In its Referral Madness—How Employee referral Programs Turn Good Employees into Great Recruiters and Grow Your Bottom Line, CareerBuilder cites studies indicating that for companies with referral programs:

• 26% of external hires are generated from employee referrals, making employee referrals the No. 1 source of hire.
• Referrals generated the best return on investment
• Referrals rated  highest for the quality of new hires

Not much to argue with there.

Building the Business Case for a Referral

Referral madness goes on to cite the following benefits of referral programs:

• Lower cost per hire
• Faster recruitment time, because you've essentially outsourced the task of sourcing and pre-screening applicants
• More qualified candidates, because employees know what makes someone successful at your organization and because employees are unlikely to refer anyone who would reflect badly on them
• A sense of connection to the employer that employees are making a positive contribution to the company
• Better retention because referred employees have already-established social connections and a better understanding of the culture
• Brand enhancement because you've turned your employees into brand advocates

Best Practices for Building Successful Employee Referral Programs

CarreerBuilder suggests that success hinges on three best practices:

• Motivating employees to use the system
• Teaching them how to use the system
• Measuring, assessing, and improving the program

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Motivating Employees

Cash bonuses are by far the biggest motivator in getting employees to participate in employee referral programs, says CareerBuilder.

There is no hard-and-fast rule for how much money you should offer candidates for referrals. The "right" reward will depend upon industry and company size as well as the position for which the candidate is being referred. For instance, you may want to offer a higher incentive for positions that require extensive experience or highly specialized skills (e.g. hard-to-fill positions).

Pro-Rate the Payout

As a way to increase the quality of referrals and reduce employee turnover, many companies pay out their incentives in two stages, offering an initial payout upon hiring a referral as well as a second, supplementary bonus once the referred employee has reached a certain number of days of employment.

Try Charitable Donations

Offering employees socially responsible gifts like donations to their favorite charities may be another approach you should consider, CareerBuilder says.

Reward All Referrals

While most referral programs only reward employees when they generate a successful hire, one way to increase referrals might be to offer a small reward for the sheer act of referring a candidate, CareerBuilder suggests.

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When You Can't Pay Incentives

If cash rewards just aren't in the cards, there are other ways to incentivize employees to participate. Consider:

Vacation Days. Who doesn't love a day off? Allow your employees to indulge their Ferris Bueller fantasies by offering employees who generate successful referrals an extra vacation day — with pay, CareerBuilder suggests.

Personalized or public "thank you." Recognize employees for referring candidates by giving out personalized thank-you notes or gift cards, offering coveted, non-monetary prizes like reserved parking spaces or a cubicle by the window, or thanking them at a reception with their peers. These seemingly small gestures can go a long way in keeping them motivated and willing to participate.

Raffles. Rather than giving individual bonuses, you can cut down your overall costs by offering a drawing for one fabulous prize — such as a new iPad, an automobile lease, or an all-expenses paid weekend getaway, on a quarterly or semi-annual basis.

In tomorrow's Advisor, more on making referral programs successful, and an introduction to HR.BLR.com, the unique one-step solutions center for HR managers.

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