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Should You Consider an Employee Referral Policy?

June 23, 2016 | posted by Abacus Payroll
new employee referral programs

Your employees’ good word should, ideally, mean as much to you as an official application or referral, so why not implement an employee referral policy or program? Although traditional recruiting methods should make up the bulk of your hiring, you certainly have some incentive to consider using referral bonuses or rewards in exchange for your employees’ stamp of approval on a new hire.

The Case against a Referral Policy

The strongest arguments against employee referrals stem from the same basic concept: employee bias. Between a fear of nepotism clouding your employees’ judgement and the risk of incentive abuse, it’s easy to understand why you might feel some trepidation—though one might argue that, if you work in an environment where you can’t trust your employees, you probably shouldn’t implement a referral policy that is contingent on their judgment anyway.
It is worth noting, however, that your employees stand to lose just as much as you do in the event of a bad hire—perhaps even more, depending on your parameters. There are a few ways to ensure total cooperation from your employees while minimizing the risk of system abuse:

  • Explain to your employees that you will deliver the incentive or bonus only after the new hire has completed a certain amount of work (e.g., a training phase)
  • Clearly state that abuse of the referral system’s incentive aspect is unacceptable
  • Encourage employees to find potential recruits who possess specific, job-pertinent qualities—refrain from asking for basic aspects like “good work ethic” or “flexible character”


The Case for a Referral Policy

As long as you work in a setting that fosters openness and loyalty, the incentives for a referral policy in your office far outweigh the drawbacks.
For starters, you can consistently rely on your employees’ judgment of character and work ethic insofar as they aren’t likely to refer someone with whom they won’t work well. This takes a huge chunk out of the individual screening process, and it should effectively move their referral to the top of your list.
You also don’t have to worry about screening your potential new hire for obscure or specific job experience—again, as long as you can trust that your employees won’t recommend an underqualified person for the job, you can focus more of your attention on the actual hiring process, rather than wading through applications from people who don’t meet the prerequisites.
Finally, showing your employees that you trust their judgment builds a strong work culture, which, in turn, facilitates productivity and higher morale. Knowing that they’ll be working with someone who shares those values also strengthens your employees’ sense of workplace culture; done right, an employee referral policy can bring the whole office together, giving you a satisfyingly high ROI in the process.

Bonuses vs. Alternative Incentives

When it comes time to reward your employees for their referrals, you have a couple of options at your disposal: a standard bonus, wage increase, or an alternative reward.
According to the IRS, bonuses are supplemental income, meaning that they are subject to a 25 percent tax. Consider your employees’ tax status as well: will giving them an extra $5,000 bump them up into the next tax bracket? If so, you might want to explore other options—your employees might not appreciate a monetary gift in these extenuating circumstances.
In fact, you might be better off providing your employee in question with a material or non-monetary bonus—some ideas might include a sought-after assignment, the ability to work from home temporarily, a vacation, or a coffee maker. In these cases, you can show your support and appreciation of the employee without altering their tax standing or jeopardizing your company’s financial status.
Of course, the sky is the limit when it comes to alternative incentives. Be creative!
Finding a way to balance employee compensation with practical methodology can be a nightmare. For more information on how you can reward your employees without breaking the bank, call Abacus Payroll at (856) 667-6225 today!

About the Author: Abacus Payroll

Abacus Payroll, Inc. is a leading provider of payroll solutions for businesses of all sizes. Whether yours is a family-owned small business or a national corporation, we provide payroll, tax and other financial services on time and at an affordable price. Unlike other payroll providers, Abacus Payroll will assign your very own payroll specialist who will understand your payroll needs inside and out. So no more speaking to a different person each time, no more sitting on hold for hours and most importantly no more missed deadlines! Contact us today to see how we can help your business. You can count on us.