Referral Bonus: 3 Steps to Paying Employees Their Bonus (2024)

What Is a Referral Bonus?

Referral bonuses are a recruitment tool used by organizations to generate leads by rewarding employees who refer candidates for positions that are typically hard to fill. These are typically cash bonuses but can be paid in different formats such as paid time off (PTO), as vacation bonus

How Do Referral Bonuses Work?

Typically referral bonuses are awarded when a current employee recommends a candidate(s) for an open position, and the company hires the employee’s referral.

How Can Referral Bonuses Help Your Organization?

Offering referral bonuses has many advantages for the organization, such as a reduction in staffing cost, better candidate pool and increased employee retention.

• Reduced staffing cost. Organizations that utilize staffing agencies typically pay a rate or salary that is 25-100% greater than the hired employee’s salary or hourly wage. For example, if you agree to pay a hiring agency a rate of 25% for an open position with an hourly rate of $25/hour, that hourly rate would be $31.25/hour. By implementing an employee referral bonus program, you reduce this cost. Employees will sing praises about their experience with your organization with their network, a powerful word of mouth tool that brings their friends, family and former colleagues to your organization.
• Better candidate pool. Referral bonuses provide for a better candidate pool. Typically the bonus is tied to a length of service and performance, so employees are more conscientious of who they refer.
• Employee retention. Research has found that employees who are referred through a referral program are more likely to stay with an organization. ConveyIQ noted that “retention rates for referred hires are at 45% after two years, more than double the 20% retention rate for traditional hires.”

Popular Types of Referral Bonuses

Referral bonuses are typically monetary rewards; however, there are a number of other options to choose from, like tangible prizes or company recognition.

Financial Bonus

Financial bonuses are the most common type of referral bonus. In essence, employees are awarded a predetermined cash amount for their referral. The criteria of the award is set by the organization (e.g. length of stay, role level). Referral cash bonuses can be as low as $50 to upward of $2,500.

Social Bonus

Though not as common as a financial bonus, social bonuses are just as effective. This is when your employee receives social recognition for their referral. For example, during your organization’s town hall meeting, the CEO publicly praises the employee.

Altruistic Bonus

Altruistic bonuses are when your organization provides financial support in the form of a donation to a cause in the name of the referring employee. For example, a $500 donation was made on behalf of Jane Doe to the American Cancer Society after her reference was hired at the company.

Vacation Bonus

Vacation bonuses are bonuses awarded in vacation time, paid trips or monetary value towards your employee's travel expenses.

Custom Bonus

If you want your employees more invested in your organization's referral bonus program, consider a custom bonus. Custom bonuses are when both the organization and employees come to a mutual agreement on what the bonus award will be. When employees feel as though they're a part of something, which in this case is creating their bonus, they're more motivated to participate.

Tiered Bonus

Tiered bonuses are provided when the referred hire reaches key milestones. For example, after 30 days of service, the referring employee is awarded $100, and $200 at 60 days.

How to Pay Employees Referral Bonuses

Your referral bonus pay is contingent upon your current policies. There are three things you should consider when paying a referral bonus: the amount, when the bonus will be paid and any applicable taxes.

Step 1: Determine Amount

Before implementing your referral bonus program, you’ll want to determine the amount to be paid. Work with your finance team to help allocate financial support. By predetermining the amount, you can communicate with employees and remove potential surprises.

Step 2: Set a Time Period

Timing is essential to a successful referral bonus program. You'll need to determine if the payment will be split, paid in a lump sum, etc. Some examples of bonus payments are:

• One-third payments after 90 days, 180 days, and one year of service of the referred employee.
• Half of the bonus when the new hire starts and the other half after six months.
• Payment in full after 90 days of service.

Step 3: Withhold Taxes

Since referral bonuses are considered supplemental wages, they are also subject to taxes. Be sure to withhold social security and medicare taxes as well as state and local taxes, if applicable. Federal withholdings can be calculated at a flat supplement tax rate of 22% or by using the employee’s W-4 to determine the federal withholding for federal income tax.

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