Beware the downside of employee referrals

Electrical Apparatus, Feb 2007

Asking employees to recommend possible hires sounds like a good idea. Who would know a job applicant better than a personal acquaintance? But research by a professor at the Massachusetts Institute of Technology reveals that there's a downside to the practice that should be considered.

By hiring someone known by an employee, you're tapping into a social network whose members may be more loyal to one another than to the firms that hire them.

"Referral programs have been very successful in recruiting talent into organizations, especially in sectors where the labor market is tight," says MIT Sloan Assistant Professor of Management Emilio Castilla. "Referral programs seem to show clear productivity and early-turnover advantages. They seem to attract more productive employees.

"But too often, companies just worry about getting the people in the first place, not thinking about long-term implications for the organization," Castilla continues. "Where you hire someone who is referred, you are bringing part of the worker's social network into your company. Employers often forget that when a worker is hired using a referral program, that employee becomes linked and even dependent upon other workers in the organization."

What happens when the person doing the referring leaves the company? "According to our research, the new employee may leave or become less productive if the company does not work to retain the mentor and the other way around," says Castilla. "This important social process is often overlooked by managers."