What Is a Referral Bonus? Everything Employers Should Know

Introduction

According to a Glassdoor study, the cost of each new employee hired is around $4,000, although it can cost even more depending on the person's role. Other factors can also influence that number, including your industry and the size and location of your company. Hiring often involves significant resources when you factor in recruiting, interviewing, onboarding, and training — assuming you hire every person who makes it through recruitment and into the interview stage.

In today's competitive job market, you can give your company a distinct advantage by offering your employees a referral bonus, which can allow you to both reduce recruitment costs and quickly find qualified candidates. But what, exactly, is a referral bonus, and how does it work?

In this article, we will explain what a referral bonus is. Also, this article highlights the various types of employee referral benefits you can offer, how a referral bonus program can benefit your company, how to set up a referral bonus program, and the best ways to pay out your employee referral bonuses.

What is a referral bonus?

A referral bonus is incentive companies provide to current employees as a reward for recommending a qualified candidate who is ultimately hired to fill a vacant position. Often, companies offer referral bonuses when trying to hire someone for an important position that has previously proven difficult to fill.

Types of referral bonuses

You could offer your existing employees several different referral bonus programs for their recruitment assistance. Some referral bonus policy examples include:

Gift cards

For a company just getting its employee referral bonus policy off the ground, gift cards can be a cost-effective reward and a great litmus test for how well its employees receive such a program. From there, the company can then consider offering more significant incentives.

Bonus payments

The most common referral bonus companies offer a monetary bonus payment. This is the most flexible type of bonus for filling any position, regardless of its importance or relative "size." For example, offering a referral bonus of $5,000 or $10,000 for filling a specialized position might seem extravagant. Still, a referral bonus of this size pays for itself.

Paid time off

Another common reward for employee referrals is paid time off. Employees may appreciate this referral bonus in some geographical regions more than in others. For example, some European countries entitle workers to large amounts of paid leave time, unlike countries like the United States, where employment regulations do not specify a required amount of paid time off.

Charity donation

In your employee referral bonus policy, your company may choose to appeal to your employees' altruistic nature. In this situation, the company can donate to a charity of the employee's choosing as a reward for referring a successful hire.

Motivational prizes

Another potential referral bonus could be a valuable prize, whether the desired item, such as a tablet or laptop computer, or an all-expenses-paid vacation.

Tiered rewards

A more active but popular referral bonus can consist of incentives in increments to the referring employee as their referred candidate reaches various stages of the hiring process. For example, you could provide an initial bonus when the candidate attends a job interview, another incentive when the new hire completes training, and another reward once the referred employee has been with the company for a specific time.

Benefits of offering an employee referral bonus program

Employees are not the only ones who benefit from referral bonuses; your company will also reap several rewards by providing such a program.

Referral bonuses can help you fill vacant job postings quickly

Your HR department can save time and effort in the recruitment stage by rewarding employees who know people who work in similar fields and may be interested in filling open jobs with your company. This direct referral process allows you to spend less time finding applicants because your employees send them directly.

Referral bonuses can save your company recruitment expenses

When your employees provide you with potential job candidates, your company can save on marketing costs that would otherwise be spent advertising the job posting. Recruitment and hiring for specialized positions can also be exceptionally expensive, so circumventing most of the process by hiring someone via employee referral can result in significant cost savings.

Referral bonuses can make your employees feel involved and engaged

Employee engagement can be a significant challenge for any company. Gallup reported that in early 2022, only 32% of employees in the U.S. considered themselves engaged in their jobs, while 17% were actively disengaged. Globally, this number was even more dismal in 2021, when Gallup announced that only 20% of employees were engaged.

Offering an employee referral bonus program can significantly impact employee engagement. Encouraging referrals allows your employees to help build the company from within, and it also helps new employees to feel engaged by virtue of knowing someone currently with the company.

Referral bonuses can introduce candidates who have not applied

Finding the right candidate for any open position can be challenging, especially if that person still needs to apply. An employee referral program can allow your existing employees to help fill those gaps, connecting your company with the perfect candidate for any job.

Creating a successful referral bonus policy

It's important to create an employee referral bonus program that works. Here are some best practices to follow.

Define your program's goals

Your company may have one reason or multiple reasons to design a referral bonus program, some of which may include the following:

• Expanding your candidate pool
• Improving the quality of potential hires
• Improving employee satisfaction and engagement
• Increasing your new employee retention rate
• Improving diversity within your company
• Lowering recruitment and hiring costs
• Hiring the most qualified candidates more quickly
• Filling difficult positions with specialized candidates

Create your program's infrastructure

Every successful employee referral bonus program has rules, and the most successful programs have laws that are easy to understand and follow. Your rules should include the following:

• How to make a referral. Any referral form implemented, whether on paper or online, should request specific information, such as the candidate's name and contact information, the referring employee, the relationship between the candidate and the employee, and the position(s) for which the candidate is best suited.
• Who can participate in the program? Often, executives, senior management, and HR staff are ineligible to receive referral bonuses because it is their job to expand the company and ensure succession planning.
• Who is considered a valid candidate? Some programs specify that candidates who have previously applied with the company are not considered valid. Other programs disallow employees from referring direct family members to receive a referral bonus.

Decide on the incentives

Before making your employee referral program announcement, you must clearly state what rewards your referring employees will receive. Whether you choose monetary rewards, gift cards, or time off or implement a tiered rewards system, this should be communicated to your employees to avoid any dispute when you award the bonus.

Check local legal requirements

Some countries or states may have employment regulations to consider to keep your employee referral bonus program compliant. Otherwise, the legal headaches may thwart your company's attempt to reward employees for successful hires.

Announce the program to your employees

When you are ready to launch your employee referral bonus program, you can announce it to your employees using various forms of communication. For example, you may send an email blast, hang posters in the break room, post about the program on your company intranet, and so on.

It's also important to send periodic reminders about the program to ensure the maximum number of employees know that the program exists and how to submit a referral.

Paying out referral bonuses

Upon the successful hiring of a candidate referred by an employee, you can then provide the employee with their earned reward. It is important to keep in mind your jurisdiction's payroll and tax laws and your company's payroll process. Two areas you should pay particular attention to are:

Tax withholding

It is essential to ensure you withhold the appropriate taxes from your employee's referral bonus. Determining the proper withholding amounts depends on your jurisdiction. You certainly want to avoid causing tax compliance issues for your company or your employee down the road.

Payment timing

If your program includes a length-of-time requirement for new employees, such as staying with the company for three months before the referring employee can be rewarded, ensure the requirements have been met before distributing the incentive. Ensure your employee understands when they will receive their reward, and if applicable, ensure the reward is processed during the correct payroll cycle.

Conclusion

Finding the perfect candidate for any vacant job position may be as simple as asking for referrals from your current employees. Referral bonuses are an excellent way to incentivize employees to connect your HR team with qualified candidates from their networks.

If your company is willing to hire remote talent from anywhere in the world, this can vastly expand your candidate pool and your employees' networks. Although hiring globally can seem daunting and complicated, it doesn't have to be. Skuad offers a unified platform that allows you to quickly onboard new hires from anywhere in the world; process secure global payroll with one click; maintain compliance with local employment laws; and manage benefits, timesheets, work permits, and more.

Skuad has everything you need to create a diverse, globally-distributed team. For more information, request a demo today.