Your CFO is questioning your employee referral program, here’s what you can do

Tawfiq Abu-Khajil
Co-Founder
December 3, 2023
Blog
2 min read
Summary
Employee referral programs are valuable for recruiting, but CFOs may doubt their cost-effectiveness. This article discusses reasons for such doubts and offers strategies to persuade CFOs of their worth.

Employee referral programs have long been a staple in the world of recruiting, offering numerous benefits such as reduced hiring costs, faster recruitment processes, and a higher likelihood of finding quality candidates. 

However, in some organizations, the Chief Financial Officer (CFO) might question the cost-effectiveness of such programs, leading to a potential threat to their continuation. If you find yourself in a situation where your CFO is looking to shut down or reduce your employee referral program, fear not! 

In this article, we will explore the reasons behind this decision and provide strategies to convince your CFO of their value.

Understanding the CFO's Perspective

CFOs are often driven by the need to optimize budgets and cut unnecessary expenses. When they question the employee referral program, it's likely because they want to ensure the organization's money is well-spent. Two common reasons a CFO may want to shut down or reduce the program:

1) Lack of Measurable ROI

Many CFOs seek concrete data that shows how the program contributes to the company's bottom line. If you cannot provide this evidence, they may be inclined to discontinue it.

2) Concerns About Costs

CFOs are accountable for cost control, and if they believe that the program is too costly compared to other hiring methods, they may want to eliminate it.

Start Speaking CFO Language

If you believe that the employee referral program is worth preserving and can address the CFO's concerns, here are the key points to put forward to them:. 

1) Reduction in Cost-per-Hire

It is crucial to calculate the average referral bonus paid in a given year and compare that to your average cost-per-hire. When calculating your cost-per-hire, make sure to take into account your spend on job boards, recruitment agencies, and advertising (and often third-party contract labor). For instance, if your average referral bonus is $2,000 but your cost-per-hire is $3,500, it will be clear for your CFO that each referral is saving you $1,500. If your average referral bonus is higher than your average cost-per-hire, don’t worry. You can still identify savings with other strategies mentioned next. 

2) Reduction in third-party contract labor 

One of the highest costs, especially in healthcare, is third-party contract labor – which is mainly brought about when the recruiting team is unable to find enough staff to cover its organization’s operations. If you can clearly show your CFO that employee referrals have reduced your reliance on third-party contract labor – hence, reducing your premium bill for such staff – it will be clear that a $-ROI exists from your employee referral program. 

Take all the roles you filled with a referred hire and calculate how much it would have been if these roles were filled with 3rd-party contract labor. 

3) Reduction in backfilling costs 

This advantage is often overlooked as it’s slightly harder to calculate. However, one of the biggest advantages of a referred employee is their higher retention. According to iCIMS, referrals stay 70% longer than non-referrals. However, to your CFO, that means nothing unless you can show savings generated as a result. 

A simple method to show this is to calculate how much it costs you to hire, train and onboard an employee (Let’s say it’s $2,000). Next, find out how many employees you typically have to hire for the same position in a 5-year period (Let’s say it’s 10 – since your employees stay an average of 6-months only). This means that backfilling this specific position costs $20,000 in 5 years. 

Next, find out how much longer do your referred employees stay at your company (Let’s say instead of the typical 6 months, you find that they stay 10 months). This means, if all were referred, you’ll only need 6 employees to backfill this position in a 5 year period, instead of the typical 10. Hence, your backfilling costs for this specific position drops from $20,000 to $12,000 in a 5-year period. So, that’s $1,100 of savings every year. Multiply that by your open reqs and then your average referral rate. 

For example, if you’re having to fill 1,000 reqs every year and 30% of them are referrals → that’s ($1,100 backfilling savings) x (1,000 open reqs) x (30% referral rate) = $330,000 of savings annually. 

4) Reduction in time-to-hire / Revenue per employee

The average employee referral takes 13 days less to hire. But what does this mean for your CFO? Similar to backfilling costs, it means nothing unless you can show a clear ROI. One way to do so is to find out what your organization’s annual revenue per employee is. 

This is calculated by taking your organization’s or a specific division’s revenue and dividing it by the number of employees in your organization or that specific division. 

For instance, if your organization has a revenue of $1.2B and has 15,000 employees, your annual revenue per employee is $80,000. This means that for every day a role stays vacant, your organization loses $307 (Note: there’s 260 working days in a year). So, if your employee referral program can reduce your time-to-hire by 13 days, that’s $3,991 revenue generated per employee referral. 

Now, multiply that $3,991 with the total number of employee referrals you had in a given year. 

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By understanding the CFO's perspective and presenting a compelling case based on data and clear $ ROI, you can make a strong argument for the program's continued existence. Employee referral programs, when executed correctly, can be a powerful tool for efficient, high-quality recruitment, and their value should not be underestimated.

See how Eqo can help you enhance your employee referral program with in-depth admin analytics.

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