Employee referral programs are the best source of new hires. More importantly, they’re the best source of quality hires. Employees hired through employee referral programs have better retention and productivity than employees hired through other methods, and the associated hiring costs are also lower.

What should employers look out for when designing or managing an employee referral program? Like any employee program, there are benefits and pitfalls, and employers must be aware of both for a program to run successfully.

Bottom line – you must continually manage your employee referral plan by staying current with your company’s needs, the employees’ desires, and the modern workplace to make sure that you’re running an effective program. Manage your ups. Manage your downs.

Let’s dig into the truth about employee referral programs.

Employee referral programs are a cultural litmus test.

Your employees are your best brand ambassadors. They can sing your praises from the mountaintop or tell their friends and acquaintances that they would never want to work at your company. A good employee referral program is only as good as your culture.

If your employees refer their friends to you for jobs frequently, and there’s excitement in the air, congratulations! You’ve got a great culture.

If you ask, encourage, and beg your employees to refer their friends to your company, and you hear crickets? Then, your culture probably needs some work. Your employees aren’t going to refer their friends to come work for you if they can barely stand it themselves – no matter what the referral bonuses are.

Think of your employee referral program as a cultural litmus test. Even though it’s being used to recruit new talent to your organization, your referral program can provide you with insight on your culture. If your culture is excellent, with lots of energy, fantastic. Do you know why? What is it that your employees like? Love? Why are they referring?

You can use this information to attract more great people to your organization. And, you want to keep doing what you’re doing to retain the fantastic employees you currently have.

If your employees aren’t referring, it’s time to sit down and have some hard discussions. What’s not working? What’s working? What needs aren’t being met? What needs to change? Why wouldn’t your current employees want a friend to work for your company?

If you’re going to move forward, you need to fix where you are.

A company’s culture can make or break a company. A company’s cultural feel starts at the top. It’s good for every company to review and work on culture regularly. It’s important to your employees, and therefore, it should be critical to you.

They’re also a strategic hiring method.

Employee referral programs are more strategic than other hiring methods. Unlike other recruiting methods, the candidate is typically pre-vetted before the first interview since he/she is known and vouched for by the employee. This pre-vetting is not only done for skill sets but also for cultural fit.

To optimize an employee referral program, the program must be set up with identifiable parameters and processes for the organization’s current employees. For example, if a high number of referrals come in every year, employees have to understand that not every referral will get hired. Further, specific high-level referrals may get treated differently than referrals for other job openings. Employees also need to know how the incentive program works for referrals – if they don’t feel incentivized to refer, they probably won’t.

They can help your diverse hiring initiatives, if you get it right.

Diversity and inclusion aren’t just buzzwords in recruiting. Diversity can improve engagement, retention, profits, and a company’ culture, as well as attract new talent – employees today want to work at diverse companies. So, it makes sense that employers want to hire a diverse and inclusive workforce. Achieving this starts in the recruiting process. If you execute your referral program well, you can drastically improve your diverse hiring.

In many employee referral programs, encouraging diversity is tricky for employers. It’s common, when referring candidates, for employees to refer friends that look like them – perhaps because of inherent natural bias, or maybe because they’re closest friends happen to also be part of their specific demographic. To counter this bias, employers can include inherent bias training with current employees as either part of their onboarding process, or when setting up their employee referral program.

Employers can also directly encourage employees to refer friends or acquaintances who are more diverse. Companies can give extra rewards or incentives to employees who refer women or other underrepresented groups to positions at that company. It’s a great way to get people to start thinking about and acting on diversity needs.

The compensation structure of your program matters.

It’s common for employers often offer cash bonuses to employees for good referral hires. Cash bonuses serve as an enticing incentive for solid referrals and encourage employees to refer other potential candidates to the organization as positions open. And, when you have employees who are serving as brand ambassadors, it’s nice to reward them with supplemental income for filling this role.

Don’t depend on cash as your primary motivator for employee participation in your program, though. If cash is the only only motivator, you might end up with some bad referrals from employees hoping to somehow hit the cash bonus jackpot. Relying on cash bonuses tends to emphasize quantity over quality – one of the problems you’re trying to avoid in setting up your referral program. The goal is that your employees understand the purpose of the program, and if your only reward is cash, you might create additional problems for yourself.

Make sure you educate your workforce on your employee referral program. Make sure that there is a robust process set up. Make sure everyone understands the purpose and the parameters. Make sure you monitor the program for any pitfalls.

Your employee referral program brings in… referred candidates.

Sounds obvious, but it’s important to remember that once your employees start making good referrals, you’ll start interviewing referred candidates. It’s the goal of every referral program to interview, and hopefully hire, outstanding candidates referred by your employees . But you can’t forget that a referred candidate thinks, and acts, slightly differently than a passive candidate.

You want your candidates to have a fantastic experience during the recruiting process. The candidate was referred to you by a current employee, so more than likely, they already have the skinny on the job, the company, some other employees, and possibly, you.

It’s important that the candidate doesn’t feel like they’ve got a price on their head once they learn about the compensation structure of the referral program. The referred candidate may question the intentions of the employee who referred them: (1) Was it because they wanted to help? (2) Or was it because they wanted the cash?

Once a referred candidate is hired, you have to watch out for cliques. It’s a little high school, but friends often stick together at work. The new hire and employee that referred them know each other, have a history, have inside jokes…see where this is going?

Make sure that the candidate feels valued during the recruiting process. Make it an experience from beginning to end. Make sure the referral doesn’t feel like a bounty. And, if hired, make sure that the candidate, now employee, gets the opportunity to work with many other employees – this will help you avoid the exclusive friendship circle problem.

There is no question that employee referral programs remain one of the best ways to recruit top talent. As long as employers are aware of some of the potential pitfalls, organizations can build and manage effective, diverse, rewarding referral programs for their organizations.