Do Hefty Payouts for Employee Referrals Work?

It’s no secret that attracting top talent is as difficult as it’s ever been before. The rapid growth in technology that enables employees to connect and collaborate in real-time has been off the charts. It really doesn’t matter where employees reside. Teams can be made up of people from all 4 corners of the globe, which is making attracting talent that much more complicated. Further, we love personalization in all facets of our lives from how we manage our finances to socializing with friends and family to how we best achieve work objectives. The days where 100% of your employees spend many hours commuting into a physical office 5 days a week all year is over.

Then you have this concept of multi-generations in the workplace. I am the first one to criticize the practice of labelling people simply based on the year they were born — Baby Boomer, Gen X, Gen Y, Gen This and Gen That. I get it… it makes it easier for us to wrap our heads around the concept that people are different from one another and our preferences and interests matter more than ever. What it really comes down to is the fact that each and every employee in your organization is unique by virtue of being them. The point is that in order to achieve maximum employee engagement you need to find that happy medium between the interests of the organization and the interests of the employee. I know I know… easier said than done, but it’s reality and it’s extremely important to being able to engage and retain top talent that you worked so hard to attract.

I just rambled about the realities we are facing in Western societies relating to work. When it comes to the specific challenge of attracting top talent we have seen so many different ideas and strategies being tried in our organizations today. Many work and many don’t. The research is clear that leveraging employee referrals is very effective and results in high quality candidates. The general concept is that the employee knows the organization and can assess whether or not someone in their network would “fit” into the culture of the orgnaization. If you employ 500 employees and each employee has an average network size of 100 people then that’s potentially a 50,000 person network that you could tap into. Instead of “posting and praying”, spending boatloads of money on traditional advertising (e.g. LinkedIn, niche job boards, etc…) you could simply tap into this connected network. Social Talent published a really cool infographic on the value of an employee referral. Check it out here. Through research from Jobvite they stated that, on average, organizations recruit from employee referrals 40% of the time. I’ve heard higher numbers into the 50%+ range, but 40% is still a pretty big number.

Although I am a fan of employee referrals there are drawbacks, notably the creation of a “homogenous workforce”. What this means is that people tend to associate themselves with people like them with similar backgrounds, perspectives and experiences. A few potential risks are the lack of innovation, lack of workplace diversity and inclusion and inability to creatively solve problems. Further, if the program is not set up properly (i.e. it encourages wrong behaviours and actions) it could eventually lead to disengagement, disappointment and frustration among employees.

Let’s Think About a Scenario…

In late July TextNow, a Waterloo-based tech company, announced that it was offering employees $13,000 for each referral that is hired, and another $13,000 to the person who gets hired. That’s $26,000 for every single hire that is made through an employee referral. Yes you read that correctly. I encourage you to read the article, and I feel pretty confident that you will raise your eyebrows a few times. Several red flags popped up for me when I read it and here they are.

First, throwing money at the “talent shortage” problem without addressing the root cause of the problem is like throwing darts at a dart board in the dark. Of course every single Canadian tech company is competing with each other in Canada, and in the United States. TextNow COO Lindsay Gibson states in the article that “people don’t know who TextNow is, and start the recruitment process 10 steps behind”. This is a branding problem and nothing else. I can go on and on about employer branding and what it is and how to build and cultivate one but the point is that throwing close to $30k per recruit at this does not solve their branding problem. In fact, I would argue that irresponsibly throwing money around like this would negatively impact their brand. All successful Canadian tech companies started with zero brand recognition — case in point: Hootsuite, Shopify, Achievers, Unbounce, Bench Accounting, Wave Accounting, and the list goes on. They worked hard to get where they are today, and they did this by creating awesome workplaces that their employees love, involving their employees in telling their stores, leveraging a diverse marketing strategy and being stubbornly consistent about it.

Second, over the long-term money never EVER improves how an employee feels about the organization they work for. Money has the opposite effect. If an employee does not feel that they are being compensated fairly then it causes them to potentially feel undervalued, demotivated, disengaged, and so forth. The whole point of an employee referral is that the employee genuinely wants to refer — they love their organization so much that they want others to experience what they have. Personally, if I was disengaged from the organization I was working for I would likely not refer anyone in my network to them, regardless of how much money they were offering. This is why I love measuring the “employee net promoter score” just like Marketers measure the net promoter score of their customers. However, I do believe that in the short run TextNow will see a significant upward swing in the number of referrals employees make, but over time, it will likely decrease.

Third, what are they hiding? In my experience organizations that irresponsibly throw money around like this are hiding something, and that thing usually has something to do with how they operate on a day-to-day basis. All you have to do is look at the key drivers of employee engagement and evaluate TextNow against those drivers — leadership, rewards and recognition, direct manager, learning and growth opportunities and so forth.

Fourth, solving the talent problems takes time and commitment. In the article they referenced Facebook and LinkedIn campaigns that they rolled out. Here’s the thing about campaigns. You can’t launch a campaign, sit back and watch the millions flock to you. It doesn’t work that way. Do you remember the massive popularity of the Old Spice videos from a few years ago? They were awesome… but… when they stopped engaging with their audience about them the interest and popularity waned. The same thing happens with organizations. You can’t simply turn on and off the switch when you feel like it.

Yes I’m Being cynical…

This is probably one of the more cynical posts I’ve written, but that’s because so much of what TextNow is doing is wrong. Of course I don’t know their full story and how they operate as a company. They could be the greatest organization ever and what I wrote is nothing but inaccurate b.s. If that’s the case then I will gladly take this post down. But I am simply reacting to what I read… that’s it. I can tell you this. Paying that kind of money for an employee referral as a stand-alone initiative is incredibly dumb. It does nothing to impact their culture, workplace, employee engagement, productivity, long-term sustainability or anything else that connects to and impacts their business. Do they really want to attract people who are only motivated by money? Likely not.

8 comments

  • Hi, Jeff:

    I read your post with some surprise. I’m currently an employee of TextNow, and if you’d be so kind I’d like to refute a few basic assumptions:

    We, as a company, could not agree more that the culture of a company is important. And employee branding is also important. Neither of those things happens overnight, sadly: It takes a great deal of work to push out a positive corporate image. The underlying assumption here is that we’re doing a signing bonus in the place of developing a positive culture or other things; rather, the signing bonus is in addition to the work our team is doing to make TextNow the best workplace in North America.

    Which is why we’ve been doing a lot of different things on that front. In fact, a recent story I published on our engineering blog (engineering.textnow.com) is of great and direct importance to me personally: https://engineering.textnow.com/alls-well-that-ends-wellness-textnow-and-employee-health-8db61d35bf5. It may not seem like much, but I can state from my own experience TextNow is a company that literally values my health as a person, not just as a worker.

    We’re also sponsoring a game night down at the Tannery to encourage potential recruits to learn more about TextNow. And the page we have up on our site about the signing bonus also has a terrific video about life inside TextNow that I heartily encourage you to watch: https://www.textnow.com/signon

    I personally feel that TextNow is a tremendous place to work, for more than just thirteen thousand reasons.

    • Kevin, thanks for contributing. I do like the fact that you guys are doing many things versus just putting all of your eggs into one basket. My post was specifically on the employee referral bonus decision that you guys made, and my commentary on both the optics of doing something like that and the likely implications. I’ve been doing this for 17+ years and what I wrote was from personal experience. I have no doubt that TextNow is a fantastic organization to work for, as evident from the comments here and on LinkedIn. This is priceless… but… the optics of coming out with a program like the one you guys did does not promote TextNow in a light that you really want, which I described in my post. However, I am looking forward to taking a trip out to KW to meet with you guys as I do with many other growing SMB tech companies. Thanks again.

  • Hey Jeff! My name is Valeria and I currently work in the Social Media team at TextNow. I’d like to tell you a little bit about my own personal experience:
    I started off as a CSR, having a university education, but not having the experience to be able to get a position that I believed would be more in line with my talents. I remained here for a little over a year, and the only thing that kept me going was everything that TextNow offered me. As you may or may not know, working in customer service is probably one of the most soul-destroying positions of all time. I can’t think of any one of my fellow coworkers who didn’t feel like going home and opening up a bottle of wine after. But here’s what TextNow also offered that made it worthwhile to stick around:
    1. Autonomy- the sense that I was responsible for more than my job description detailed. To be able to take ownership of the product, and feel like my opinions and input were valued
    2. A sense of family- Coming in to work, it always made it easier to be able to sit beside people that made you laugh, and furthermore, to be able to walk away from your desk, head over to lunch and interact with developers, or participate in group personal training sessions.
    3. An opportunity for advancement- this is probably the most important one. I have never felt more valued than at TextNow. As stated, I started off as a CSR, voiced my opinions and desires for how much more we can do as a company, and unexpectedly, I was listened to. I was recently promoted, and never been happier. I have the chance to interact with the COO, CEO, and other areas of the company I didn’t have a chance to before, and collaborate in a way that I can guarantee you is not available anywhere else. I feel comfortable walking across the office and asking someone whose title is above mine whether they can help me out with my own ideas and most of the time, they end up only improving upon them.

    I can safely call myself a TextNow success story, and all of my satisfaction, my desire to get up on a Monday morning and go to work, has been driven from my own sense of pride. Pride in what I do, who I get to do it for, and the people I work with. And hey, if at the end of it all, I get an extra 13K to pay for my wedding, who am I to complain? 🙂

    • Valeria,
      I appreciate you weighing in and telling your personal story. What you described is absolutely priceless and what every organization should strive towards. Organizations that I think of who have magnetic employer brands have been able to a) build truly fantastic workplaces and b) share employee stories publicly using a variety of effective media. I think it would be fantastic for TextNow to spend $26,000 that they would have spent on an employee referral hire on creating a series of highly compelling videos featuring you (just an idea), and then leverage the power of the world wide web to share, promote, engage, etc… This is how you build an employer brand that people will like. Thanks again for sharing.

  • Would love for you to come by the TextNow offices for lunch and to see what we are all about. I believe it is an amazing place to work and would be happy to give you some insight into the motivation behind this program and the other employee initiatives we run. Let me know if you are free for a visit.

  • Hi Jeff!

    Thanks so much for writing about us!

    I agree with a lot of your points – employees need to be engaged otherwise no money will solve the desire to refer. Lucky for us, we have a very engaged team and kick-ass NPS score 🙂

    Whether this move was responsible use of capital or not: we will find out soon enough when the data comes in, but only we would know. Your post definitely is proof that it was! Publicity was one of our main goals.

    Awesome blog. I would love to grab coffee and chat HR. Shoot me a note if you’re interested.

    Best,

    Derek Ting
    CEO of TextNow

    • Thanks for weighing in Derek. I hear you on the publicity front… but… any publicity is not always desirable publicity. I think you would rather have publicity focusing on other things versus whether or not spending $26,000 per employee referral hire is a good idea or not. In terms of outcomes I am sure you will measure a handful of them, both short-term and long-term. The real impact likely won’t be felt until you can measure attrition rates, productivity over time and cost of hire. I would love to take a trip out there and meet you guys.

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