Data: Referrals Strongly Impact Retention and Depend on Employee Performance

May 11, 2015

This post was co-authored with Lauren Holbrook and Arnnon Geshuri

Are you paying close attention to the trends coming out of your referral program?

If you aren’t, you should. It’s good stuff.

Here at our company, we realized that we were short-sighted when we simply paid referral bonuses quarter after quarter, and only monitored volume of referrals and the budget impact of the program.

As referrals and employee data built up, we figured we possessed a rich dataset that could be mined for meaningful trends. We had a powerful tool that could drive positive change throughout the company - shape the company culture, talent caliber, even help diversity. There were many strong correlations between referral and referee attributes and we could apply those correlations to help us either fully drive or simply supplement any company initiative that may have currently been in vogue.

Here is what we found out:

Referrals impact retention

1. Referred employees stay longer.

Looking at the time referred employees stay at our company versus non-referrals, it is clear that referred employees stay longer. As a matter of fact, the difference in tenure is significant.

This probably has something to do with the fact that when I decided to refer my buddy Todd, I already pre-filtered for cultural fit and possibly, even for performance. I was able to make this judgment call based on our social interactions and the comments he made here and there over the years we were friends. I knew if he likes working 9 to 5 or if he likes to get everything done when his muse strikes, regardless of the time of day. I knew if he was looking for a mature work environment or wanted a cool start up with bean bags instead of office chairs. I knew if he embraces uncertainty or preferred to plan things out to the last detail and stick to the plan.

I probably knew more things than his old boss or any future interview panel would ever know about Todd. My projected culture fit estimate was even better if I knew him from a previous company where we worked side by side. In either case, if I have known Todd for a while, I could guess if he would be happy at the place I am referring him to. I want Todd to be happy, after all, we are friends.

2. Referrers stay longer.

Our data also shows that employees who refer candidates stay much longer than employees who have never referred anyone.

This probably has something to do with engagement. If I’m engaged and happy at my company I will tell my friends to come and work here as well. Think about what the Net Promoter Score measures: How likely is it that you would recommend our company/product/service to a friend or colleague?”  What is your company’s net promoter question that may derive a similar score? Well, it’s the referral program.

But if you are a contrarian like I am, you will make the argument that some people refer for the referral bonus only. There is some of that and we see it in the data. However, the behavior is self-correcting. Some people refer a ton of people and only put down a vague sentence about them. They also put down that they have known the person for the lowest amount of time available on our nifty drop down field. Think about the chances we will hire that person? Quality over quantity applies to many things in life and your referrals are one of those things. Good luck referring John, who you have known for less than 3 months and “Who is a hard worker and would be an asset to the company.” After you spend a few weekends referring random people you found on LinkedIn and none of them got hired, you will probably consider your lost opportunity cost and go to the weekend BBQ you are invited to instead of putting bogus referrers into the system.

3. People who make successful referrals stay longer.

Now that we have put the argument of the bogus buddy referrals to the side, let’s go back to real referrals that the referrer actually cares about. The data also clearly shows that if you referred people and they got hired, you stay much longer with the company than if your buddies didn’t get hired. We believe the trend is heavily influenced by the employee actively building a community and an expanded network at work. For one, the wider and stronger your network, the quicker you can get work done. Referring people who end up being hired just makes your life easier. Imagine a world where you have a friend who you referred in every cross functional group.

Secondly, psychologist would throw in the familiarity heuristic - people like what is familiar, the so called “beautiful-is-familiar” effect. The more familiar faces you see at work, the happier you are at work. I love getting my morning coffee in the kitchenette and knowing the name of almost everyone that I walk by on my way there. What a positive way to start my day.

Finally, and from personal experience, with every hired referral, I not only feel more connected but also feel an obligation to stay longer. I would feel I am letting my friends down if I recruited my friends and then suddenly have to tell them that I’m moving on. Referrals are a form commitment, whether you realize it or not. And because you are a good person, your subconscious will remind you of that if you consider leaving.

Performance determines referral quality: The Warrior, The Crab and The Wild Card

referral quality depends on performance

1. The Warrior: A players refer other A players

Another crystal clear trend we saw in the referral data:A players refer A players. We weren’t surprised. There are many publications that talk about this phenomenon.

From a company’s perspective, this is a wonderful and impactful trend and we want more of it.

You may ask why we call A players that refer A player warriors? Well, what more powerful visual of a situation where winning or losing is literary a matter of life or death when you are at war with the competition? If you were a soldier going into battle and had to select a small team to fight by your side, who would you refer?

Since we track everyone’s performance scores and can link employees to their referrals we did notice that the top performing referrals were in fact brought in by top performers. We wanted to reinforce that behavior and thanked the referrers for it and asked them to do more of it.

Everyone’s incentives are different so you should spend time and really think about what would make those awesome warriors feel appreciated and hopefully motivate them to refer more battle-ready former colleagues and friends. We do think that there is an intrinsic motivator that those people have – the sole fact that they are bringing in a fellow top performer is probably bringing them joy and a satisfaction. In our books, referring a real rock star must be near the top of Maslow’s Hierarchy of Needs of every true top performer. The referral bonus is nice too.

Besides the sense of accomplishment and bonus that your top referrer get, consider recognizing them additionally with a gift card, a shiny pin, a cool trophy of some sort, or something else that would be meaningful to them. Whatever it is - just find a way to say thank you as, this referrer after all, is helping you build your company.

2. The Crab: B players refer C players

Now let’s take some time and think about the B players. If you rate performance on a curve then, naturally, you will have a higher percentage of B players than A players. That is great news as B players are solid performers. B players do their job and they do it well. You can count on them. And if you follow the same “birds of a feather flock together” assumption as you saw with the A players then it’s safe to assume that asking B players to refer their friends will help you recruit more B players.

Think again.

The trend that the data revealed was that B players refer C players.

I call those B players crabs as I always imagine a bucket full of crabs, trying to get to the top of the bucket. Imagine the top of the bucket being the top score during the performance review cycle. It may not even be that. The top of the bucket might simply be feeling like the smartest person in every meeting you go to. Sometimes what crabs do to get higher is pull other crabs around them down – it is in their best interest not to hire top talent that could shift that dynamic.

It’s not pretty. B players do not want to refer a rock star friend who will darn sure make it even harder for them to shine. Behavior like this isn’t helpful to neither the referrer nor the company so it’s imperative that you clearly highlight to your employees that the quality of their referrals matter.

3. The Wild Card: C players refer A, B, and C players

If your performance scale has four ratings then C players are closer to the bottom than they are to the top. Your gut is probably telling you that the C player is either not referring at all or referring low caliber candidates – why make life harder for oneself?

That theory seems to make a lot of sense and yet, is completely incorrect.

The data showed that C players refer A, B and C players. It could be because a C player isn’t super calibrated with the culture and refers a variety of friends and by laws of chance some are excellent.

It could also be that a C player is a few ratings away from the top percentile – the group of employees rated as top performers.  They do not feel their referral would be in competition or a professional threat - there is no inherent filtering of their network.

Another possibility is the C player is less likely to receive a bonus based on performance so the only way to increase their incremental compensation is to submit referrals that have a high probability of getting hired. The C player may very well know what good performance looks like and make solid referrals.

The disconnect might be their own cognitive bias of illusory superiority - overestimating their own performance, relative to their peers, and therefore not trying very hard and not scoring very hard themselves. In other words, they may have a perception gap about their own performance but, at the same time, be able to very soberly evaluate the potential performance or culture fit of someone else.

But who are you to judge?

Now that we have gone through some referral behavior myth busters by digging into the quantitate trends, think about the cognitive biases of the person running the program. Most HR departments still run business based on gut analytics. Following your gut is a problem – you are human – your assumptions are imperfect.

HR wins where statistics and psychology meet.

Two out of the six macro trends mentioned above proved counterintuitive. If we didn’t consult the data, we would’ve messed up at least 30% of the intent of the program. If you screw up 30% of the program each year, you have screwed a cumulative 100% of the program in three years. The company culture and talent caliber would be influenced significantly and the HR team may not even understand that they have unintentionally but actively done the damage themselves.

You know you’re doing something right when you hear ”I love these people”

Being the HR department we are eager to hear feedback about the quality of people who we hire. Luckily, one of the things we hear the most is that our employees enjoy their peers. This is especially true in engineering and it comes up in every survey we run: “I have never worked with such competent and smart people in my entire life. My coworkers are one of the best things about this company.” How cool is that?

If you think about it, people try to attend conferences, pay good money for seminars, join clubs and do so many things just to meet experts in their field or find inspirational figures they can learn from or look up to. What if you had that available internally?

What we have created, and are still adding to, is a world-class collection of outstanding, extraordinary professionals. Our engineers feed off of each others’ ideas, collaborate to make the impossible happen and frankly, are just fun to be around. Our goal is super simple: if we picked a random sample of people and put them at a Thanksgiving dinner table, each person would be so interesting and cool that the stories at the table would make for a memorable evening.

I think we have achieved this and every company, regardless of the industry or field, can do this too. Just start with excellent people, then ask them to help invite their equally excellent friends to join. This is very true in engineering but can also be true in every other department. I work in HR and I know I feel the same way about my coworkers.

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