Employee Referral Bonus: What It Is and How to Offer One

An employee referral bonus is given to a worker by their company when they successfully recruit a candidate from within their own networks. These bonuses can take the form of rewards or prizes and are usually part of a more robust employee referral program.

If an employer offers an employee referral bonus opportunity, it’s likely granted under specific guidelines and conditions. This can include what type of role is being referred, how long the referred candidate has been at the company and what role the employee submitting the referral has.

Benefits of an Employee Referral Bonus

Employee referral bonuses can make a significant impact on your hiring efforts, especially in a candidate market where talented professionals have a wealth of employment options. If your company is facing problems in hiring new employees, offering a referral bonus is one of many strategies to boost recruitment.

Supplements Staffing Agencies 

Staffing agencies can be helpful, but they’re also expensive. Plus, they’re not as effective as many other recruiting strategies. So rather than fork out tons of cash outsourcing your hiring efforts, cut your spending and offer employees an opportunity to support your recruitment strategy while making an impact on the future of their workplace. Doing so will reduce your reliance on staffing agencies and reward employees for their efforts. 

Improves Candidate Pool

Research shows that referrals are one of the best sources for recruitment, with referrals being five times more likely to be hired than non-referral candidates. Taking your employee referral program to the next level with a referral bonus can drastically improve the quality of your candidate pool too — because it’s one thing to get an influx of candidates, but it’s another thing to acquire qualified candidates.

Saves Company Resources 

If you’re a small company and struggling to hire great employees, offering a referral bonus can be a viable startup recruitment strategy. While referral bonuses are often associated with monetary rewards, there are a number of other options to choose from like tangible prizes or company recognition.

Reduces Time-to-Fill   

Employee referrals have the highest applicant to hire conversion rate, accounting for 7 percent of applications but 40 percent of all hires. Referrals also begin their jobs quicker in comparison to candidates from job boards and career sites. With a referral bonus, this can help to speed up the recruitment process even more.

Depending on the role and level of seniority, the cost-of-vacancy for a position can reach upwards of tens of thousands of dollars. With referral bonuses costing only $1,000 to 5,000 on average, a shorter time-to-fill is well worth the employee incentive.

Reduces Cost-Per-Hire 

Cost-per-hire is a strong indicator of your team’s ability to recruit qualified candidates. To determine if your referral bonus program is cost-effective, calculate your cost-per-hire and compare it to how much time and money you’ve spent on referral bonuses in the past year. In one survey by Clutch, 55 percent of companies stated that hiring referrals was less expensive than hiring non-referral candidates.

Helps Meet Hiring Goals After Funding Rounds

If you just closed a round of funding, then you have lots of cash (great!) along with steep growth and hiring goals (yikes!). Improve your recruiting efforts after a round of funding by using some of that new cash towards referral bonuses to ensure you meet investor goals. 

Employee Referral Bonus Guidelines

Employee referral bonuses tend to come with specific guidelines that must be met before it can be given. Here are some common guidelines used to determine referral bonuses eligibility.

Type of Job Role 

Referral bonuses are typically offered to employees who refer someone for full-time, permanent roles. Depending on the company, roles that are part-time or contract-based may not be eligible for a referral bonus.

Length of Employment 

A referral bonus may be granted once the referred employee is hired and remains at the company for a predetermined amount of time. This length of time can range from several days to several months, depending on personal company policy.

Relationship With Company 

For referred candidates, some companies do not consider those who have a relationship with the company — like someone who previously applied to an open role — as eligible for a referral bonus. This prevents existing employees from dipping into the company’s established talent community to cash in on a bonus. 

For existing employees, those like HR managers, recruiters, hiring managers and executives are also excluded from receiving a referral bonus. It’s already their primary responsibility to fill vacant roles, meaning they may have existing knowledge in recruitment strategies or have an already expansive professional network.

11 Employee Referral Bonus Examples

Here are some of the most common employee referral bonuses companies offer today. To figure out which one is most effective for your company, conducting an employee survey may be your best bet.

1. CASH REFERRAL BONUS

Monetary bonuses are by far the most common type of referral bonus. These bonuses can range from as low as $250 to as high as $25,000 depending on the seniority level of the role, demand for the position or duration the role has been open.

2. DIVERSITY REFERRAL BONUS

One downside of employee referral programs is that they often lead to companies hiring people with similar backgrounds, interests and thought processes. To combat this, companies can set diversity hiring goals and use their employee referral program to attract diverse candidates.

3. TIERED REFERRAL BONUS

Rather than paying employees the full referral bonus after the candidate is on the team for a certain time period, some employers break down the bonus and distribute them in increments at different stages in the recruitment process. 

For example, you may give 20 percent of the bonus for referrals that receive a phone interview, another 30 percent for referrals that get an in-person interview and then the remaining 50 percent once the referral is hired and works for 90 days.

4. RAFFLE REFERRAL BONUS

Another option is to put every employee’s name that provided a quality referral into a monthly or quarterly raffle for different bonus prizes. This is an option if you’re a smaller company or don’t have the budget for a robust referral bonus program.

5. PRIZE REFERRAL BONUS

Instead of giving out money, some companies may offer prizes like gift cards, subscriptions or smart devices. If you decide to use this type of referral bonus, find something tangible and wanted by the employees specific to your company.

6. VACATION REFERRAL BONUS

Another employee referral bonus option is to offer a vacation. It could be an all-expense paid trip planned by your company, or a cash lump sum to go toward transportation, hotels or experiences. Remember, you don’t have to go all out with a far-flung adventure, you can keep it local with a staycation spa day or a fancy dinner offer.

7. ADDITIONAL BENEFIT REFERRAL BONUS

Boost your current perks and benefits by offering more PTO days, additional money towards their education stipend or lunch paid by the company for a year to incentivize employees for referrals.

8. RECOGNITION REFERRAL BONUS

Contrary to popular belief, referral bonuses don’t have to be expensive. Sometimes it’s enough to simply recognize, thank and award your employees for their referral in a company-wide format.

9. Charity Referral Bonus

Offering employees cash isn’t always the most effective incentive. However, if all or part of the referral bonus is donated to a charity of the employee’s choice, they may be more inclined to make referrals and support the causes they care about.

10. EXTERNAL NON-EMPLOYEE REFERRAL BONUS

If your employees don’t refer to the quantity and quality of candidates you need to meet hiring goals, you can offer referral bonuses to people outside of your company. In the end, a good referral is a good referral, so it doesn’t really matter who it comes from. And anyone who is willing to bat for your company and attract great candidates should be deserving of a little bonus to say thanks for their efforts.

11. CUSTOM REFERRAL BONUS

Rather than having a set referral bonus, allow employees to decide how they would like to be rewarded for their efforts. You may need to set some kind of limitations, but employees will be happier with their reward if they have a say in what it is.

How to Promote an Employee Referral Bonus

In order to successfully utilize an employee referral bonus program, it’s critical you clearly communicate what it is, how it works and the prizes you offer for qualified referrals. Here are a few ideas for promoting your employee referral program and referral bonus.

Explain the Bonus to Employees

The first time you roll out the bonus program, have an all-team meeting and break down exactly what you’re looking for in referrals. In addition, create clear and shareable documentation for employees to reference before they make referrals. You don’t want an influx of under qualified candidates or disgruntled employees if the guidelines weren’t properly followed.

Remind Employees 

Regularly remind employees of your referral bonus, especially when you’re planning on having a mass hiring period. If you’ve made any changes to your program like if you’re increasing the cash value of the bonus for a hard-to-hire role, make sure everyone in the company knows about the change so there’s an equal and fair chance at earning the bonus.

Make Referrals Fun 

If your team is full of competitive go-getters, a competition is a great way to encourage employees to make referrals. Offer an additional bonus for employees who make the most referrals in a set time or who refer hard-to-fill positions.

Market on Social Media 

Make sure to include content about your referral bonus program in recruitment marketing and branding materials. This is particularly important if you offer bonuses to people outside of the company. Spread the word with social media recruiting and you may even find your next new hire is actually an external candidate wanting to make some extra cash through your referral bonus program.  

When to Refer Someone for a Job

Making a referral is a reflection on you as an employee — and your considerations for who would benefit the company — in addition to affecting the career of the one being referred. 

With that in mind, it’s best to make sure that helping out a friend is not the only motivation for your referral, and that who you’re referring would indeed be a suitable fit for the job. 

Before referring someone, ask yourself:

• How well do I know this person? Could I vouch for them professionally?
• Have I worked with them before and seen their skills first-hand? 
• Are they familiar with the company’s goals and mission? 
• Why are they looking to leave their current job? 

Take into account how the person’s work history and skillset aligns with the open role. Keep in mind, too, that factors like how long they stay with the company after they’re hired may determine if you actually receive your referral bonus.

Are Employee Referral Bonuses Taxable?

Yes — at least in the United States. 

Employee referral bonuses, or any employee bonuses, are grouped as supplemental wages, which are taxed by the Internal Revenue Service (IRS). Bonuses are subject to federal tax, and may also be subject to state, Social Security and Medicare taxes.

If the referral bonus is at or below $1 million, how much is taxed depends on whether the bonus is combined with an employee’s regular wages or given separately. If combined, federal income tax is taken out from the total combined amount, in the same way as a regular pay period. If separate, employers can take out federal income tax at a 22 percent flat rate.