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Hiring bonuses in tech companies

I finally realized the answer to something that had been bothering me for years: why is it that so many “good” companies pay such small referral bonuses (the cash payed to an employee when they successfully find a friend/ex-colleague/etc to fill an open position at the company) ?

The Maths of Referral

This is taken from the games industry in the UK … the situation differs from niche to niche of the software industry, the actual figures will vary, but the overall outcome is the same.

Approximate salary for a moderately hard-to-find good programmer (in the games industry: usually a “senior programmer” or a “lead programer”): £50,000

Approximate percentage commission charged by basic recruitment agency (non-headhunter): 20% of first year salary

Total cost to hire a new employee via an agency: £10,000

Typical hiring bonus / referral bonus paid to existing employee if they find and recommend someone, INSTEAD of them coming via an agency: £1,000

In the games industry, the vast majority of all hiring is done by these two methods. It varies from studio to studio, but it seems to tend to be more via agencies (perhaps 40%-70%) than by referrals (perhaps 20%-40%).

The quality of staff from referrals is generally agreed – publically, at least – to be much higher on average than those from agencies. Usually hiring managers and HR departments will talk about “known quantity” and “pre-approved to work with the team” and such like. Games industry companies, being entirely software driven (apart from a very small number of exceptions), typically spend as much as 80% of their budget for each project on salaries and on-costs (miscellaneous spending on their staff).

So … why on earth do these software companies pay the 10k fee so often, and not raise that 1k fee to try and make the referral happen more often?

If at first you don’t succeed…

After prodding and probing, and pointing out the flaws in the first, somewhat dumb, answers I get, I usually get an answer something along the lines of:

Raising the referral fee does not significantly increase the total number of successful referrals are made; we’ve tried it before, it didn’t work.

There are a bunch of obvious objections to this, any of which may or may not be valid in a given situation, but which you can’t really ignore (was the policy publicised properly, was it run for a long enough time, was it run at a time when the job market was just at a very bad time anyway, etc). However, I have long felt that all that was trumped by the simple one of:

If your company is entirely driven by your people, and you’re doing this hiring bonus stuff in the first place because you need to hire extra candidates of great quality, surely you should also be rewarding your current (brilliant) staff as much as you possibly can? It even makes *arguable* financial sense (i.e. enough that you can probably persuade the senior management to do it even if the CFO is claiming it isn’t “working”)

A little story

I recently spoke to an old friend about what I was doing, and it turned out he was really interested in coming to work for the company I currently work at (he hadn’t realised I was working here until that moment). He knew I was some kind of manager, and asked what was the “best” way of going about getting on to my team.

I was momentarily thrown by the question, because he’s very experienced in industry, and would know he should just send me a CV, and I’d forward it to HR (standard practice). The fact he was asking made me think for a moment, and the true answer to the “best” way of doing it opened my eyes.

We’re good friends. If I got a referral bonus for hiring him, I’d share a lot of it with him. Likewise, if he gets a good salary at the new employer, I’m going to benefit from that (free drinks for months, etc :)). In the end, the “best” route is for us to both work together to maximize our total payoff.

So what we should have done is:

  1. I tell him the name of the best recruitment agency we’re already using
  2. He signs up with them, and specifies he ONLY wants to be interviewed at our studio, for a specific advertised job (this is fairly standard practice for good candidates with specific skills)
  3. They put him forward for interview, I don’t comment except to recommend him as someone I know when the CV comes to us

Why? Because at my current employer, the referral bonus is a mere £500, and the good agencies have professional negotiatiors working to get the best salaries for the people on their books – not as good as having an Agent, by a long way, but a lot better than nothing. My friend is a technical person, so not particularly skilled at salary negotiation. He’s pretty much guaranteed to get AT LEAST £1,000 more salary if he has an agency negotiate it on his behalf (they’re on commission-based pay, so they benefit from getting higher rates).

And, sad though this is to say, companies tend to value more highly what has cost them more, so even though it would cost the company a lot more to hire him this way, they’d probably value him substantially more than someone else on the same salary (agency fees are applied ON TOP OF the salary, and it’s a hard rule that the employee doesn’t get paid less because of it). So it would probably increase his chances of being treated properly by the employer (who is still an unknown quantity to him right now, even though I’m saying they’re OK).

Good companies

And now, finally, I understand how it is that so many “good” companies have settled down around the 1k level for referrals. Good companies tend to be run to be as profitable as possible, with a good balance of treating people reasonably well, because that clearly helps with profits even in the relatively short term.

Good companies won’t be looking at referral bonuses with any great scrutiny – they have many other things to worry about, that are a lot harder to get right, and which their competitors are beating them on. So, they do a kind of quick approximation to a “good” solution: they pay just enough in referral to offset the expected advantage that an employee would personally derive from going via an agency. Hopefully just enough to discourage the use of agencies.

This directly reduces the headline expenditure of that big, nasty, £10,000 fee – and probably does more to reduce it than any other *single* action.

Bad companies

Bad companies see referral bonuses as “paying people extra to do something they damn well ought to be doing anyway”, and don’t pay them. I’m not going into how short-sighted (and plain greedy) this is – that should be self-evident, I hope (unless anyone reading this can’t see it, in which case fill in a comment in the form below…).

Referral bonuses at these companies tend to be zero, with occasional exceptions for named individuals (whether because they were blackmailed into paying them, or as a special non-salary reward for tax reasons, I don’t know – I just know I’ve rarely seen companies where a “no referral bonus policy” was ever completely adhered to).

In the games industry in particular (maybe other software industries too, but I’ve not seen enough in enough detail to be sure), the bad companies also tend to do detailed breakdowns of different bonuses by profession, department, and usually even the actual specific project. This tends to be nothing more than an attempt to shave off the bonus actually paid, to pare it back as much as possible. A lot of mediocre and poor managers really hate “giving away” money like this, and do their utmost to avoid it (usually whilst blowing a lot more than that each time one of their staff leaves, because they have no idea how much it costs the company to replace a single member of staff, and so screwing up the money-saving plan entirely).

Great companies

Great companies like to hire great people (there’s a famous phrase about that somewhere…), and that means that the people they’ve hired very quickly work out for themselves when New Hire X has just cost the company a 5-figure sum in immediate payment to a recruitment agency. They also tend to quickly be able to think of 5 or 10 other things their team (or even they personally) could have done with that extra budget if it had been given to them gratis.

And, after all, most companies seem to agree that “referred” staff are as good as or better than “agency-recruited” staff. Which implies they’d be happy to pay *at least as much* for the former as for the latter.

So, great companies are more likely to have something approaching parity in the payments for referring someone to a position and the cost it would have taken for an agency to fill that position. Yes, that really does mean paying many thousands of pounds for each individual successful referral. Agency fees can be negotiated down, depending on circumstance, and there are some small fringe benefits, so I’ve typically heard of the referral bonus being around 70% of the expected agency fee, or perhaps 90% of the “minimum” agency fee (for agencies with contextually-varying fees).

Enough that your highly brilliant, great people at least feel it’s close enough to parity not to be bothered by it. They’re great people; they assume there are factors they don’t know about: they’ll forgive a few tens of percent difference.

No, I don’t work for a great company, I work for a good company. But I keep trying to make it more of a great one every day…

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