So, I read this story yesterday about the employee who referred a friend and got screwed out of his referral bonus. People on Hacker News argued about “Name and Shame” and who was right and wrong but the first thought that popped into my head was “employee referral bonuses are pants on head stupid.”

Forget about this particular case and the collateral problems it’s causing. The employee referral bonus is just an intrinsically bad idea. Ostensibly the bonus exists to reward an employee for referring someone into a job. All it really does is distort the incentives in a way that can’t possibly be good.

Following is a list of reasons I want an employee of mine referring someone to my company:

  1. The person being referred is beyond awesome at what they do and we’d be fools not to hire them.
  2. Did you not read #1?

When I hold a $10,000 gun to the referrer’s head I’m distracting them from that one simple reason. When there’s no bonus involved there are people the employee will refer and people they won’t. With the money hanging out there a third category of people opens up: people the employee will refer if they can get $10,000. This third category is made up completely from the people the employee wouldn’t have referred if the bonus didn’t exist. I don’t want any of these people in the third category.

The absolute last thing I want to do is turn my employees into contingency recruiters and that’s exactly what the referral bonus does.

So if referral bonuses aren’t right how do you get your employees to refer great talent to the company and the company to great talent? Make your company such an awesome place to be and work that your employees naturally want to do that. Figure out what your employees want and then give it to them. Great health care, free lunch, 20% time…whatever. They’ll be so happy with you that they won’t be able to contain themselves when they find out a friend is looking for a job.

If you want to hear my thoughts on some of the responses to this post, read my follow up here