to data from the Society for Human Resource Management, it costs businesses close to $5,000 for each new hire, but for specialized roles, the costs can skyrocket to as much as three times the yearly salary. When it comes to finding qualified candidates quickly and reducing recruiting costs, businesses can give themselves an advantage by offering employees a referral bonus to tap into their networks.
However, there is more to referral bonuses than handing out a check after a new employee is hired. Your business will need to establish policies, withhold taxes, and follow other local regulations to remain compliant when offering referral bonuses. In this article, we cover everything you should know before starting a referral bonus program in your business, as well as how to remain compliant when you introduce it. Let’s get into it!
What Is a Referral Bonus?
A referral bonus is the HR term for when a business incentivizes its employees to refer candidates for vacant roles. A business will typically offer a referral bonus—a financial reward for an employee—when they’re trying to recruit for hard-to-fill positions or positions they need to fill quickly.
Types of Referral Bonuses
There are many different types of referral bonus programs, but these are some of the most common:
Bonus Payments
Bonus payments are the most common type of referral reward. They offer the most flexibility and can be used as a reward for filling roles big and small. Paying an employee a $10,000 referral bonus might seem like a lot, but if it offsets your total recruitment costs for specialized positions by $60,000, it might be worth it.
Paid Time Off
Paid time off is another common incentive for employee referrals. However, keep in mind that this may be less effective in regions where employees are entitled to large amounts of paid time off, like in some European countries, compared to countries such as the U.S. where there are no regulations for paid time off.
Gift Cards
Gift cards are typically a less costly incentive and can be a good way for businesses to test how they’d run an employee referral system with more significant rewards.
Tiered Rewards
Employee referral rewards programs can offer many different types of compensation, from bonuses to paid time off to gift cards, but they can also incorporate several incentives. For example, your business could offer employees a gift card for every candidate they refer, a paid day off if that candidate interviews, and a bonus if that candidate is eventually hired. Rewards may also vary depending on the role you’re hiring for; employees referring for a high-value role might receive a higher value reward than for a low-value role.
Benefits of Offering a Referral Bonus to Your Employees
In addition to the benefit for employees, referral programs can offer huge benefits to companies:
- Referral bonuses can fill roles quickly: Because your employees may know people who do similar work or are looking for new roles, their referrals are often a great fit for your business. This means you spend less time searching for applicants and instead have them sent to you.
- Referral bonuses can cut recruitment costs: Largely due to reduced recruitment marketing costs, employee referrals can help reduce the cost of recruitment. For specialized, competitive roles, finding the right candidate can consume more budget than you’d hope for, but employee referrals can mitigate those costs.
- Referral programs can identify candidates who may not have applied: For any given role, finding the right candidate is a challenge; and it doesn’t help that the best fit might not even be aware of the vacancy. Employee referral programs can help close some of those gaps and put strong candidates in touch with your business.
- Referral programs can help you boost employee engagement: Employee engagement can be a challenge for any business, but referral programs can help. Not only does encouraging referrals give your current employees the opportunity to shape the business from the inside, but it also helps engage new employees, as they’re at least somewhat familiar with someone currently on your team.
How to Set up a Referral Bonus Program
So you know a bit about employee referral bonus programs and think it could be a great addition to your employee value proposition—great! But how do you set up a referral bonus program? Here, we cover some of the most important steps to take as you begin your own referral program.
1. Decide Upon a Reward Amount
Statistics from 2019 indicate that the average referral bonus was around $2,500; however, this number can be altered depending on the needs of your business or the role you’re hiring for. You’ll want to determine the reward prior to announcing it to your employees to avoid any conflicts upon awarding the bonus.
2. Establish Rules
Employee referral bonus programs may have different rules from business to business, but you should ensure that yours are clear and communicated to all employees. Some common rules for employee referral bonus programs are things like:
- Candidates who are referred should have no prior contact with the business, so employees can’t refer candidates who previously applied or interviewed with the business.
- Employees who make hiring decisions, such as recruitment staff or hiring managers, are often made ineligible for bonuses, as they could unfairly favor the candidates they refer.
3. Check Legal Requirements
Depending on the jurisdiction in which your business operates, there may be employment laws that you’ll need to adhere to in order to run a compliant referral bonus system. For example, you will want to post the positions publicly before employees can receive a referral bonus, or take steps to ensure that all candidates are evaluated equally regardless of how they discovered the position, as doing otherwise could lead to compliance challenges.
Employee referral bonus systems are meant to ease the burden of hiring and reduce administrative burdens, but if your referral system isn’t compliant with local laws, it could lead to additional headaches.
4. Tell Your Employees & Show Them How to Submit Referrals
Finally, when you’re prepared to run your referral program, it’s time to tell your employees about it. While this step is fairly simple, it’s important to get it right. Your employees are the ones who’ll be referring people from their networks, and ensuring they know the details about your referral program is essential to its success.
Take advantage of various forms of communication to ensure that all employees, both those working above or below the position you’re seeking, are aware of the program and how they can submit a referral.
Don’t forget to remove as much friction from the referral process as possible. The easier it is for employees to refer candidates, the better your chances for success are.
How to Pay Your Employees a Referral Bonus
How you pay your employees a referral bonus will depend on a number of factors, including things like a jurisdiction’s payroll and tax laws, how your business manages payroll, and how your compensation packages are set up.
However, regardless of how your business manages employee compensation, you’ll want to pay careful attention to these two items when paying employees a referral bonus:
Tax Withholding
Tax withholdings for forms of pay like bonuses and overtime could vary from region to region, so ensuring that the right taxes are withheld from the referral bonus is important for staying compliant. If the proper payroll taxes aren’t withheld, it could create a tax compliance issue for both you and the employee.
Payment Timing
Before you pay your employee their referral bonus, you’ll want to ensure that the new hire has met any requirements (such as staying with the company for 90 days). Then, you’ll need to account for when the payment will actually be distributed and ensure that it’s properly processed along with your payroll.
Employee Referral Bonus FAQs
Referral bonuses can be a useful tool for finding qualified candidates, but they’re unique programs and there’s a lot to learn before implementing one. Here, we answer some common questions about employee referral bonus programs.
What’s the Difference Between a Recruitment Incentive and a Referral Bonus?
Recruitment incentives and referral bonuses are easy to get mixed up, as they’re both special types of compensation paid following a hire. The difference is that a recruitment incentive goes to the job seeker, whereas a referral bonus is paid to an existing employee who helps identify strong candidates. Both can help boost your employer branding.
Recruitment incentives and referral bonuses are also similar in that they’re both typically only paid out after the hire has been employed for a set duration.
How Should Employee Referral Bonuses Be Paid?
Bonus payments are the most common type of referral reward, but different types of rewards can also be useful. Whether your business chooses to reward employees for referrals with bonuses to their paycheck, paid time off, gift cards, or any other type of compensation will ultimately come down to what works best for your organization and keeps you compliant.
What Are the Downsides to Offering Referral Bonuses?
There is some debate about how effective employee referral incentives are, and there’s no clear conclusion to be drawn. For some businesses that have offered generous referral incentives, the results have been incredibly beneficial. However, their success isn’t guaranteed, and some companies have seen success with employee referral programs even after dropping incentives such as bonuses.
An additional concern surrounding employee referrals is that employees typically refer their friends or people they’re close with. This isn’t inherently bad, but it can also put your business at risk of becoming too intellectually siloed, and limit diverse perspectives.
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