Employee Referral vs External Hiring: Which Method Is Better for Your Business?

Hiring the right people is crucial for any business, but the way you go about it matters too.

Should you rely on employee referral programs or stick with external hiring?

Both approaches have their perks and challenges, and knowing when to use each can make a big difference in building a strong team.

In this article, we’ll break down what employee referral programs and external hiring are, compare their advantages and drawbacks, and help you figure out which method works best for your hiring goals. Let’s dive in!

What are Employee Referral Programs?

Employee referral programs are structured initiatives where companies encourage their existing employees to recommend qualified candidates from their network for open positions.

According to the Society for Human Resource Management (SHRM), these programs are among the most effective recruitment methods, often leading to faster hiring processes and higher-quality hires.

By leveraging employees’ connections, companies can tap into a pool of talent that might not otherwise be reached through traditional hiring methods.

How They Work

Employee referral programs typically involve offering incentives, such as bonuses, gift cards, or recognition, to employees who successfully refer a candidate.

The process is simple: employees submit their referrals through an internal portal or to the HR team, who then evaluate the candidate like any other applicant.

These programs can be seamlessly integrated into hiring strategies by promoting them during team meetings, via internal communications, or through a dedicated referral platform, ensuring employees are motivated and aware of the benefits.

What is External Hiring?

External hiring refers to the process of recruiting candidates from outside the organization to fill open positions.

This method brings fresh talent, diverse perspectives, and new skills to a company.

External hiring is crucial for roles requiring specialized skills or when internal talent pools are insufficient.

By reaching out beyond the organization, businesses can attract a wider range of candidates who may bring innovative ideas and solutions.

How They Work

External hiring typically involves several approaches, including posting job openings on online job boards, partnering with recruitment agencies, attending career fairs, and using professional networks like LinkedIn.

Employers may also invest in advertising on social media or leveraging employee networks to widen their research.

Each method offers unique advantages, such as broader visibility through job boards or access to pre-screened candidates via recruiters.

It allows companies to tailor their strategies based on specific hiring needs.

Employee Referral Programs vs External Hiring: Key Differences

Choosing between employee referral programs and external hiring depends on your business goals and resources.

While both methods have their strengths, understanding their differences can help you decide which approach suits your hiring needs.

Here’s a quick comparison:

Aspect	Employee Referral Programs	External Hiring
Cost	Lower cost per hire since sourcing expenses like job ads and recruiter fees are minimized.	Higher cost due to job advertisements, recruiter fees, and extended onboarding processes.
Time-to-Hire	Faster, as referred candidates are often pre-qualified and move quickly through the process.	Longer, as it involves sourcing, screening, and interviewing a larger pool of applicants.
Candidate Quality	Often yields high-quality candidates who are a strong cultural fit, thanks to employer recommendations.	Provides access to a broader talent pool, though candidates may need more thorough evaluation.
Diversity	Can result in homogenous teams, as employees may refer people with similar backgrounds.	Better for promoting diversity and bringing in fresh perspectives from outside networks.
Employer Branding	Strengthen internal engagement and boost employee loyalty through involvement in hiring.	Enhances company visibility in the job market and appeals to a wider audience.

This comparison highlights how referral programs excel in cost and speed, while external hiring is ideal for increasing diversity and market presence.

Both approaches can complement each other when used strategically.

Advantages of Employee Referral Programs vs. External Hiring

Both employee referral programs and external hiring have their own strengths, depending on your recruitment needs.

Let’s take a closer look at the advantages of each to help you make the right choice.

Employee Referral Advantage

1. Faster and cost-effective

Referral programs save time and money by skipping lengthy sourcing processes and reducing hiring costs like job ads and recruiter fees.

2. Better retention

Referred employees tend to have stayed longer due to better cultural fit, with “excellent conversion rates from interview to hire and longer tenure,” according to SHRM.

Referral programs help recruit top talent and improve retention.

3. Boost morale

Encouraging employees to refer candidates increases their engagement and creates a sense of involvement in the company’s growth.

External Hiring Advantage

1. Broader talent pool

According to US Bank, external hiring opens up access to a wide range of candidates with diverse experience and backgrounds.

2. Fresh perspectives

Bringing in external talent introduces new ideas and skills that can drive innovation and growth.

3. Builds branding

Posting jobs externally enhances your company’s visibility, positioning you as an employer of choice in the market.

Drawbacks of Employee Referral Programs vs. External Hiring

No hiring method is perfect. Both referral programs and external hiring have their downside. Let’s break down the challenges you might face with each approach.

Employee Referral Drawbacks

1. Limited diversity

Referrals often come from similar networks, which can lead to less diverse teams.

2. Bias in hiring

Personal connections may unintentionally influence hiring decisions, overlooking equally qualified candidates.

3. Narrow talent pool

Relying too much on employee networks can restrict access to fresh and varied talent.

External Hiring Drawbacks

1. Costly and time-consuming

External hiring typically involves higher expenses and longer processes due to advertising, recruiting, and screening.

2. Risk of poor fit

Candidates from outside may not align well with the company culture, leading to higher turnover rates.

3. Lengthy onboarding

External hires often require more time and resources for training and integration into the team.

When to Choose Referral Programs vs. External Hiring

Knowing when to choose a referral program over external hiring depends on your company’s current needs and goals.

Let’s take a look at the situations where each method shines.

Referral Programs: When to Use

Urgent or specialized roles

When you need to fill a position quickly, referrals can speed up the process with pre-qualified candidates.

Maintaining work culture

If you’re focused on maintaining a strong, cohesive work culture, referrals help ensure candidates fit in well.

Reducing turnover

Referred employees tend to stay longer, so if retention is a priority, referral programs are a great option.

External Hiring: When to Use

Expanding into new markets

External hiring helps bring in fresh talent with local expertise or knowledge of new industries.

Enhancing diversity

If increasing diversity is a priority, external hiring can help you access a wider range of candidates.

Sourcing highly specialized talent

When you need specific skills that aren’t available in your current employee network, external hiring gives you a broader pool to draw from.

Frequently Asked Questions (FAQs)

How to incentivize employee referrals effectively?

Offer attractive rewards, like cash bonuses, gift cards, or extra time off. Make sure to keep employees informed about the success of their referrals to keep them motivated.

Can referral programs and external hiring work together?

Absolutely! Combining both strategies can help fill roles faster and with diverse candidates. Use referrals for urgent or cultural-fit positions, and external hiring for specialized roles or when you need a broader talent pool.

What tools can streamline both processes?

Applicant Tracking Systems (ATS) and referral platforms can help manage both referrals and external hiring. These tools make it easier to track candidates, automate communications, and streamline the overall process.

How to ensure diversity with referral programs?

Encourage employees to refer candidates from diverse backgrounds by setting diversity goals and promoting inclusive messaging. You can also widen the pool by combining referrals with external hiring methods.

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