What Do Employee Referral Programs Do? Measuring the Direct and Overall Effects of a Management Practice

Employee referral programs (ERPs) are randomly introduced in a grocery chain. Larger referral bonuses increase referrals and decrease referral quality, though the increase in referrals from having an ERP is modest. However, the overall effect of having an ERP is substantial, reducing attrition by roughly 15% and decreasing firm labor costs by up to almost 3%. This occurs, partly, because referrals stay longer than nonreferrals, but, mainly, because all workers stay longer in treated than control stores, even among stores where no referrals are made. The most-supported mechanism for these indirect effects is that workers value being involved in hiring.