Don’t Break Referral Hiring

(This is a republished blog from my failed startup, Mighty Spring, on the subject of Referral Hiring)

A recent post on the First Round Capital blog promoted “referral hiring” as the go-to form of talent sourcing for young companies and provided ammunition for generating greater numbers of referrals from existing employees.

It seemed obvious while reading this post that using the suggested tactics would improve raw referral numbers, but degrade referral quality. There was little mention of the introduction of misaligned incentives and the downside risks associated with those new incentives.

Comments on the post from the popular startup community, Hacker News, seemed to indicate that many employees have an intuitive grasp of the ris;ks and incentive problems that come with trying to juice referral-based
candidate lead generation — more so, perhaps, than employers who are
narrowly focused on trying maximize their referral numbers.

Today, with the help of comments from the Hacker News community on the aforementioned FRC post, we’ll attempt to present a fuller picture of referral hiring.

The Importance of Incentive-less Referrals

Offering a referral bonus to employees for referring friends who get hired is common practice, but is it necessary?

By offering bonuses in this way, companies essentially turn their
employees into part-time contingency recruiters who now face the same
bad incentives of their full-time counterparts.

With $5,000 or more potentially on the line, a given employee is likely to be more lenient with their referral standards than if there were no financial
reward at stake. Meanwhile, employees who truly love their jobs naturally gush about work and try to get their talented friends involved.

In the Hacker News discussion, user Conorgil145 made a comment to this exact effect, “If I love my job, then you better believe that all of my developer friends are going to hear about it until I am blue in the face.”

To drive a significant volume of meaningful referrals, focus on a feedback loop with your employees that address their root concerns — the reasons that they’re not already gushing to their talented friends about how much they love their company. If you want your employees to gush to their friends, ask them directly, “What can we do as a company to improve the likelihood of you recommending us to those in your network as a place to work?”

Requesting referrals from employees who have fundamental concerns about their workplace lowers the likelihood of them referring their most talented friends. Instead, you’ likely to hear about their buddy who “really
needs a job”.

Once you’ve nipped the real issues in the bud, keep
your hiring needs in the forefront of employees’ minds by mentioning
them at regular intervals. Make your workplace somewhere people really
do want to work, and the word of mouth will take care of itself.

If you insist on using referral bonuses, consider tying them to the
long-term success of the hire instead of positioning them as a quick
buck. Fast cash actually lowers the standard of who your employees will
refer. Try, for example, referrals bonuses (cash or equity) that vest
based on the hire’s performance over the first year.

Your Hiring Process (is a Problem)

Companies don’t like to admit it, but many have hiring processes that treat
candidates who are early in the hiring funnel as expendable,
interchangeable, and disposable. This incentivizes employees to not
refer their friends for fear of mistreatment.

Angersock notes,

“What’s really annoying is when you try to bring in talented engineers from
your network, and your company drops the ball: either by not getting in
touch with them, or low-balling them, or refusing decent equity.

If I’m referring somebody from my network to you, I want to make sure you
treat them well and with promptness–disrespecting them is a sign of
disrespect to me as well, and makes me look like an ass to them.”

It doesn’t take much to turn a good candidate off with your hiring
process. Slow contact at important junctures, overly-vague explanations
of how the hiring process works, what to expect from a given interviewer, and poor transparency into decision making criteria are all big annoyances for candidates (though most companies consider them to be a given in hiring).

In a world where “hire the best, no questions” is considered foundational behavior for success, isn’t your hiring process your most important product? What if the only product
your company produced was your hiring process? How would it change from your approach today?

First impressions don’t fade easily. You may get a candidate who has been through a poor hiring process to accept an offer, but they’ll remember how they were treated. Even if they chalk their experience up to chance, they still may still be concerned about subjecting their friends to the same treatment.

The Hacker News crowd expounds on the troubles with the middle of the hiring funnel, and the resulting effects:

Tptacek writes,

“My
sense of it is that the valley believes recruiting to be a ‘top of the
funnel’ problem. My experience says that it isn’t. My hypothesis is that
the inefficiency is in qualifying candidates (deeper in the funnel),
and that if you can fix that problem, the top of the funnel can sort
itself out without much effort.”

InclinedPlane writes,

“I’ve
seen too many examples of poor interviewing process, too many bad hires
made, and too many good hires passed over to not put most of the onus
on the middle of the funnel. Most interviewers are just not good at
understanding the fragility of the process, or in having sufficient
empathy to understand the difficulty of getting good data on a
candidate.”

From GVIrish,

“By
putting all of my contacts in the hands of the HR dept I no longer have
any control over how or when the company contacts them. That company
can easily break the trust I have with my contacts. I wouldn’t be
comfortable doing that, referral bonus or no referral bonus.”

Proxies Will Fail You

Referral
hiring can seem like a panacea, especially compared to low conversion
rates from alternatives, but that attitude masks the real problem:
you’re likely bad at evaluating cold leads.

Like focusing on
candidates from top-tier schools, seeking out friends of existing
employees is nothing more than a proxy for independently-determined
quality. This approach leaves you with an insulated pool of candidates,
and a statistical evaluation will tell you that focusing too narrowly on
referrals virtually assures that you’re missing out on the best talent
in the market.

Tptacek points out the dangers here:

“Network
hiring unavoidably personalizes the hiring process: candidates come in
the door with sponsors. It’s hard to hire objectively, staying as close
to apple-apples as possible, when your candidates are friends of
employees who have significant bonuses riding on the selection.”

If You Want More Referrals, Align Incentives For Success

Consider
paying for your employees’ contact lists, not the hires that come from
them. By doing so, you put the incentive to conduct a high-quality and
thorough interview process on the people doing the hiring. Traditional
recruiting fee structures are broken and standard employee referral fees are an equally broken extension of that model.

Poorly-aligned
incentives are ultimately bad for you, the company, even though they
look like they reduce risk in the short term. A better, more efficient
hiring funnel will provide outsized returns over many, many hires, and
aligning incentives in candidate sourcing is the best thing you can do
to jumpstart the necessary change.

Colliding Worlds

Right now companies are only asking to mine your LinkedIn and Facebook
connections. But what’s next? Does anyone want to connect their Snapchat account? Soon they’ll want family trees and the posts from your Secret
account.

From edandersen on the subject,

“My
personal network is not yours to ‘mine’. If an HR person at my company
contacts a friend of mine to pitch a job at the company I work at,
trying to use my name as an ‘in’, that is seriously unprofessional.”

More from pnathan:

“I’m not going to want to sit down with you and let you chew through my social networks for recruiting leads.”

Conclusion

Well-executed referral hiring has exceptional value, but not all referral hiring is well-executed. Incentivized referrals have inherent risk, and pressing
current employees to offer up a marginal referral potentially alienates
the referrer and likely generates a worse-fitting candidate than one who is organically recommended.

If you’d like to augment your current candidate acquisition efforts with high-quality, non-referral-based leads, check out Mighty Spring. We provide a curated short-list of candidates who are both qualified for, and interested in, your company’s open job.

TL;DR:
Optimize your hiring process and candidate lead generation strategy
end-to-end with referrals as one element. Consider ways to drive
referrals that are not based in financial incentives. If you must use
financial incentives, align them with long-term organizational goals.
Use Mighty Spring as another way to see great candidates :)