6 Steps to Build an Employee Referral Program

Quick look: Your best hiring resource might already be on your payroll. By leveraging the networks of the people who know your company best, employee referral programs tap into something job boards can’t always replicate. Here, we break down what an employee referral program is, the data-backed business case for building one, and six steps to create a referral program that motivates your team to participate.

Finding great talent is one of the biggest challenges facing small and midsized businesses (SMBs) today. Job boards generate volume but not always quality, and mis-hires cost precious time and money.

For many SMBs, the answer to this could be their own employees. An internal referral program turns your workforce into a recruiting engine, connecting you with pre-vetted candidates with a built-in endorsement. However, designing a program that workers actually use requires some strategic planning.

Here’s everything you need to know about how to build an employee referral program, and their proven power.

What is an employee referral?

An employee referral is when a current employee recommends someone from their personal or professional network for an open position at your company.

A formal employee referral program takes it a step further by establishing a structured process, including:

• Clear eligibility rules
• A submission process
• An incentive for employees whose referrals result in a hire (optional, but common)

Unlike cold applications through job boards, referred candidates’ skills, work ethic, and cultural fit have typically been vetted by a current team member. This informal pre-screening adds value before the first interview is even scheduled.

The benefits of employee referral programs

The impact an internal referral program can have on a company isn’t just a hunch; recent data backs it up. According to industry research, the advantages of employee referral programs include:

• Faster hiring: Referred candidates typically move through the hiring process faster than applicants from other sources, due to being pre-vetted, and tend to accept offers more quickly.
• Cost efficiency: Referrals reduce the need for advertising on job boards, agency fees, and extended sourcing time.
• Improved retention: One study found that businesses with referral programs experienced 15% less turnover.
• Stronger cultural and role fit: Current employees understand what it takes to succeed within the organization and are often selective about who they recommend. This can lead to stronger candidates who have a clearer understanding of the company culture and expectations.
• Better matches: The Society for Human Resource Management (SHRM), a medium-sized organization, reports that half of its referrals become hires, and approximately 10% of its hires were referred.
• Improved engagement: When employees play an active role in growing the team, they develop a stronger sense of ownership and connection to the company’s success.

6 steps to create an employee referral program

The impact an employee referral program can have on a business is clear. For SMBs, the question isn’t whether to build one, it’s how to build one that works. Here’s a look at how to do that:

Step 1: Define program goals and eligibility rules

Before you start promoting roles, it’s crucial to spell out what your program aims to accomplish and who can participate. Common goals include improving certain HR metrics, like time-to-fill, cost-per-hire, and retention, or supporting equitable hiring initiatives.

Eligibility rules to consider:

• Which employees can make referrals (all staff or specific departments)?
• Are managers eligible to refer candidates for roles they supervise?
• Can employees refer candidates for any open position, or only specific ones?
• Are there any conflict-of-interest restrictions (e.g., referring immediate family members)?

Clearly documenting these guidelines protects everyone and sets expectations from the start.

Step 2: Design your incentive structure

Incentives drive participation, and while the most common approach is a one-time monetary bonus, other ideas include:

• Tiered bonuses that increase based on how long the referred hire stays (for example, a partial bonus at 90 days, with the remainder paid at one year of tenure)
• Non-cash rewards such as extra paid time off (PTO), gift cards, etc.
• Public recognition through company-wide announcements, shout-outs in meetings, or an internal leaderboard

The right motivator depends on your company culture, and business leaders can survey their team to determine what incentives resonate most.

Step 3: Create a simple, transparent submission process

Employees are less likely to submit a referral if the process is cumbersome.

Ideally, your process should:

• Give staff a single, easy-to-use way to submit a referral, which could be a dedicated email address, an online form, or a feature in your human resources information system (HRIS)
• Confirm receipt of each submission so the referring employee knows their suggestion was logged
• Provide regular status updates on whether their candidate got an interview, made it to the next round, got hired, etc.
• Clearly outline when and how bonuses are paid out

Step 4: Promote open roles actively and often

The more visibility available positions get, the more likely employees are to think of someone they know who might be a fit.

Some strategies for how to encourage employee referrals are:

• Sharing open roles during town halls, team meetings, and in your internal communication channels
• Sending a brief monthly or biweekly internal hiring update
• Promoting the positions on your corporate social media accounts, making it easy for staff to share on their own profiles, and expanding reach
• Introducing the referral program during new hire onboarding, so it’s built into the culture from day one

Step 5: Track results and refine over time

The most impactful referral programs are measured and continually improved. Key employee referral program benchmarks to track include:

• Referral submission rate (the percentage of employees submitting referrals)
• Referral-to-hire conversion rate (how often referred candidates become hires)
• Time-to-fill for referred hires vs. other sources
• Retention rates for referred hires at 6 months, 1 year, and 2 years
• Cost-per-hire through the referral program vs. other channels

Review these numbers quarterly. If participation is low, consider whether your incentives are compelling, your process is simple enough, or your internal communications are reaching employees. Small tweaks like a cleaner submission process or a more visible internal campaign can make a big difference.

Step 6: Consider outside support when needed

For SMBs with limited or small HR teams, building and managing a referral program can feel like just one more item on a long to-do list. This is one area where an HR outsourcing provider, like a professional employer organization (PEO), can help.

A PEO like ExtensisHR can assist with program design, policy development, bonus administration, payroll coordination, and ongoing program management, so you can experience the benefits of a referral without creating extra administrative burden for your team.

Additionally, ExtensisHR includes comprehensive recruiting services embedded in its PEO solution at no extra charge, providing access to a dedicated team of hiring professionals to assist with everything from job advertisement creation to new hire onboarding coordination.