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Employee referral is an internal recruitment method employed by organizations to identify potential candidates from their existing employees' social networks. An employee referral scheme encourages a company's existing employees to select and recruit the suitable candidates from their social networks. As a reward, the employer typically pays the referring employee a referral bonus. Recruiting candidates using employee referral is widely acknowledged as being the most cost effective and efficient recruitment method to recruit candidates and as such, employers of all sizes, across all industries are trying to increase the volume of recruits through this channel. As per the Global Employee Referral Index 2013 Survey, 92% of the participants reported employee referrals as one of the top recruiting sources for recruiting as well as the #1 source to see a significant rise in investment in 2014.
Proponents of employee referral schemes claim the benefits to be an improved candidate quality, ‘fit’, and retention levels, while at the same time delivering a significant reduction in recruitment expenditure.However, there are a number of potential drawbacks. One of the greatest concerns tends to be that relying too heavily on employee referrals could limit diversity in the workplace, with new staff recruited in the likeness of existing employees. But, provided that there is already a diverse workforce in place this ceases to be such an issue.
Improved candidate quality, ‘fit’, and retention
The one-to-one direct relationship between the candidate and the referring employee and the exchange of knowledge that takes place allows the candidate to develop a strong understanding of the company, its business and the application and recruitment process. With this information the candidate is ideally placed to assess their own suitability and likelihood of success at the company and make an informed decision, with the support of the referring employee as to whether to apply. This is the start of the company’s recruitment process where, at no cost to the employer, candidates and employees remove unsuitable and poor quality candidates, from the recruitment process ensuring a consistently high quality of applications
Candidates who are interviewed are thoroughly prepared resulting in superior interview to job offer conversion rates. In addition, successful candidates get up to speed faster compared to other recruitment methods. Candidate ‘fit’ to the company’s culture, departments and teams is improved as the expectations of candidate and employer match. This significantly increases the level of staff retention and builds a loyal and committed workforce - ultimately reducing the company’s future recruitment requirements
Reduction in Recruitment Expenditure
Employee referral scheme’s allows existing employees to screen, select and refer only the best candidates to the recruitment process. This eliminates the often considerable cost of third parties service providers who would have previously conducted the screening and selection process.
The costs of operating an employee referral scheme extends to the cash bonus’ paid to employees and internal promotion and administration, the total of which is considerably lower than the expense of recruiting using traditional recruitment consultants, headhunters and online recruitment methods
As candidate quality improves and interview to job offer conversion rates increase, the amount of time spent interviewing decreases, which means the company’s Human Resources headcount can be streamlined and be used more efficiently. Marketing and advertising expenditures decrease as existing employees source potential candidates from the existing personal networks of friends, family, acquaintances and associates.
The opportunity to improve candidate quality, ‘fit’, and retention levels, while at the same time significantly reduce recruitment expenditure, has seen a dramatic increase in the emphasis employers place on increasing the volume of recruits by employer referral. Through referrals, employers can access employees' networks, through social media or personal networks, to find qualified talents to fill the open positions, according to Harpaul Samhbi, CEO of Careerify. However, there are number of obstacles to achieving the desired increase:
- An employees social network is limited – only a small proportion of the network may be suitable for referral
- Recruiting from an employee’s limited social network may compromise the diversity of the workforce
- Actively referring candidates increases an employee’s workload and may be detrimental to their main responsibilities
- The best and most relevant candidates may not be acquainted with an existing employee of the company and therefore cannot be recruited via the referral scheme
- The complexity of today's technology does not allow for easy employee referral management, states Founder Kristy Schoenberg of Riferral.com 
An employee referral scheme is only as good as the volume and quality of candidates applying through the channel.