Monday, April 12, 2010

Referral Programs

Most companies, startups included, have employee referral programs. Nearly every corporation will tell you that referrals are the best source of their employees. If you compare the cost of an employee acquisition through a retained recruiter and through a referral, it's usually an order of magnitude. A retained recruiter usually gets 30% of the recruit's first year salary: for a $100k/year engineer, that's $30k a year. The typical referral bonus paid out to an employee is less than $3000.

One response that companies make when faced with urgent need for hiring is to raise the referral bonus. Strangely enough, this makes very little difference to the rate of recruits unless the referral fee is increased dramatically. In fact, the biggest way you can get more referrals from your employees is to make them happy. Google was the master at this: the campus is filled with fun exhibits, so when you invite your friends over for lunch, you pretty much have to take them all over campus and show them the various cool things. It makes you feel good, and it makes your friends want to work at this great environment. The mind-blowing free food perk is also amazing, and Google did not enforce strict limits on guests: these guests frequently became future full-time employees.

People recruit friends because they want their friends to be happy too, and even new employees are very good at filtering people whom they instinctively know won't fit in the culture. It wasn't uncommon to see a note from an employee referring a friend who wouldn't fit thus: "Hi, this is my friend X. He's a major pain in the ass to work with, and I wouldn't want him here. I don't want to offend him by not referring him, so could you please write him a note saying that there's no position here for him?" For some positions, you might want to ignore such notes, but by and large, if the person with a financial incentive to get someone hired would forgo that incentive so as to never have to work with that person, that's a pretty strong signal.

Finally, if you start to see the number of referrals drop off, this is a signal not that your carrot isn't good enough, but that your employees are no longer as happy at work. Nobody wants to bring their friends into a toxic work environment. Unfortunately, very few companies pay attention to this as a signal.
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