Performance-Contingent Referral Contracts
RCTClinical Trial
Employers frequently rely on social networks to source job applicants, but standard fixed-fee referral systems cause workers to refer family members and close friends for social or risk-sharing reasons rather than selecting highly productive candidates.
Picture this
Think of a talent scout who gets paid a small flat fee just for bringing anyone to try out for a sports team. The scout will naturally bring family members or friends who want the easy payout or favor. But if the scout's pay is tied directly to how well the new player actually performs on the field, the scout switches gears and invites the most skilled teammate from a previous league instead of a relative.
What the evidence says
High-stakes performance pay reduced the probability of referring relatives by 7 percentage points (from a baseline of under 15%) and increased the probability of referring coworkers by 8 percentage points (from a baseline of 12%, p < 0.05).
- Who was studied
- N = 561 original male participants drawn from a random sample of households in urban Kolkata, India.
- How
- Lab-in-the-field randomized controlled trial (RCT) comparing fixed finder's fees against performance-contingent finder's fees for referring network members to complete cognitive tasks.
What to do
Structure workplace employee referral incentives so that a significant portion of the referral bonus is contingent on the referred candidate achieving specific, measurable on-the-job performance benchmarks.
From the source
"When individuals in our study receive performance pay, so that their finder's fee depends on their referral's performance, they become 7 percentage points less likely to refer relatives, who are more integrated into our respondents' risk-sharing networks according to the survey data."
468 Job Referrals in India AER Dec12.pdf