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How to calculate employee referral bonus

Neel J Shah
June 20, 2022

It's hard to keep up with all the rapid changes that are impacting today's workforce. Recruiters face a lot of challenges when sourcing or hiring candidates, but they don't have to do it alone. Companies have numerous employees who are well-connected and can provide a trusted, diverse set of potential candidates. That is why the idea of building an efficient system to collect employee referrals comes into the spotlight.

Employee referrals are one of the most effective and cost-efficient ways to speed up your hiring. However, getting referrals is never easy. It’s also challenging to make the idea of a referral bonus appealing enough.

Bonuses on successful employee referrals vary and can depend on many different factors. This guide will show you how to calculate employee referral bonuses that will motivate employees to refer the best candidates. Let’s dive right into it.

Know your metrics before calculating employee referral bonuses

Even if you have a convincing employee referral program, the main question is how well it works. To determine the performance of referral incentives, you need to know the company's key recruiting metrics to measure against.

Here we’ll list some essential metrics to look at.

Cost-per-Hire (CPH)

Cost-per-hire is a practical metric to measure the costs incurred during the recruitment of a new employee. This includes recruitment salaries, recruitment software, and advertising costs for attracting all the new hires as well as external fees for the agencies. Do not forget to include the referral program bonuses that you need to pay.

Here is a basic scheme we took from Workable:

Sometimes companies include learning and development program costs for employees in the calculations.

What many companies also forget is to include the time employees spent interviewing candidates. 

It is possible to calculate cost-per-hire by dividing the total cost of recruiting in a certain period by the total number of hires.

Now you know your average cost-per-hire for one employee.

Measure your Cost-per-hire for referrals only

Now you can use the same formula but only include time recruiters spent on the referral candidate and motivational bonuses. If possible, try to count in time employees spend on bringing you referrals. However, if you use proper employee referral automation software, this is probably a very small number.

Most probably, after seeing the number you will learn how little your company spends on attracting employees from referrals only. The biggest costs will be the bonuses if you have implemented any, or extra activities like budget for, for example, parties if you organized sourcing jams.

Now imagine if attracting all employees costed as little as it costs to attract candidates from employee referrals.

Extra metrics to follow
Calculate your referral Time-to-Hire

This metric will not directly affect your bonus calculations but if you have to build a case for implementing a better referral system and referral culture, your manager needs to know this metric as well.

Measure what percentage of referrals to the company is successfully hired in a specific period. If you want to calculate the average success rate of a referral, simply divide the total number of referrals by those that were hired. Afterwards, you can multiply the number by 100 and get the percentage.

If the percentage of referred employees who become new hires is low, it’s best to perform a more detailed analysis to figure out why. The question is: why are your employees recommending you to the wrong people? And if the people were right, what made them worse than candidates from other sources?

Measure the tenure of referred hires

Tenure of referrals is a metric to measure the length of a referred hire staying in the company. For calculation, take the period of time between the new referral’s starting and ending date of working. 

Compare the result to your company’s average. Typically, referrals have longer tenure, and if it is lower than external hire tenure, you should examine the reasons behind it.

What are the different types of employee referral bonuses?

Most companies use cash as referral bonuses. However, the type of bonus may vary for different companies, and money is not always the best choice. Sometimes they might also offer gift cards, gifts, tours, concert tickets, day-offs, or vouchers. That is why we gathered the list of the best employee referral bonus types.

Cash referral bonus

Numerous companies rely on monetary bonuses as their referral incentive. Pricing typically falls into the $1,000-$5,000 range depending on the role, demand for the position, or how long it's been open. For example, if it’s a DevOps engineer (a hard-to-fill position), then companies may want to pay more. 

Is cash a good incentive for employee referrals?

Data shows that 71% of employees consider cash to be the best referral bonus.

What is the downside when it comes to monetary bonuses is taxes. You have to discuss them with your company’s managers and employees in advance. Make sure that the bonus is not eaten out by taxes for your employees.

Gift card referral bonus

Gift cards are one of the most popular rewards for referral programs nowadays. They tend to be easy to manage, have Instant gratification, give the illusion of free money, and are more secure than cash. In addition, 35% of companies that give away gift cards offer a choice of vendors as well.

Also, gift cards help recruiters and HR solve the taxes problem.

Vacation referral bonus

There's something else you can give an employee as a referral bonus. It could be a one-week vacation. Companies can organize an expensive trip or give employees a lump sum of money to spend on transportation, hotels, desserts, or any experience.

Charitable referral bonus

As we mentioned earlier, not all incentives have to come in the shape of cash. Sometimes employees receive a bonus to be donated to a charity of their choice instead of being given as a gift card or cash, because they find a cause to be more motivating.

When the number one reason people make referrals is to help a friend in finding a job, think how motivating donating could be for some of your colleagues.

Prize referral bonus

Companies often use prizes instead of money as referral bonuses to incentivize their employees. If you want to offer this type of referral bonus, try something physical and meaningful for your employees.

Custom referral bonus

You can customize your referral scheme and reward your employees the way they chose. Instead of using a set referral bonus, it is sometimes better to give more freedom. Of course, you can have some limitations, but employees will feel satisfied if their reward is what they desire.

How to Calculate Employee Referral Bonus

You need to offer your employees a competitive bonus system that will motivate them to refer their friends and acquaintances. But what is the ideal amount of money you can offer them? Well, the range of bonus amounts might be very different depending on the size and maturity of the company and on the human factor as well.

Reports say, cash bonuses may range from $250 to $25,000 depending on the seniority levels. However, the average referral bonuses are between $1,000 and $2,500. The main goal is to make employees feel rewarded and appreciated.

Operate with numbers that you already have. Understand how much you save when you hire using referrals, and estimate how much you can give to your employees.

Create a gradation depending on department you’re looking to hire for and seniority of the specialists.

Remember that there is no right answer. Every company has a different setup, so an employee referral bonus calculation would depend heavily on your business model and resources. However, many companies offer significant referral bonuses because of their effectiveness.

Talk to your employees to know what they want.

Why should your company implement employee referral bonuses?

  • Various employers struggle with recruiting new people, and the hiring process often ends up costing a lot of money. By using a referral program, you not only save on those costs, but you also save time. Candidates referred through “in-house” channels are at least 40% cheaper than candidates from sourcing or job boards. 
  • Implementing an employee referral program increases the retention rate as referral hires stay in a company 70% longer than other employees. 
  • Referral bonuses are an easy and effective way to attract new employees and create interest in your company. This can be especially useful for jobs that are hard to fill when the talent market is flooded with qualified applicants.

How to implement a transparent system for employee referrals?

Hiring a new team member is always complicated. Managing referrals is even harder. That’s why here at Intrro, we automate the whole process: employees connect their LinkedIn networks to Intrro, and recruiters can review recommended talent that match the jobs their responsible for found in their ATS right away. The hiring team then asks for intros to people with just one click — sending a notification to Slack. Then the employee can introduce you to their contact with just a couple of clicks!

By leveraging the value of company’s employee networks and automating the whole employee referral process, Intrro helps fill open roles faster and much more cost-efficient.

Now since you know your referral cost-per-hire, imagine if more than 30% of your hires could cost you as little as referral hires.

Learn more about how Intrro can help you build an approach to recruiting that is company wide — request a demo now.

Conclusions

Referral bonuses can be a great way to reward employees who recommend qualified candidates in their networks. They'll help your team connect with the best-qualified people within their network and save you time in the long run. The job market is fierce these days, so if you're struggling to find someone perfect for a position, it might be the right time to work on the meaningful and customizable referral awards.

June 20, 2022

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