Tuesday, May 14, 2013

Why Paying Employees For Job Referrals May be A Bad Idea

Many ad agencies and other companies offer employees incentives when they successfully refer a candidate who gets hired.  These incentive payments range from a low of about $1,000-1,500 to as much as $3,500. I have heard of even higher.  Companies added this incentive in order to partially alleviate the expense of recruitment fees and to encourage their employees to send them good people. 

The problem with this is that it encourages employees to make “placements” without regard to quality.  It also encourage internal people like HR and hiring managers to let down their guard while interviewing and accept these referrals without due diligence - after all, the referring employee a good worker.

I hear tales of woe from candidates all the time. I recently saw a young man who had been referred to an agency by an employee who he had once worked with.  The referring account person barely knew the account person she referred, but she liked him.  And she knew that if he went there she could get a nice bonus.  

At the same time, the HR department had many jobs to fill.  Hiring this account executive cleared up one open job.  

Of course the account and the job turned out not to be as advertised.  The account person was stuck and after fourteen months he resigned so he could spend full time looking for the right job.  During those fourteen months, his client had three CMO's and he had two group heads and three account supervisors.  Now I don't for a second think the agency had any idea that the job or the client would be so bad.  But this was a strategic young account person placed on a retail account.  It was a totally wrong job for him and did not advance his career one iota.  Careers are like fast trains.  They can take a sudden curve going too fast and suddenly come off the tracks.  And that is my issue with employee job referrals.

I hear this story with some frequency.  Why does this happen?  Well, the referring account manager wanted her bonus.  The HR person simply wanted the job filled.  She was a contract recruiter whose performance was measured on how many jobs she could fill and how quickly.  Beyond that there is very little quality control.  

Because this account executive had been working on this highly undesirable account, he became undesirable within the agency.  They completely discounted his prior experience and refused to consider him for anything other than the most executional accounts.  The irony is that this is a very well managed agency with excellent human resources.  To use an analogy, the account person became known by the company he kept.  

There were two winners in this situation, the account manager who got paid an incentive encouraging to take a job he should never have been in.  I have had many candidates tell me that they were duped by their friends.  Their friends meant well and have nothing to lose by a wrongful recommendation.  The other winner was the contract recruiter who was able to put a notch in her belt for filling the job. 

I actually like the idea of incentivizing employees to send appropriate candidates. But the issue is that contemporaries don’t necessarily know who among their friends is really appropriate.  They aren't professional recruiters and usually have no vested interest in the people they send.  And, it isn't like the agency sends out complete job specifications to employees.  Beyond that, most of the people everyone knows are known either by reputation or as social contacts – the person in the office down the hall who you occasionally share a sandwich with.  They don't know their strengths or weaknesses or their career objectives.  Employee referrals should be given total scrutiny, including a determination of their relationship with the referred individual.

This kind of recruiting by companies doesn’t really save money.  While it may save some short term recruiter commission expenses, there is no quality control built into the system.  Most in-house recruitment managers are evaluated on how quickly they fill jobs, not by the longevity of their referrals.  I wonder how many companies have actually conducted a regression analysis to compare the longevity of internally referred candidates to those placed by a professional outside recruiter? 

Now, of course, the bean counters only look at the bottom line and see that they saved a fat recruitment fee.  And a job got filled with some efficiency.  No matter that the turnover rate may actually increase and the harm done to the account and agency morale may far outweigh the couple of thousand dollars saved by paying a fee internally.

My advice to people who get referred to a friend's company:  buyer beware.


  1. I suspect that this can cause problems at the junior levels, where such small incentives are prized and referrals prove to be underwhelming. I'd be rather surprised if this were more commonplace at the mid, upper-mid and above levels. Simply can't fathom someone putting a few grand ahead of the obvious downside of suggesting candidates they aren't certain will deliver. Even if does happen, I think the onus is squarely upon HR and the line-managers to do sufficient vetting. If someone's hired and then fired shortly thereafter, I hardly can see how one faults the referring candidate or process for the mishap.

  2. @Unknown: Unfortunately you are wrong. At senior levels it happens all the time. Company presidents are always calling me to discuss replacing senior executives who were sent by their friends and can't believe it happened that they were unsuitable. It happens all the time when people hire a resume instead of a person. They don't spend enough time creating true job specifications and thinking about what issues have to be solved. The logic, is, "If so-and-so sent them, they have to be good." I just got a CFO spot for exactly these reasons.

  3. I think the important thing to keep in mind here is that employees don't make "placements."

    They recommend friends and acquaintances for a variety of reasons, which are typically personal and unknown to the company. Typically, the least of these reasons is whether there is actually a good fit with the position or the company. They simply don't know, don't care, or wouldn't even think anyone expected them to think about that. They are not recruiting professionals.

    Getting great colleagues and the recognition that comes from bringing good people into the fold should be incentive enough. Payments increase the pool of candidates, which typically clogs up the vetting process, to the detriment of candidates and company alike. Good article, Paul.

    1. Mark: You are totally right. When employees recommend their friends, they are often not thinking about the fit; they are just thinking of making a match, maybe. The system falls apart when these people are not properly vetted, as you mentioned. And, all too often, companies are interested in filling vacancies so they tell the recommended candidate what they are looking to hear so they can fill the job.

  4. In your experience haven't the right people ever ended up in the right position due to a employee referral. And haven't candidates placed by professional recruiters like yourself ever been placed in the wrong position ?I say if you are referred by a friend and the job seems right go for it. And be very vigilant in learning the back stories. This goes for the employer as well.

    And finally to throw contract recruiters user the bus by saying they are just notching their belts is an insult to some of iyour own colleagues. And that's only if you never had a contract yourself. How many times have you notched your belt?
    It's a tough world out there and usually you have to, just as everyone else does, look out for yourself.

  5. @Anonymous; Of course there are good placements on every side. That wasn't my point. My point is that your friends can get you in more trouble than your enemies because they mean well. If the job seems right and the candidate can thoroughly check it out, including its ramifications for the future, by all means take it.

    There are really good contract recruiters out there. They prefer to work freelance and do a very good job. Others merely go from job to job. I don't begrudge either kind. I just warn candidates to do their homework.

    By the way, I don't notch my belt. Don't need to and never have. .


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