Behavioral Economics for Leaders

CHAPTER 10The Unintended Positive Side Effects of Employee Referral Programs

Although employee referral programs are often criticized as nepotism, there are economic benefits for companies if vacancies are filled by people who were recommended by employees already working there. Some companies even pay the referrer a bonus. What is this all about?

When supermarket cashier Mary enters the employee locker room one morning, she sees that a new sign has been put up on the bulletin board. In large letters, it states that employees will receive a bonus of $100 if vacancies are filled through their recommendations. In small print, it says that the bonus will be paid if both the referring person and the new hire remain in the company for at least five months. After reading the bulletin, Mary goes to the supermarket checkout line and starts her daily work. The first customers come in while Mary logs in at the register, unwraps the rolls of coins, and checks the paper money again. She has a long day ahead of her; but tonight, she thinks, she'll call her friend Sally, who is currently unemployed, and tell her about the vacancy at the supermarket. If Sally is interested, Mary will make a recommendation for Sally to the branch manager tomorrow. If all turns out right, both women can be helped: Sally with a new job and Mary with a bonus and a nice new colleague. Mary does not spend much time wondering why the supermarket chain is suddenly willing to pay a bonus for referrals. The retail ...