The Psychology Behind Effective Employee Referral Programs: Why Money Isn’t Always the Answer

Who would have known that a Clubhouse discussion about psychology and marketing would have pivoted into a conversation about employee referral programs.

But it did, and it turns out, there may be more underlying psychological factors at play than we thought.

There are many different kinds of employee referral programs. Some provide monetary rewards, and others get more creative.

I’m going to focus on monetary reward employee referral systems because I don’t believe they are the most effective, yet they seem to be the most common. From what I’ve read as I’ve done research into this topic, companies who have had trouble getting their monetary-based referral programs off the ground would agree.

 

Have No Problem Making Money From a Referral

Let’s dive into what seems to be the most common reward for employee referrals: money.

Some people have no problem accepting payment if someone they refer gets hired.

There are probably some people who turn a company’s employee referral program into a side gig.

In 2015, Intel announced that it would double its employee referral bonus to employees who referred minorities, women, and veterans to increase their hiring diversity.*

 

Feel Weird Making Money From Their Friend’s Good Fortune

One of the things recruiters and a company’s talent acquisition team often ask people when trying to drum up referrals is, “who do you know that would be a great fit for X role and our culture?”

“Who do you know” is the critical part of that question and probably the part that prevents people from participating in their company’s referral program.

Some people, myself included, feel weird making money to help a friend or former colleague get a job at their company. I sometimes worry about what my friend will think if they knew I made money as a result of their getting hired and may question if I was doing it for the money or to generously help them out.

That could be enough to prevent people from referring their friends, even if they would be a remarkable hire and a tremendous addition to the company. The social risk outweighs any compensation.

A program like Intel’s could be doubly risky where my referral of a black friend for a role could net double the payout. What if that friend starts to think that I only approached them about the role because they’re black, which means double the payout compared to referring a white male friend with similar experience?

This could be an irrational thought or decision-making process, but when have people consistently made rational decisions? Seriously. We’re awful at making rational decisions free from emotion.

However, if HR were to reframe the question from “who do you know” to “who can you find,” it may change the economic and social dynamic.

Suppose I’m in marketing, and I essentially turn into a temporary recruiter of sorts, searching my network of acquaintances and professional connections. In that case, I may not have any problem whatsoever with accepting a monetary reward for their referral.

 

Loss Aversion is Greater Than the Benefits of Gaining Something

All of this leads to a final psychological factor associated with referrals, and that’s the topic of risk aversion, essentially that our aversion to loss is greater than potential gains.

In his book, Thinking Fast and Slow, Daniel Kahneman points out that the potential gain someone could attain to balance the risk of loss is usually between 1.5 to 2.5 times the possible loss.

For example, if someone were in a situation where they could stand to lose $100, they would likely need to be offered the chance to gain $150 or $200 as an alternative outcome. This is what he refers to as loss aversion.

He writes, “For most people, the fear of losing $100 is more intense than the hope of gaining $150. We concluded from many such observations that “losses loom larger than gains” and that people are loss averse.”[i]

How does this relate to an employee referral program? It means whatever you think is a fair monetary employee referral bonus will likely need to be increased by a factor of 1.5 or 2 to encourage people to overcome their risk aversion.

 

What Are Some Other Options?

A lot of what I’ve written is based on assertions backed up with some quick research. I’d like to dive deeper into some of the non-monetary employee referral programs that companies have implemented and understand how those are working - especially if the company moved from a monetary to a non-monetary program.

I plan to conduct more research, interview some people, and update this article as I gain more insight into this topic.

A few examples I can think of would be offering recognition, even something as simple as a t-shirt. Most people’s friends wouldn’t feel offended if you accepted a t-shirt in return for their employment at your company based on your referral.

It could also be in the form of recognition from your CEO or other influential, high-ranking person in your company. When I was at Microsoft, it would have been a highlight of my time there to have been mentioned by Satya Nadella in some kind of company communication.

Instead of the employee receiving a monetary reward, a company could donate money to a non-profit or charity of their choice. Accenture does something similar in that they offer their employees the option of donating a portion of their referral bonus and will match the amount.

Those are just a few examples. I’ll continue to dig into the creative things companies are doing and update this article as I learn more.

If you have an example of a successful employee referral program, please let me know by sending me an email at travis@rainierdigital.com

 


*All of the information I could find on Intel’s diversity-focused employee referral plan was from around 2015. I’m not sure they’re still doing this or a modified version of it. I’m looking into it and will update this article when I find out more.

 

[i] Kahneman, Daniel. Thinking, Fast and Slow (p. 284). Farrar, Straus and Giroux. Kindle Edition.