HR Leads Business

Jul 18, 2017 | Barry Lawrence, MBA, aPHR, Staff Writer for HRCI

The Hidden Dark Side of Employee Referral Bonus Programs

Organizations use employee referral bonus programs to help recruit top talent, motivating referring employees with the opportunity to earn extra cash or other rewards for helping to land a new hire. But how does an employee referral bonus program impact a potential new hire? New research suggests that potential new hires can be "turned off" when learning there is a "bounty" on their head.

Past research has mostly focused on the benefits of employee referral bonus programs from the perspective of employers and employees. New research, published in Applied Psychology: The Dark Side of Employee Referral Bonus Programs is among the first to explore the impact that employee referral bonus programs have on job candidates. The study cautions that:

  • Awareness of a referral bonus can negatively influence applicants’ perceptions of referrer credibility.
  • When potential applicants know that employees receive a bonus for making a referral, organizational attractiveness may be negatively influenced.

A Question of Sincerity

In the eyes of a job seeker, an organization’s employee can, indeed, be a credible source about the job and the workplace environment, according to the research, led by Sara Stockman at Ghent University, Belgium. But upon learning that a bonus is up for grabs, applicants may begin to question whether they are getting a trustworthy assessment.

"Individuals might perceive the referrer as trying to convince them to apply for the job for financial reasons rather than because they genuinely want to help them," the research notes. The more negative perception of the referrer and their credibility also did not change, the study found, even when variables such as the timing of the bonus payout, the size of the bonus and the type of employee referral bonus rewards were changed.

"As soon as a referral bonus was mentioned, no matter its form, potential applicants appeared to question the credibility of the referring employee." And most job seekers will find out, the researchers contend. Nearly 80 percent of employees interviewed in the study said that, yes, they would tell the new hire about the referral bonus. Otherwise, "they would feel awkward not having told and still receiving the bonus."

Referrals: The Good, the Bad and the Ugly

New hires from referral programs are found to have "lower turnover, better job performance and higher job satisfaction than employees recruiting from formal sources such as advertising," the researchers agree. But more research needs to be done to study the impact on the applicants.

Employers are urged to consider the negative effects that referral programs can have on potential applicants, and to look for other ways to motivate employees to make referrals, such as through ambassadorship programs or emphasizing the importance of sharing work vacancies as part of a long-term career networking strategy. AgileHR urges companies to be creative and consider various types of rewards such as gift cards, a VIP lunch and company swag.

Dragonfly, a recruiting agency that specializes in the media market, points out the good, the bad and the ugly sides of employee referrals. Here’s the HR Leads Business overview:

Employee Referrals: Benefits and Challenges                   

                                       EmployeeReferralsChart

"As long as companies are aware of the pitfalls, they can take steps to avoid they," blogs Cheryl Boyer, SPHR, Vice President of Client Services at Berkshire Associate. She warns of unintended disparate impact and links to two Office of Federal Contract Compliance Programs (FCCP) suits as examples that allege discrimination from referral programs that disproportionately favored some groups over others.

"Employee referral programs can be one of the best sources for hiring good employees," Boyer concludes. "However, these programs can also come with unintended consequences, if not implemented well."

What have been your experiences with employee referral bonus programs?