Chances are, you or someone you know has landed a job through a friend or family member. And when it comes to job searching, most of us reach out to our networks for leads. However, on the flip side, does hiring through employee referrals really pay off for firms?
Mitch Hoffman, a professor of Strategic Management, wants to know. At the Rotman School of Management, Hoffman specializes in personnel economics, a research area that examines how employees and employers behave, make decisions and contribute to productive economies.
“How people find jobs is a classic question in business and in economics,” explains Hoffman. “And we know that people rely on social networks and connections more and more for employment. It’s an area that’s worth a closer look.”
In one of his studies, Hoffman combed through massive amounts of personnel data provided by call centres, trucking companies and a high-tech firm to identify trends and the impact of referrals-based hiring. He’s also written about the work of fellow researchers who have studied the topic.
So — should firms put more weight on applicants who come recommended by an employee?
It depends, says Hoffman.
Based on what he’s studied and seen, there are some advantages. In general, hiring referred employees tends to incur lower recruiting costs and results in lower turnover rates.
On the other hand, this type of hiring approach can limit diversity in the workplace, as women and minorities are less likely to be referred for jobs. Most importantly, nepotism can be bad for workplace morale and instilling a sense of fairness.
Hoffman also points out that it’s hard to pinpoint definitively if referred employees are, in fact, more productive.
“What’s most interesting is looking at why differences come up in how people are hired and find work. Is there something about the workplace that causes referred or non-referred employees to behave or approach work different? What motivates someone to recommend someone for a job — is it for a bonus or because they genuinely think a friend might be a good fit?”
What’s more, companies might find these observed trends useful when it comes to how they approach recruitment.
“For industries that are constantly in need of fresh ideas and new faces, a low turnover rate might not be a huge advantage, so referrals might not be the way to go. For other organizations, it may work.”
In a few cases, Hoffman has been able to take a hands-on approach with his research. Right now, he’s working with a European firm, studying the effectiveness of their referrals programs and why employees make referrals.
His other work will also likely affect how firms hire in the future: Hoffman is currently investigating how new technologies, like AI, might change the way institutions screen applications.
“Some tricky questions are: How can we remove human bias from hiring but also exploit the ability of new technologies to predict quality of hire? How do new technologies on hiring affect the way firms make hiring decisions? We’re basically trying to get at the ‘black box’ of how to find and hire good talent.”
Written by Rebecca Cheung | More Rotman Insights »