The Case for the $10,000 Employee Referral Bonus

September 28, 2019
Author: Tyran Saffold Jr

Employee retention is one of the greatest human capital expenses for an organization. In 2018, about one in every four workers left a job, and U.S. employers paid a whopping $600 billion in turnover costs. By 2020, that figure is expected to increase by 19 percent to an estimated $680 billion. The facts, revealed in the most recent Retention Report from the Work Institute, demonstrate the deep financial implications of the revolving office door.

Employee Referral Bonuses Lead to Quality Hires

How can employers increase retention rates? What are keys to employee sustainability and job satisfaction? Given the tight labor market and the sky-high costs of attrition, it might be time to switch the script and incentivize employees instead of recruiters with big bonuses when they successfully place a new job candidate. By rewarding those who know the company best, an organization has the potential to better align the job prospect with the company – and increase job longevity with the referring employee.

Recruiting Costs

The cost to retain a professional recruiting firm typically begins at $10,000 for a single job placement, but that amount can actually be small compared to total turnover costs. According to a Bureau of Labor Statistics'Longitudinal Study, the average person holds at least 11 jobs in his or her working years. However, each time the employee changes organizations, the employer pays training, hiring, recruiting, vacancy and departure costs. The 2018 Retention Report says that the estimated turnover cost is 33 percent of a person’s salary, explaining that for every three people who leave their jobs, the cost for the organization is the same as if it hired one person.

Tightening Labor Market

Today, there are more available jobs than there are workers and organizations around the nation are struggling to acquire the right talent. In fact, the competition is so tight that sometimes new hires who have accepted a job don’t even show up on the first day. Talent acquisition managers scramble to find answers, but are often relegated to starting the search over from the very beginning. So, the recruiting and hiring costs double — just for that single position.

Employee Recommended

Some companies find success in recruiting, hiring and retention by incentivizing their current employees with big referral bonuses, say $10,000 — the same cost the organization would pay a professional recruiter. The perspective is this: if the employee recommends a prospect, there’s a level of genuine interest in his or her success at the organization. Also, by having “skin in the game,” the employee is positioned to feel a stronger alignment and loyalty with the organization. This is key to job longevity.

Employee referrers, also cited as employee recommenders, provide definable value to the organization. In research published in the Journal of Business and Psychology, researchers explain that employee recommenders provide realistic job previews. The article states:

“Compared to employees recruited through formal sources, employees recruited through referrals were found to have longer tenure, better performance, higher levels of job satisfaction and more pre-hire knowledge, which may facilitate socialization.”

Employee referrals have also proved to be more economically advantageous than finding candidates from career sites and job boards. One source said that, by comparing the two options, referred candidates can be hired 55 percent faster and have a 25 percent higher retention rate.

No matter what the industry or geographic location, finding the right talent takes time and tenacity – and sometimes a team approach. Incentivizing current employees with substantial bonuses can be a smart strategy to reduce attrition and grow an organization.