How to calculate the right amount for your employee referral bonuses

Tawfiq Abu-Khajil

Co-Founder

July 12, 2024

2 min read

What is an employee referral bonus?

An employee referral bonus is a monetary reward provided to employees who refer hirable candidates for job openings within their organization. It serves as an incentive to encourage employees to actively participate in the recruitment process and helps attract high-quality talent through trusted con

Employee referral programs are an effective way to tap into the power of existing employees' networks and attract top talent. One critical aspect to consider when implementing such programs is determining the appropriate amount for employee referral bonuses.

In this article, we will explore key considerations in determining the ideal employee referral bonus to maximize the success of your referral program.

1. Start by calculating your average cost-per-hire*

Cost Per Hire = Total Recruitment Cost in a given period (one year) / Total Number of Hires in that given period

Note: In this case here, you’ll only* need to calculate costs that referral hires help you avoid. These include: Job advertisement fees, Job Board Fees, External recruiter fees, Recruiting agency fees, Staffing agency/firm fees, Recruiting event costs, Travel expenses due to recruitment, Employer branding.

2. Determine your average referral bonus amount.

Next, you’ll need to determine how much you want your average referral bonus amount to come down to. Typically this should be at-least $500 – $1,000 less than your calculated cost per hire – as referrals are a way to effectively reduce your recruiting costs.

3. Categorize your open positions

Typically, if you’re a large organization your roles will probably be already categorized according to seniority.

If not, there are multiple options for categorization:

For example, divide your open roles into 1) Hardest-to-fill 2) Hard-to-fill 3) Easy-to-fill.
Another example is by seniority: VP, Directors, Managers, Seniors, Entry-Level
A third example of bucketing is using business areas: Warehouse, Retail, Trucking, Technicians, etc …

4. Distribute your average referral bonus amount across your categories

There’s two ways to do so.

a) The easy way is to distribute your average referral bonus amount across your categories. For example, let’s say your your average referral bonus amount is $1,500, you would distribute it as such:

b) The second and even more-accurate way is to use your past referral data and distribute the bonus amounts accordingly. Here’s an example

To determine if your bonus amounts are distributed accurately, calculate how much your average referral bonus amount would be if your % of referrals remained the same as last year and you met your expected hires for the current year.

Keep editing the proposed referral bonus amounts until the average equals your target one calculated above.

For example, for the above to produce an average referral bonus amount of $1,500, the proposed amounts would have to be: