What is a referral bonus? Definition, types and tips

Updated 23 May 2023

The success of a business depends on the quality and efficiency of its employees. Sometimes, finding the best candidate for a position and the company can be a challenging task. A referral programme offers employers a valuable resource for providing incentives to employees to encourage them to refer suitable recruits. In this article, we explain what referral bonuses are, how they work and when to refer your contacts.

What is an employee referral bonus?

An employee referral bonus is a sum of money or perks a company offers employees who recommend candidates for vacant positions. Companies have some latitude in determining when to make payments. For example, a company might offer employees a single bonus for referrals after a specified period of employment or provide smaller bonuses upon reaching certain employment milestones. This bonus can be any amount the company deems appropriate to encourage employee recruitment.

A company's incentive for referrals

Here are some reasons companies offer their employees bonuses for referrals:

Reducing the cost of recruitment: The recruitment process takes less time, resulting in a reduction in hiring costs. Additionally, offering employees bonuses for referrals allows companies to save money by avoiding the cost of advertising on job boards and using external agencies.
Enhancing the quality of candidates: Since current employees typically refer candidates who meet the hiring criteria, employers can be confident in finding candidates who are a good fit got open roles. Unlike job boards or external recruiting agency advertisements, current employees are more familiar with the company's requirements for candidates.
Strengthening the employee retention rate: Due to their familiarity with the company's culture and norms, recruits tend to stay with the organisation longer. In addition, existing employees who receive rewards for referrals feel that the employer values and recognises them, encouraging their loyalty and contentment.

Types of referral bonus

Employers might offer their employees various other referral incentives In exchange for bringing qualified candidates to the organisation, such as:

Financial bonuses

A financial bonus is an employee referral incentive, which the company typically presents as a cash prize. This bonus offers the most flexibility for referring people for junior and senior roles. Upon referring a successful candidate, the employee receives a monetary reward. The amount usually depends on the seniority of the open role, demand for the work skills or the duration the position has been vacant.

Social bonuses

Employees might receive a social bonus when they help find candidates, receiving recognition and praise for their efforts. Here are some ways a company might express its gratitude:

publicising good work on social media or in the company newsletter
awarding a special prize at the annual company dinner or shareholders' meeting
providing a parking space or a desirable desk location for the employee who refers the most candidates or senior positions
sending an email from the CEO or founder congratulating the employee on a job well done

Altruistic bonuses

Incentives of cash are not always the most effective motivational tools. Many employees place a high value on specific charity and community initiatives over obtaining something for themselves. A company that donates bonuses to a charity of the employee's choice can encourage them to make more referrals while supporting their favourite charities. Typically, employers ask each employee which charity they prefer to donate to.

Tiered bonuses

Some employers distribute bonuses in increments at different stages of the recruitment process rather than paying employees the full amount after a specific period. For example, employees could receive a small bonus for candidates who interview and a larger one for candidates the company hires through referrals. Companies often pay a higher incentive if the candidate remains with the company for a certain period, such as three to six months after joining. Some companies reward both the referrer and the referred.

Raffle bonuses

Another option companies may opt for is to enter every employee who provides a quality referral into a raffle for various bonus prizes over the course of a month or a quarter. The specific time is up to the employer. The company enters the employee's name again for each additional reference. Then, the company holds a raffle to select one or two winners to receive a bonus.

Prize bonuses

Companies may choose to reward referrals with valuable prizes instead of cash. Typically, they choose something that most people are likely to want and are passionate about, such as the most recent piece of technology. For example, employees could receive a new mobile phone, a set of noise-cancelling headphones or a smartwatch. In addition, some companies offer points that employees can redeem for a prize of their choice.

Vacation bonuses

There are typically two types of travel bonuses: an all-expense-paid trip or a monetary reward for use towards travel expenses. Alternatively, the company might offer paid vacation days, spa days, or fancy dinners for two. This is an effective way for companies to reward their employees while helping them indulge themselves in ways they may not otherwise. This bonus could also include more vacation time for successful referrals.

Custom bonuses

Instead of a fixed referral incentive, employers might let their employees decide the reward they want for their efforts. These employees usually discuss what they want as a bonus for successful referrals with the human resources department. This is a way to motivate employees even further by giving them what they desire. Custom bonuses are, of course, subject to limitations set by the company.

Additional benefits bonuses

Some companies offer their employees additional incentives for referrals. There are several types of work perks, including allowing pets to accompany their owners to work and providing educational stipends. Some companies also offer paid time off. These work perks traditionally help employees to concentrate on their work better or improve their skills.

When to refer a contact

Before forwarding resumes to human resources, it's imperative that you carefully screen your contacts. Refer someone for a job at the company you are working for when:

The person qualifies for the role

Ask the referral for a copy of their resume and other relevant materials so you can gain a better understanding of them. This way, you can determine whether the individual you are considering has the skills, qualifications and professional experience necessary to succeed in the position. The best way to do this is to ask yourself if you would consider the person for the job if the candidate was a stranger.

The person has an interest in the position

If the person you wish to refer isn't excited about the position, it might be better to consider finding someone else. If you make a recommendation that doesn't succeed, you might damage your credibility. There's no point in forcing a fit that doesn't exist. Choose someone who has a passion for the position and promises to put a lot of effort into their work if they're successful in getting the job.

Working with your referral wouldn't cause a problem

Consider whether you would enjoy working with and seeing this person almost daily. If you have previously collaborated well with someone, you may enjoy working with them again. Even if you wouldn't be working directly with your connection in the new role, it's only fair to ask yourself if you would want to do so.

They are a good fit for the company's culture

Every company has its own work culture, and different individuals thrive in different environments. Ensure that the person you refer to is a good fit for the organisation. For example, whether your referral is personable and would be suitable for a workplace with a social culture.

The definition of what constitutes a referral bonus

Regardless of the type of bonus the company offers for referrals, most programmes have a few things in common:

Companies usually only pay out if the candidates who employees refer receive an interview or a position.
Most companies don't offer compensation to referrers who refer contract or temporary employees.
It's uncommon for executives or HR personnel to receive referral incentives because they have an opinion in the hiring process.
Candidates who employees referred for a position can't have any prior contact with the company. For example, former applicants or those the company has contacted previously typically don't qualify.