Definition
The term employee referral program is used to describe an incentive system that allows existing employees to receive a monetary award if they refer a job candidate and that individual is subsequently hired. Employee referral programs are based on the view that recruiting through social networks is more cost effective than alternative approaches.
Explanation
Companies will sponsor employee referral programs if management believes their existing employees' social networks are a reliable and cost-efficient source of new employees. An employee referral bonus is oftentimes awarded to a current employee if the individual they refer is ultimately hired by their company. Typically, the new hire must stay with the company for a predetermined period of time before the bonus is paid. For example, an employee might be paid $1,000 if the individual they refer is hired and they stay with the company for at least six months.
Employees are thought to use good judgment when they select candidates to be recruited. This can save a company the expenses normally associated with the recruiting process.
One of the criticisms of these programs is they can limit diversity in a company. The social networks of existing employees may share the same thoughts and opinions as the employee. This is less of a concern if a great deal of diversity already exists in the business. The process of referring candidates can also be a distraction to an employee, and may be detrimental to their productivity or performance.
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