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It is not easy for employers to find the right person for an open position. Recommendations from current employees are often helpful. It is no wonder that many companies practice employee referral programmes (ERPs), offering their employees bonuses for referring their contacts for open positions. However, how successful are such referral programmes – and what are their effects on company performance?

A research team involving Nick Zubanov, professor of organisational economics and principal investigator at the Cluster of Excellence “The Politics of Inequality” at the University of Konstanz, investigated this question. The team introduced ERPs with varying bonus sizes (up to 40% of the monthly income) in randomly selected test stores of a large European supermarket chain and let the programme run for 13 months. They then compared the performance in the treated stores with that in the remaining control stores where no ERP was introduced.

The effects on staff turnover
On average, the ERPs introduced in the test stores reduced turnover by 15% compared to the otherwise similar control stores. One reason why the ERPs worked was that referral hires turned out to be 45% less likely to quit than non-referral hires. “This makes sense: referral hires make better job-worker matches, otherwise they would not have been referred in the first place”, Zubanov explains.

However, this reason alone does not explain the entire observed effect because there were very few referrals: only 3% of the total number of workers hired in the test stores were referrals. An interesting side-effect of the ERP: non-referred workers in these stores became less likely to quit, too, after the ERP was introduced. This effect was even observed in the test stores without any referrals at all.

Further analysis revealed the most plausible explanation for this effect: workers in these stores seem to like the feeling of being involved in the hiring process, and ERP gave them this feeling. The quantitatively more important reason for the decrease in staff turnover was the positive effect ERPs have on the company culture. Nick Zubanov explains, “Staff members feel more respected when they are included in the hiring process through the referral programme. They appreciate having a say in choosing whom they work with, and as a result are less likely to quit.”

This is probably the most important message of the study: management practices matter, not only for what they do, but also for what they communicate to the workers about their company.

The effects on the bottom line
The test ERPs introduced in the company were good value for money. They cost, on average, 10 cents per worker-month in terms of referral bonuses paid, but the savings in the costs of turnover they bring are at least 2.49 euros per worker-month. No wonder the company rolled out a slightly adjusted version of the ERP to all its stores after the trial period was over.

“ERPs are popular with companies because they are profitable, but can we ‘ERP our way’ to a new level of economic prosperity? Unlikely. Relative to the total labour costs, the savings from ERPs are small: 0.6% to 2.8%, depending on the calculation method. Still, ERP is a small step towards higher economic efficiency and a larger step towards making companies a better place to work”, Zubanov concludes.

Key facts:

• Original publication: Guido Friebel, Matthias Heinz, Mitchell Hoffman, Nick Zubanov, What Do Employee Referral Programs Do? Measuring the Direct and Overall Effects of a Management Practice, Journal of Political Economy¶
• Universities participating in the study: University of Konstanz, Goethe University Frankfurt, University of Cologne, University of Toronto (Canada)
• The study was conducted on a European supermarket chain with 238 stores. Supermarkets were selected for the study because they have high turnover of staff and low prerequisites for hiring, so that nearly every employee could recommend someone from their circle of acquaintances
• The study was funded by the German Research Foundation (DFG) in the framework of the Excellence Strategy, by the Michael Lee-Chin Family Institute and by the Social Sciences and Humanities Research Council (SSHRC)