How Referrals Can Result in Lower Pay

Have you ever been referred for a job by a friend or family member? You might think that a referral would give you an advantage in the hiring process and lead to better compensation.

However, referrals can actually result in lower pay, particularly for women and minorities. This can also be a big concern for employers who may be unwittingly undermining Diversity, Equity, and Inclusion initiatives while creating a culture of nepotism in the workplace.

coworkers sitting around a table

How Can Referrals Impact Compensation?

According to a study by PayScale, referrals do not always lead to higher pay. In fact, the study found that people who were referred to a job by a friend or family member earned 6.3% less than those who were hired without a referral.

This might seem counterintuitive. After all, referrals have been a popular way for filling empty roles, with some employers going so far as to reward bonuses for successful referrals. For job seekers, referrals are often touted as a way to get a foot in the door and gain an advantage in the hiring process. As well, some employers view referrals as a way to save time and money on recruitment while also benefiting from the endorsement of a current employee.

However, the PayScale study suggests that referrals might actually lead to lower pay because they can perpetuate existing inequalities. If the majority of an organization’s employees are white and male, for example, they are more likely to refer other white male candidates.

Studies have found that everyone is more likely to receive a starting salary that is an average of $1,600 lower. Women referred for jobs earned an average of $3,700 less than their male counterparts. Minorities also suffer, earning an average of $1,700 less than non-minorities when referred. This can create a cycle of homogeneity, where people who are already part of the in-group are more likely to be hired and earn higher salaries.

Leaning on Referrals Can Lead to a Culture of Nepotism

The negative effects of referrals on compensation are particularly pronounced for women and minorities. 

The Payscale study also found that women who were referred to a job earned 2.3% less, while men who were referred earned 1.1% more than men who were not. Similarly, people of color who were referred to a job earned 1.9% less.

In this way, referrals can perpetuate a culture of nepotism, where people who are well-connected or related to current employees are more likely to be hired and promoted. This can limit opportunities for qualified candidates who are not part of the in-group and can also create a workplace culture that is resistant to diversity and inclusion. So not only are you likely to be paid less with a referral, but you may also be accepting a role in a company that does not share your values. 

coworkers discussing pay

Addressing the Challenges with Referrals

Employers may not be as concerned about having to pay employees slightly less, but they should be concerned about the effects of a waning commitment to diversity, equity and inclusion. When the makeup of a company becomes overtly based on referrals, employees can begin to feel less valued and less engaged, which hurts the company’s bottom line. 

So, what can be done to address the negative effects of referrals on compensation and diversity? One approach is to implement referral programs that are designed to promote diversity and reduce bias. For example, some companies offer bonuses or other incentives to employees who refer candidates from underrepresented groups or who refer candidates who are not already part of the company’s demographic majority. However, this approach is not without its own pitfalls.

Another approach is to supplement referrals with other forms of recruitment, such as working with career/hiring matching professionals. By casting a wider net and actively seeking out diverse candidates, employers can mitigate the homogeneity that can arise from relying too heavily on referrals.

Finally, it is important for employers to address the underlying biases and systemic inequalities that can perpetuate discrimination and create a pay equity gap, especially for women and minorities. The solution is a commitment to diversity and inclusion at all levels of the organization, including an internal audit on the impact that referrals have on the makeup and pay equity of the organization.By turning to professional job matchers like KanagrooStar, job seekers and employers can bypass the pitfalls of referrals. KangarooStar offers a game-changing platform so that instead of hiring someone’s brother-in-law or friend, you can leverage the benefits of algorithms and data to truly hire the best person for the job.