Referral bonuses seem like a win-win. The referred employee gets a great new job, and you get some extra cash.
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But where money is involved, there can also be hard feelings.
Here’s an example: A woman I know helped a friend get a job at the pharmaceutical company where she worked. When the friend started in the new position, the woman who passed along her resume asked her out to dinner to celebrate. The recent hire was thrilled. In fact, she almost felt guilty allowing the woman to pay for her meal—until she found out about the large sum her companion pocketed simply by making the referral.
During the new hire’s orientation, she learned from the human resources department that the “finder’s fee” was a generous $2,500. Suddenly that dinner didn’t seem like much after all. Was she right to be disappointed?
Some would say she should be happy just to have a job. But others argue that an equitable split of the bonus is only fair.
It’s a tough call, so I spoke with etiquette expert Lizzie Post of the Emily Post Institute to find out: Is there proper protocol when it comes to referral bonuses?
Post, the great-great-granddaughter of the famed manners maven, says it’s largely a situational question with no clear-cut answer. So, before you split the check, here are a few things to keep in mind.
Consider the Referral Relationship
Post points out that if you’re the one seeking out potential employees and doing all the legwork (e.g., connecting with job seekers in your network and inviting them to apply), “That money is yours.”
On the other hand, it might be fair to divide the bonus if two colleagues have the same mutual friend in mind for the position, she notes.
Another case for offering a kickback might be if a third party (say, a friend who doesn’t work at your company) knows your company is hiring and suggests a friend of theirs who just happens to be perfect for the job. All of a sudden, you have someone to refer—even though you’ve never met. Post says at that point, you may want to offer something to the person who brought the new hire to your virtual doorstep.
However, since you’re the one putting your reputation and your name on the line, it’s still up to you to decide if you’re willing to share the love.
Size Matters (Maybe)
Generally, the value of referral incentives ranges from $250 for entry-level positions to more than $25,000 for top executives, with the most common bonus falling between $1,000 and $2,500, according to a survey by Worldatwork.
While most people wouldn’t think of asking for a cut of a small award, if you stand to gain a substantial sum and know that your referral will find out once he or she accepts the position, you may feel like it’s the proverbial elephant in the room, and be more inclined to share.
The New Hire Will Have the Same Bonus Opportunity
Post says while it would be extremely rude for the new hire to bring up the bonus, if he or she did, it would be fine to explain that that’s how the company works and if he or she eventually refers someone, he or she will benefit from the same policy.
Post adds that it’s common in the business world to motivate certain behaviors with financial rewards—so it shouldn’t come as a surprise to either party that there’s a reward for bringing a valuable asset onboard.
Personal Finance is Just That—Personal
According to the etiquette guru, the biggest takeaway is that “money is something really personal and no one needs to know how much you make or why you’re making that amount.”
If the new employee presses you for details, Post explains, “You could say something like, ‘Pat, I’m really glad that you’re going to be working here and I think you’ll be a great addition to the team. I would have referred you with or without the bonus, but I don’t discuss my compensation with anyone.’”
If you decide to split the prize in some way, it’s completely at your discretion, notes Post. But don’t forget—no matter if you split the cash, you (and you alone) will be taxed on the full amount.
Depending on your comfort level and the nature of your relationship, you may feel compelled to share a portion of your referral bonus or express your best wishes in another way, like taking the new hire out for lunch, drink, or a celebratory drink. Whatever you choose to do, remember you went to bat for this person and were awarded for your efforts, and the new hire has the benefit of a brand-new career. So really, it’s a good situation—for everyone involved.
If you decide to split the prize in some way, it's completely at your discretion, notes Post. But don't forget—no matter if you split the cash, you (and you alone) will be taxed on the full amount.
The employee referral bonus that you would offer for help hiring for this position would then be higher than that for an entry-level position because they provide more value to your team than the previous category; anywhere from $500 – $2,000 is a reasonable amount that will both incentivize your current staff to ...
The short version? Agencies typically pay referral fees of 5% to 10% of the revenue they receive—but there's plenty of nuance on how you handle it, and many agencies pay 0% in referral fees. You'll want to get advice from your lawyer on specific language, and your accountant on how to handle the money.
Since employee referral bonuses are considered supplemental wages by the IRS, these types of bonuses are subject to taxes. Companies will usually: Tax gross-up for the bonus amount. Gross-up means a company will pay an employee to offset additional taxes.
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.
'” If you decide to split the prize in some way, it's completely at your discretion, notes Post. But don't forget—no matter if you split the cash, you (and you alone) will be taxed on the full amount.
It is sometimes called a finder's fee and is used in many industries, like insurance, real estate, and retail. The fees, typically in cash, could be anywhere from 5% to 25% of the total sale, depending on the type of transaction.
Generally, a healthy referral rate is around 2%, although some industries (such as SaaS) have referral rates as high as 3-5%. Improve referral rates with double-sided rewards, strategically timed emails about your program, an optimized friend experience, and software automation.
Over 70% of organizations offer monetary incentives, with the average employee referral bonus ranging from $1,000 to $5,000, to those who refer potential job candidates. Referral hires exhibit an impressive 46% average retention rate, contrasting with the 33% for online job postings.
If you are an employee (you get a W-2) you cannot deduct any business expenses. If you are self-employed you can deduct the entire referral fee as a business expense on Schedule C.
The 1099-MISC is used for things like gifts and prizes, while the 1099-NEC is for self-employment income. Since a referral bonus is more like a prize than self-employment income, the 1099-MISC is the correct form.
Referral bonuses are a popular way for companies to attract top talent and expand their network of potential candidates. By offering an incentive to current employees who refer new hires, companies can tap into their existing workforce to find qualified candidates who may not be actively job searching.
The average employee referral bonus is $2,500, but the payout should be more or less depending on the impact of the role and how difficult it is to recruit qualified candidates. Pro tip: If you decide to offer cash for your referral bonus, it's best to use a tiered system.
The best range I've seen is between $3k - $5k. However, I've also seen non-cash referral programs and referral bonuses such as paid trips, donations, or gift cards, which can be easier to absorb for company budgets that are tighter.
The effectiveness of your referral program can vary widely based on industry, product, target audience, and various other factors. However, a good referral rate often falls between 2% to 5% of the total customer base. This means that 2% to 5% of your customers actively refer others to your business.
Typically a healthy recruiting organization has a referral rate of 35% – 40%. Participation Rate: What percentage of your workforce is participating in your employee referral program? You should aim for at-least 50%. Low participation may indicate issues with program engagement, communication or referring experience.
What is a typical bonus? What's considered “typical” or “good” for a bonus amount really depends on the type of bonus you're receiving. An annual bonus of 5-10% of your yearly salary is standard in a lot of industries, just as a 5-10% annual raise is considered standard.
A referral bonus percentage is a percentage of an employee's salary that is paid as a bonus when they refer someone who is subsequently hired by the company. The percentage is usually a small percentage of the new hire's salary, and the exact percentage varies depending on company policies and practices.
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