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Referred Pain, Referred Gain

Employee hiring recommendations work wonders—except when they don’t.

By Michael Beygelman 
Most in HR and recruitment will agree that employee referrals work. People hired through employee referrals cost less to hire, stay longer, and perform better than employees hired through other recruitment channels. (see footnote 1 below)  So is there anything else we need to know about employee referrals?
Quite a lot apparently, according to research by Jenna Pieper, Assistant Professor at the University of Texas at Dallas. Pieper’s two-year study of more than 2,400 customer service representatives at a large call center in the United States suggests that we are just beginning to understand why referrals are successful, how the referrer’s own characteristics affect the job performance and turnover of those they refer (and of the referring employee themselves), and what some of the potential downsides might be for this rapidly growing source of talent.
The long-standing rationale for why employee referral programs (ERPs) often result in better-performing hires for lower cost is that referrers deliver a better match or fit between employers and potential employees at the time of hire. Referrers can provide in-depth and otherwise unavailable information to both employers and candidates. In addition, referrers essentially perform a pre-screening when they decide whom to approach—or not—about a job opportunity. More recent research, however, in particular from the social enrichment perspective (see footnote 2 below), shows that because of their basis in existing social relationships, the effects of employee referrals continue on well after the hiring event.
This research confirms the benefits of employee referrals on two important metrics: job performance and voluntary turnover. In the study, referred hires performed slightly better than new employees from other sources, handling about 2 percent more calls per hour, a small individual figure that, in aggregate, resulted in more than 3,000 additional calls handled per week for this particular call center (see footnote 3 below). The impact on voluntary turnover, however, was even more pronounced, with all referral hires being 16 percent less likely to resign than non-referral hires.
To date, the attention of practice and research has focused primarily on the referral hires and their performances, but as this research demonstrates, the characteristics of those doing the referring have measureable and sometimes significant impacts—both positive and negative—not only on the job performance and turnover of the referral hires, but on the referring employee as well. The study looked at the impact of four referrer characteristics on the job performance and voluntary turnover of referral hires: referrer job performance, referrer job tenure, job similarity between referrer and referral, and referrer employment (i.e. whether the referrer remains employed with the organization). And for the first time, the study also considered the impacts on the job performance and voluntary turnover of the referrers themselves, when those they referred were terminated or placed into similar jobs.
High-performing referrers bring in high-performing referrals—again amounting to about a 2 percent increase. But here as well, the more significant result concerns voluntary turnover. While referral hires are 16 percent less likely to resign than other hires, those referred by high-performing employees are 14 percent more likely to resign. This suggests these high-performing referral hires might have access to more opportunities outside the company, or that high-performing referrers might not be the best coaches or the most interested in assimilating referrals. Thus, the common belief that referral hires stay longer, while true in general, might not be the case for all types of referrers. Employers should be advised that efforts to retain top talent might be especially important for those referred by high performers as those referrals are actually more likely to leave.
The research also looked at the similarity of jobs between the referring employee and the referral hire. It found that referrals who were hired into the same or similar job as those who referred them had lower job performance. Similar to the results seen with longer-tenured referrers, these results suggest that hiring close friends or former colleagues into the same job might not always be advisable.
The combined effects of job similarity and job performance on voluntary turnover were once again more pronounced. Specifically, those brought into the same job as their low-performing referrer were more than twice as likely (2.38 times) to resign. In contrast, for high-performing referrers, voluntary turnover was much higher than other referrers (55 percent higher) when referrals were put into different jobs.
In other words, for this sample, the impact of bringing people into similar jobs seems to depend on whether the referrer is a low or high performer. For low-performing referrers, turnover of the referral is significantly higher when they are brought into a similar job. For high-performing referrers, the opposite was true.
As might be expected, referrals were 35 percent less likely to resign, as long as their referrer remained employed. Somewhat surprisingly, however, the job performance of referral hires whose referrer remained employed was lower than the performance of those whose referrer had left the organization. This effect is more pronounced when the referrer is a low-performer. In other words, and for this sample at least, while referral hires in general perform higher than non-referrals, they nevertheless do not perform at their highest level, as long as the person that referred them remains employed. This also leads to a trade-off: The benefit of keeping referrers employed comes at a price of lower job performance by their referrals.
The impact on the referrers themselves was also investigated, and as expected, having one’s referral successfully hired boosted the referrer’s performance by 2.8 percent. The negative impact on performance of having the referral terminated, however, was almost twice as large. In addition, those whose referrals were terminated were 2.42 times more likely to resign than those whose referrals remained employed. Job similarity brings about the same tradeoff described above: When referrals were placed into the same or similar job, the referrers performed lower, but stayed longer.
The current study is one of the largest to date on the impact of the referrer on employee referral success and the first study to look at the impact on the referrers themselves. In general, the beneficial impacts of employee referrals on job performance and lower turnover are confirmed. Depending on an organization’s cost-to-hire, however, the benefits of lowered involuntary turnover might overshadow those of improved job performance.

As the study’s author Dr. Pieper points out, now that having an ERP is more or less a given for most companies, the time has come to move beyond making comparisons between recruiting channels—e.g. referrals vs. directly sourced candidates—to looking within the channels to better understand the contexts and identify the factors that influence job performance and turnover of both referrers and referrals alike.

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