Better Solution to Outdated One Time Employee Referral Bonuses

Published on: October 27, 2012

One time employee referral bonuses are outdated and motivate wrong actionsOne time employee referral bonuses need to go the way of the dodo. They are an antiquated reward system that motivates the wrong things. Yes, some of the most well known companies use them, but these companies end up hurting both themselves and also the business community. Even the biggest morons can waste investor/company money, so enough with these one time referral bonuses!

Before I suggest a solution, let me tell you why one time referral bonuses are a waste of money:

  1. One time large rewards do not work! The effect of the bonus wears off by the next paycheck. I’ve seen this happen many times – it is often like flushing thousands down the toilet.
  2. The person referring the candidate does very little to really earn the bonus. An employee looking at their contact list and having a couple of conversation is not exactly worth $2000, $4000, or even $10000…because their responsibility ends there. The person referring the candidate, along with the operations team, should also be involved with on-boarding, teaching company culture, retention, and continued satisfaction with the company.

But we all need help in recruiting talent for our teams, and the people operations team needs assistance helping new employees settle in and do well, etc. So here is a better way:

Institute a substantial employee referral dividend. It takes about $10K-$15K in resources and cash to replace each employee who leaves the company. On top of that, since often a new hire may get higher compensation, you may need to hire one full-timer and one part-timer to replace the lost output, etc. So why not increase the stakes and give a $5K annual bonus per employee referred for as long as both the referrer and the referee are employed with the company. The bonus should be paid each year on the anniversary date that the referred employee joined the company. Why such a large bonus? Because $20K over a 4 year tenure is a small price to pay. I estimate you will get a 3X ROI on that money.

Why 3X ROI?

  1. Your talent funnel is going to be much fuller without paying any outsiders. I like to keep money in the company. Plus, outsiders send you mediocre people for a much higher fee.
  2. Employees are more motivated to make sure their fellow employees are the right people to join the company and that they are productive and happy after they join. The company saves money because less operations people need to be hired.
  3. Your own people become talent managers and help catch performance problems or dissatisfaction with the company before operations or management does. The earlier you discover a problem, the cheaper and easier it is to solve.

What are the risks?

  1. There is a risk for company diversity since the friends and acquaintances of your employees may all belong to the same demographic, alumni group, etc. The way you mitigate this is with a strong company culture and value, and education on the undeniable power of diverse teams.
  2. There may be resentment if an employee’s buddy gets fired and that employee loses his/her bonus. This risk is minor though, since a higher quality talent pool will reduce the need to fire for lack of performance.

What do you think? Connect with me on Twitter.