Recruiting new employees is expensive. Experts estimate that businesses spend billions of dollars a year — some peg the cost at more than $4,000 per new hire — as they strive to fill job openings.

Yet, too often the results don’t justify the cost. Consider this: About one-third of new employees quit their jobs within the first six months, according to one study. And a recent Gallup Poll shows that 70 percent of workers are disengaged from their jobs. With this kind of disparity between hiring costs and employee turnover/disengagement, it’s easy to question what organizations get in return for their investment.

But it doesn’t have to be that way. In fact, you can reduce your recruiting costs, increase your return on investment and reduce employee turnover by tapping into a resource that’s found under your roof: your own employees.

“Employee referrals provide an easy and inexpensive way to leverage your employee base to expand the talent pools beyond just job boards and career websites,” says Jenna Filipkowski, Ph.D., the vice president of research at the Human Capital Institute (www.hci.org), a consulting group that specializes in strategic talent management. “They’re already vetted because your employees know them. They’re a great way to get your organization’s brand out in front of people.”

Referred candidates are three to four times more likely to be hired than traditionally recruited candidates, according to a recent HCI study entitled, Making Referral Programs Count: Sourcing Quality Hires through Employee Networks. The study, which polled more than 200 organizations, also found that employee-referred candidates typically are a better cultural fit because they most likely have values and beliefs similar to the ones held by the referring employees. And while the study found that referred employees don’t necessarily perform better than nonreferred employees, they typically stay with organizations longer, Filipkowski says.

That’s no small matter in light of the high cost of employee turnover. According to a study performed by the Society for Human Resource Management, employers typically shell out the equivalent of six to nine months of an employee’s salary to find and train a replacement. Moreover, a study conducted by the Center for American Progress showed that filling the position of highly trained executives could be as high as 213 percent of their salaries.

Gaining popularity

The study showed that 29 percent of the businesses surveyed have increased their usage of employee referrals compared to the previous year. While the reasons for that are difficult to pinpoint, one thing is certain: As unemployment rates continue to drop, the pool of qualified job candidates keeps shrinking.

That, in turn, makes it more and more challenging for employers to fill open positions. As Filipkowski puts it, “It’s a candidate’s market, which isn’t so great for employers trying to fill those positions.”

As such, you must be strategic about how you recruit new employees, which could explain why employee-referral programs are becoming more popular. But in order to be effective, there are several things organizations must consider. For starters, keep it simple. “It must be simple for employees to use, not some complex, multihurdle program that’s hard for employees to wrap their brains around,” she says.

Despite the need for simplicity, organizations still need to consider many factors as they develop a referral program. For example, management must decide things such as which employees can or cannot make referrals, whether to weight all recommendations the same or give more preference to some employees because they hold senior positions or are long-tenured employees, the job performance of the referrer, and so forth. The HCI study showed that 78 percent of respondents weight all employee referrals the same and 60 percent allow all employees to participate in the program.

In addition, organizations need to give employees incentives to feel enthusiastic about referring job candidates. “They need to know why they should do this — why they should go out on a limb and ask people they know to become part of the organization,” she explains.

Cash is king

Financial incentives and some kind of public recognition/acknowledgement are two common motivators. Filipkowski says the study showed that 92 percent of the participating organizations in the study offered cash incentives, with $1,000 as the median value. While most employees prefer cash, each organization needs to figure out what would incentivize employees to make job referrals. An employee survey can help pinpoint those motivations, she says.

Organizations also must develop a formal communication plan around the program that explains its basic guidelines, as well as why such a program is needed. “If the program isn’t formalized, it’s not top of mind,” Filipkowski says. “And the communication can’t be a one-and-done effort. You have to continually promote the plan so the enthusiasm doesn’t die out.”

Programs also need the involvement and support of senior management. If they see value in the program, employees are more likely to see it, too. “Without support from senior leadership, the program won’t get off the ground,” Filipkowski says.

Of course, there’s a bigger issue in play here in which senior management plays a crucial role: creating a corporate culture that’s so dynamic that employees can’t wait to invite people they know to apply for jobs. Just as people wouldn’t recommend a lousy restaurant, they certainly won’t encourage someone they know to apply for a job at a place where they themselves don’t like to work, she notes.

“Senior leaders should understand that if they’re asking employees to refer job candidates, they better be sure that they’ve created a culture that employees want to promote,” Filipkowski says. “You’re asking employees to be an extension of your brand — communicate why others should want to work there.”

Organizations can help in that area by making it easy for employees to share reasons why their organization rocks. Let employees write blog posts on social media platforms, encourage them to write positive reviews on websites like Glassdoor or even let them create video testimonials they can share on social media. “Not many people do that, but I think it’s a smart thing to do,” Filipkowski suggests. 

Good job-referral programs also typically include a monitoring component that allows management to judge whether or not they’re effective. That would include tracking things such as how many new hires come from referral programs versus internal hires or job boards and the retention rates for job-referral employees, as well as their level of engagement and performance. “You also should track how many employees make referrals,” she adds. “If it’s always the same three people, you just might have a problem.”