Two Friends Whispering Secrets in the EarStudies from the likes of Silkroad, Jobvite, CareersXRoads and the even the U.S. Department of Labor all tell us that employee referrals are the No. 1 source of hire, generally being more influential than the almighty jobs boards and career sites, the golden gateway to employment for the mass market job seeker.

Research by Evolv has also shown that, during the first 200 days, referred workers are more productive due to them having a more realistic view of the job and better internal networks. The Evolv survey also showed that referred workers are 20 percent less likely to quit their jobs.

It’s no surprise then that more and more companies are starting to increase their dependence on word-of-mouth hiring/employee referrals – and of course this paradigm shift has been greatly assisted by social technologies. Yes, a New York Times piece shows that employee referrals now account for 45 percent of non entry-level placements at Ernst and Young, which is up from 28 percent in 2010. The piece also cited a Federal Bank of New York study which revealed that referred candidates had a 40 percent better chance of being recruited than other candidates. It seems like we are entering a new age of highly efficient and effective referral based recruitment which will eventually banish all other more meritocratic forms of recruitment to the graveyard (or at least into the outer recesses of corporate dark space).

But, this all sounds too good to be true, doesn’t it? Well, your suspicions are right; all that glitters is not gold. While I am in no way going to launch a tirade on the evils of using employee referrals in the selection process, there are certain perils and pitfalls of this form of hiring that I wish to draw your attention to, in particular, the potential negative impact that employee referrals can have on your company’s diversity agenda.

For example, the Federal Bank of New York study mentioned above showed that 63.5 percent of employers referred applicants of the same sex and 71.5 percent favored the same race or ethnicity. So, the more that a company increases its dependency on referrals, the bigger the negative impact on its diversity agenda. We already know that there is a natural tendency for people to want to hire others who they like, share interests with and can be friends with, as shown in the study, Hiring as Cultural Matching: The Case of Elite Professional Service Firms.

This means that too high a dependency on employee referrals can mean that an increasingly homogeneous stream of applicants will be entering the hiring process. In other words, heavily relaying upon employee referrals can lead to a monoculture.

While monocultures may be great for social cohesion, they are bad for business. For example, a study of 14,000 leaders by Talent Innovations concluded that organizations need a balance of both male and female leaders if they are to be truly effective. Another study by the Credit Suisse’s Research Institute of 2,400 leaders between 2005 and 2011 showed that stocks with at least one woman on the board outperformed those with no women on the board by 26 percent. Another report by DiversityInc showed that over a 10-year period, the top 50 companies for Diversity outperformed the Nasdaq by 28 percent, the SP 500 by 25 percent and the Down Jones Industrial Average by 22 percent.

So, 1) since monocultures have been shown to beto some degreedetrimental to modern business and 2) since a side effect of employee referrals hiring is increasing homogeneity of the workforce, employers should strike a balance between employee referrals hiring and hiring on the open market. What is the right ratio? There isn’t a specific number, but the rule of thumb from The New York Times article seemed to be to not go over the 50 percent mark for employee referrals hiring versus open market hiring.

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