Better Solution to Outdated One-Time Employee Referral Bonuses

by Oct 27, 2020Talent Management

One-time employee referral bonuses need to go the way of the dodo. They are an antiquated reward system that motivates the wrong things. 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. Retention, new colleague happiness, or assistance in integrating this new person – gone moment check clears.
  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 conversations is not exactly worth $2000, $4000, or even $10000 because their responsibility ends there. The person referring the candidate and 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-time 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. With an average tenure of about 2 years, someone staying for 4 is a good investment. The last company I did this system at, most people hired 6 years ago, are still there.

What are other benefits of the program?

  1. Your talent funnel is going to be much fuller without paying any outsiders. I like to keep money in the company, higher satisfaction from the team.
  2. Employees are more motivated to make sure the people they bring in are the right people to join the company and are productive and happy after joining. The company saves money because fewer operations people need to be hired to keep up the employee experience.
  3. Your own people become talent managers and help catch performance problems or dissatisfaction with the company before operations or management. 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 your employees’ friends and acquaintances may all belong to the same demographic, alumni group, etc. The way you mitigate this is with strong company culture and value and education on diverse teams’ undeniable power.
  2. There may be resentment if an employee’s buddy gets fired and that employee loses his/her bonus. This risk is minor since a higher-quality talent pool will reduce the need to fire for lack of performance.

    Image credit: Nick Youngson

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