Employees who join companies through a referral program are more likely to stay with the organization longer than those who enter through the open job market, a study has found.

While this is valuable for managers, research led by Rotman professor Mitchell Hoffman suggests it’s only a small fraction of the total benefits that can be reaped from having an employee referral program in place. In his paper published in the National Bureau of Economic Research’s working paper series, Hoffman and his co-authors partnered with a European grocery chain with 238 stores in a randomized controlled trial. Some stores were selected to have an employee referral program, while others were not, and over a 13-month period, researchers tracked hiring rates, turnover and labour costs.

In their experiment — which is the first in-house randomized control trial of its scale studying a specific hiring procedure — the stores with referral programs saw about 15 per cent less staff turnover and up to three per cent in labour costs.

Researchers found that when a referral program is in place, existing employees feel that their employer values their input, which may increase their commitment to their job. Employees are empowered to recommend people they want to work with.

“Having a referral program is a credible signal to employees that the company trusts its workers to make suggestions,” says Hoffman.

It’s a win-win situation for everyone in the firm — when people work with people they like, job satisfaction and retention may increase, ultimately reducing labour costs for the company, Hoffman says.

And when a referral is successful, they may receive a bonus, further incentivizing active participation in the program. While higher bonuses led to more referrals in their experiment, the researchers found there was a quality-quantity tradeoff where larger bonuses led to lower-quality referrals.

“Having a referral program is a credible signal to employees that the company trusts its workers to make suggestions.”

“If you care about the direct effects of having more referrals, you want to pay a substantial bonus,” says Hoffman. “In our experiment, if you didn’t give a bonus, you still got the indirect benefits of trust, but you didn’t get any referrals.”

Hoffman stresses that HR strategies must be tailored to a company’s overall strategy and culture, and it’s no exception when thinking about implementing an employee referral program. The consequences could be dire if there’s a disconnect, he says.

“If your company is using a lot of relative performance competition (employees are compared amongst one other), then using referrals could backfire because people will be tempted to refer people who are worse than themselves — they don’t want to compete against someone better,” he says.

“If your company uses root performance bonuses (incentives given when teams meet targets), then referrals might be advantageous because employees are incentivized to refer people who could be good for their personal bottom line.”

With his wide research interests in labour economics, much of Hoffman’s work is driven by questions related to hiring and workplace productivity. He’s published papers on everything from the advantages of hiring workers with criminal backgrounds in tight labour markets to whether workers overpredicting their productivity increases profits.

“There’s a lot that can be learned in HR by experiments, and I’m always open to collaborating with companies on research,” he says, noting a particular interest in working with organizations on issues related to hiring disadvantaged workers and interactions between personnel economics and public policy.