Uncovering the Cost Benefits of Implementing an Employee Referral Scheme for SMBs

The estimated cost per hire for a small to medium-sized business (SMB) in the UK can range between £3,000 and £12,000, depending on your recruitment team, the strategy used, and the role you’re hiring for. Should your recruitment drive fail to work out, these costs could soar further. 

It’s for this reason that many businesses prioritise getting hires right by actively minimising the level of associated risk. It’s also why more recruiters are turning to referral schemes as a means of introducing a level of control over candidate quality. 

There are many reasons why employee referral schemes are viewed as a cost-effective way to grow teams. According to research from Total Jobs, 68% of large businesses and 52% of SMEs claim that employee referrals are among their top-performing recruitment channels, suggesting that the approach is more effective than social media and even paid listings. 

How Employee Referral Schemes Work

Employee referral schemes encourage employees to suggest people in their networks, such as friends, former colleagues, or even family members, for vacancies within a business. 

The benefit of this is that SMBs can allow their employees to pick up the slack of the talent acquisition process by using their own networks to identify candidates. 

Typical referral schemes reward employees for successful recommendations. However, the implementation of a rewards structure opens the door to weak referrals. With this in mind, it’s worth businesses prioritising recommendations where the employee has strong connections with the candidate, as opposed to former colleagues who may have only known each other for a few months. 

Saving on Turnover Rates

High employee turnover is a scourge for SMBs, and lowering the costs of hiring and rehiring for positions must be identified as a key area of concern. 

Employee referral schemes are linked to lower instances of turnover, as your workers already conduct the initial screening process themselves. Because these recommendations come from existing team members, the candidates will likely have already been briefed on key issues, such as workload, company culture, and what a typical day with the business looks like. 

According to a LinkedIn study, employees hired through referrals have a 45% higher retention rate compared to those hired through other channels. This significantly lowers the cost associated with turnover and training. 

Lowering Costs with Automation

There are a few factors to keep in mind when creating your employee referral scheme, such as the length of service after which you’ll accept referrals from employees and what their incentive could be. 

In most cases, SMBs will offer some form of financial compensation, but other benefits, like an added day of annual leave, can be offered. 

Because of the incentives offered in return for recommendations, it’s important to have a comprehensive system in place that can manage referrals, which should be a key area of focus. 

HR software capable of managing rewards schemes and tracking performance can be a great way of tracking referral scheme eligibility, and the distribution of money or other benefits can be a great way of keeping on top of referrals. 

AI-integrated HR management software providers like Access PeopleHR Evo can be especially useful in maintaining your referral scheme in a way that builds trust among your employees and improves your chances of success. 

Minimising the Risk of Bad Hires

Recruiting the wrong talent for a role can result in significant costs and disruptions for SMBs. Not only is a bad hire likely to result in your business having to rehire for the same role faster, but it could also lead to disruption within your existing teams that may cause more talent to leave the company. 

Employee referral schemes minimise the costly impact of a bad hire because the new talent will already be part of an existing employee’s network. This indicates that they’ll be more likely to align themselves with the company culture and use their existing network to settle into their role faster. 

Having to recruit again and again for open roles because of bad hires can be a significant financial drain and a strain on scheduling. While referral schemes aren’t guaranteed to be a success, they’re far more likely to lower instances of turnover. 

Winning With Referrals

Employee referral schemes can be a win-win scenario for SMBs. Your existing workforce finds themselves rewarded by recommending someone they’re close to, helping to boost on-the-job engagement and their own likelihood of retention, and businesses benefit from a cost-effective hire who is more likely to fit into their job role and company culture. 

Life as an SMB can be especially challenging due to the difficulties associated with managing cash flow and limited resources. Implementing a solid referral scheme may not transform your budgets overnight, but it can certainly help to significantly drive down hiring costs and expenses related to high employee turnover.