Attracting the best talent is critical for companies that want to maximize their growth and profitability. But that may be more challenging today as organizations struggle with tighter recruiting budgets and leaner HR staffs.

In their quest to recruit the best-qualified candidates at the lowest cost, many companies have developed and implemented their own employee referral programs (ERPs). "Investing in an ERP consistently generates one of the highest returns on investment in terms of both cost and quality-per-hire," says Dave Lefkow, an interactive solutions consultant for Seattle-based TMP Worldwide, which creates ERP marketing programs.

Typically, ERPs work by enticing employees to identify talented friends, relatives or acquaintances who meet the qualifications for available positions within a company. Specific rules vary by company, but generally, employees are awarded a prize or cash in exchange for their successful referral. For example, at Novartis Pharmaceuticals U.S. (East Hanover, N.J.), eligible employees may receive a $2000 referral bonus if a referred candidate is hired.

Even when companies pay out hefty bonuses, the programs often reduce a company's cost-per-hire versus other recruiting sources. ERPs "most assuredly cut recruiting costs," says Nancy Cleveland, manager of Novartis Pharmaceutical U.S.'s employee referral program and supervisor for HR staffing services. Depending on the job level, a company "could potentially save $12,000 or more [per hire] especially if it had to use a retained or contingency agency."

It is difficult to accurately quantify cost-per-hire data for various recruiting sources because no standard set of metrics have been established to determine the criteria to be considered, says Frank Scanlan, media affairs manager at The Society for Human Resource Management (SHRM). "Currently, we are developing a standard metric, but [the work] is not yet complete."

However, a recent employee referral programs survey conducted by SHRM and Referral Networks reveals that the cost-per-hire associated with referrals is attractive. On average, the cost of each exempt hire made through the employee referral program was about $896 in incentives and rewards. And the cost of each nonexempt hire made through employee referral programs averaged about $399 in incentives and rewards. The survey was faxed to 1,288 randomly selected SHRM members, and an internet link was e-mailed to 1,487 randomly selected SHRM members. The results of the survey are based on the responses of a total of 586 HR professionals.

In addition to being cost-effective, ERPs usually deliver a steady stream of high-caliber candidates who have been prescreened to a certain extent by their own employees. That can be a boon to overworked HR professionals, who today are inundated with applicants-many unqualified-for advertised job openings. "Rather than weed through 300 resumes and conduct ten interviews, HR would prefer to review ten promising resumes and interview three excellent candidates," says Tom Hamilton, president of Employment Referral Marketing (Des Moines, Iowa), which markets software to help companies manage ERPs.

ERPs alone won't satisfy all of a company's recruiting needs. Employees don't typically offer an adequate number of names and top executive level jobs are rarely filled through referrals. "But chances are you can get anywhere from 10 to 25% of your hires from employee referrals," says Lefkow.

The SHRM survey reports a similar success rate. In 2000, an average of 57 referrals for exempt positions were presented to HR and an average of 15 hires were made, according to the survey respondents. These hires represented an average of 18% of the overall new hires in 2000. For nonexempt positions in 2000, an average of 73 referrals were presented to HR and an average of 27 hires were made. These hires represented an average of 24% of the overall new hires in 2000.

Because they can bring in high-quality candidates at low cost, ERPs are a logical launching point in recruiting. "Let your employees know about openings for thirty days," Hamilton advises. "If they don't bring in the candidates you want, cast a wider net and go to the other more expensive sources-put an ad in the newspaper or set up a booth at a job fair."

The Powerful Employee Resource

Indeed, ERPs allow HR to tap into the desirable pool of friends and acquaintances that employees inherently have. "People typically socialize with others like themselves. If a company values its employee, there's a good chance it would like his or her friends and acquaintances," Hamilton observes. Essentially, the programs allow companies to leverage their own employees with the people they know outside of work-through church, a child's soccer league, or a former employer, for example. Cleveland observes that roughly 60% of Novartis' referral payout goes to its sales reps, many of whom recommend former peers at other pharmaceutical companies. Making those referrals "can be very lucrative for a sales rep, if he refers good, experienced candidates."

These programs can be an excellent way to reach out to the hard-to-find passive job seeker-that person who is not reading the newspaper ads or looking on the internet job boards but is interested in a better opportunity, says Hamilton.

In addition to having a network of contacts, employees have a vested interest in finding high-quality candidates. "By making a referral, an employee is putting their professional reputation on the line to a certain extent," notes Hamilton. So he or she would not want to refer someone who seemed disorganized or had poor interpersonal skills, for example, he says.

Employees make good recruiters because they are intimately familiar with their own unique corporate culture—whether it is suit-and-tie or relaxed or sales-driven or meetings-driven—and have the intuition to know whether a neighbor or acquaintance would fit into that environment, Hamilton observes. Indeed, Novartis Pharmaceuticals' ERP, called the Point, is based on the fact that "Nobody knows Novartis better than its employees," according to company literature.

By sensitizing all employees to specific staffing needs, ERPs essentially multiply a company's recruiting resources. Ideally, the programs create a recruiting mindset, motivating employees to sell the advantages of working for their employer, advertise job openings and invite people with relevant backgrounds to "come look at our company and come work with us."

To foster this kind of recruiting approach, Biogen (Cambridge, Mass.) welcomes referrals for "any job that we post up to the VP level" even if the job is not vacant that at that moment," says Keith W. Hall, the company's director of HR. "We want our employees to always have the idea of referring qualified candidates at the front of their mind," says Hall. So if an employee meets someone impressive at a social event or a business meeting, they don't need to go through a lot of formal steps to check to see if there is an opening that fits the person's qualifications before inviting them to submit his or her resume. "It helps introduce a vigor and a freshness into our referral process," he adds. Most of the referrals that Biogen receives, he adds, are aimed at positions such as lab technicians, executive assistants, and manufacturing or customer service associates "where we do have frequent openings due to the growth of our company."

Pesky Paperwork

Indeed, ERPs can deliver great results but they do introduce some pesky challenges too. The programs can be very paperwork-intensive and can add a great burden to a company's HR staff if not managed properly. To save time and money, it's important to automate the program-from introducing the program to dispensing the referral form to tracking the many steps of the applications process, says Hamilton.

Employment Referral Marketing is one company that provides software to help companies efficiently manage ERPs. The software is based on an application service provider (ASP) model. "We host it and our clients access it through the internet. And the advantage to that is that we can implement the program for them relatively quickly. And they don't have any maintenance, security or technology issues to worry about. All those things are basically left up to us." The company's goal, says Hamilton, "is to bring efficiencies to the process."

Software can also help companies swiftly communicate rules and incentives to employees-something not all companies do well. According to the employee referral programs survey, respondents cited "lack of program awareness" as a major challenge associated with their organization's program. And only about two-fifths of respondents agreed or strongly agreed that their organizations place enough emphasis on the employee referral program.

Organizations most frequently use employee orientation to promote the program, according to survey respondents. Educating people as they join the company can be a good strategy for reaching most employees. And "new hires can be an excellent source of referrals since they typically come with a network of potential referrals from their last employer," says Lefkow. But companies need to reach out to existing employees, too, Lefkow adds. "To create ongoing awareness, an ERP needs an initial kick off phase, followed by continuous promotion," he says. "This does not necessarily mean that you have to upgrade the theme of your program every year, although elements of it should be refreshed from time to time."

At most companies communication of the program is done electronically. Companies might broadcast a weekly or biweekly e-mail that tells a referral success story, giving the name of the employee who made the referral and the amount of the bonus paid, Hamilton says. To reach employees who don't have access to e-mail, companies might distribute flyers about the program with paychecks or put posters in the lunchrooms, he adds.

Hamilton also recommends that companies brand their program. "Don't just call it your ERP. Call it something sexy-something that makes employees remember what it is." Companies might imprint the program name on memo pads or t-shirts to promote it, he says. "Companies need to identify a brand strategy that helps make the program part of the culture of the organization," Hamilton adds. Biogen, for example, markets its ERP under the name SuperRecruiter and uses a superhero as its mascot.

Just as important as a strong marketing program in promoting an ERP is the overt support of the top levels of the organization, Hamilton adds. "Executives need to find ways to plug the program at internal meetings and the annual picnic, for example. They may want to make a big deal out of who made the most referrals or stress how hiring excellent people affects the bottom line."

Even with the best promotional strategies in place, it's critical that companies define metrics for the success of their programs, says Lefkow. He advises companies to set specific goals like "increasing the percentage of hires from employee referrals from 25% to 35% in year one" and stay away from vague goals like "increase participation" or "improve morale."

Maximizing The Number Of Referrals

Once goals are set, companies can maximize the number of referrals in a number of ways. Hamilton, for example, recommends that companies to keep program rules to a minimum. "Make it easy for employees to make referrals," he says. Web-based programs have the advantage of allowing employees to make referrals from home, on the road or from their office, he points out. "They can just go to a Web site and put in the name and address of the person they want to recommend and they hit submit," he says. "It is as simple as that."

Hamilton also suggests that HR adopt a policy that gives priority to referred candidates. Putting the referred resumes on the top of the pile "shows your employees that you are committed to [the referral process]. In other words, you recognize that the referred candidate is likely to be the best one and you value employees' opinions and participation."

Some argue that companies can boost the number of referrals by offering attractive bonuses and prizes with a minimum of restrictions. For the most part, respondents of the employee referral program survey indicated that their organizations award the same incentives and rewards for both exempt and nonexempt positions.

That's the case at Biogen, too, for example. Unlike some companies, "we are not going to [pay more for the referral of an exempt employee versus an non-exempt employee]. The bottom line is that we are looking for quality people across the company," says Hall. "For the purposes of our employee referral program, we are not going to make those kinds of distinctions [and imply] that one job is more valuable than another."

But most companies do require that referrals meet some sort of criterion before a bonus is paid. According to the employee referral survey, a majority of respondents indicated that their organizations give incentives for referrals only if they are hired. Less than 5% of respondents stated their organizations gave incentives regardless of hiring or interviewing status and for referrals resulting in interviews.

And many companies require that the referred candidate stay for 90 days after being hired before a bonus is paid to the referring employee. In fact, almost half of the survey respondents in organizations with referral programs said that three months is the most common tenure period for which a new hire would be required to work before an incentive for the referral is given for both exempt and nonexempt positions. That's true, too, at SRI International (Menlo Park, California), a nonprofit research institute. The company pays its employees a $1000 bonus only after the referred candidate has worked 90 consecutive days.

Indeed, for survey respondents, the most frequently mentioned award was cash or money, followed by cars, gift certificates and raffles. The most infrequently mentioned rewards were gifts, such as TVs and jet skis. Respondents were also able to write in other responses; these included: savings bonds, lottery tickets, shirts, movie tickets, massages and flowers.

Although important, bonuses and prizes are not the sole reason employees make referrals. "Your employees also want to see their friends get great jobs," Lefkow says. "So in effect, there's something in it for them. That's why upping the amount of money you give away will not necessarily increase the number of referrals you get over time." Eventually, you see decreasing returns in this type of investment, he adds.

Lefkow cites an example of a very small company that gave away t-shirts, pens and other items as part of their program, and still saw a big increase in their results. Other companies successfully use points-based systems similar to frequent flyer miles that add up to prizes like ski vacations or a whitewater rafting adventure. Adding fun rewards to your program is a great way to increase participation without significantly increasing expenses, he adds.

Indeed, well-promoted and well-designed, ERPs can be a very effective part of a company's recruiting strategy. In today's down economy they may be most valued for their ability to slash recruiting costs. In the future, when the labor market is expected to tighten, they may be prized for their ability to attract top-notch candidates.

Recent analyses of U.S. Census data indicate that there will be a shortage of at least six million workers by the year 2008, the employee referral program survey notes. "Based on what the experts are telling us, we're going to face an employee shortage reminiscent of the late 90s," Hamilton laments. And as the baby boomers retire, finding people to fill open positions could become even more difficult, he adds. "Those companies with ERPs in place will have one more tool to help them recruit the best talent, which is critical to success in the increasingly competitive business world."

Susan Ainsworth specializes in writing about chemical industry topics and is based in the Dallas, Texas area.