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Why job referrals can hurt a company's diversity

by Herb Weisbaum /
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Job applicants wait for the opening of a job fair.Lynne Sladky / AP file

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When it comes to landing a good job, knowing the right person can make a big difference.

Referrals can speed up the hiring process, but companies that rely too heavily on them may suffer “the unintended consequences” of creating a less diverse workforce, according to a new study by PayScale, a Seattle-based company that tracks compensation.

“Not all referrals are equal,” said PayScale Vice President Lydia Frank. “Employees who come in via a referral are more engaged, but we also saw that the people receiving referrals are overwhelmingly white men — and to a much higher degree than makes sense based on the representation of white men in the labor market.”

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The PayScale report is based on an online survey of 53,000 workers across the country between April and August 2017. Other key findings:

  • A referral from a former co-worker, colleague or client tends to benefit men more than women. Men can expect to be paid $8,200 more, while the bump for women is $3,700.
  • Candidates who are hired following a referral from a friend or family member are offered a salary that’s $1,600 a year less, on average, then those who were referred by a business contact.
  • Referrals overwhelmingly benefit white men more than any other demographic group. About 44 percent of all referrals are white men, while just 22 percent are white women.

Most employment offers do not result from a referral. The PayScale survey shows that about one-third of current employees (34 percent) received one. These recommendations are more important in the construction industry (55 percent) and less important for health care and retail positions (both 31 percent).

Contrary to what many believe, the reliance on referrals in the tech field is pretty much in line with most others U.S. industries — 35 percent of the tech workers surveyed said they had received a referral.

Why referrals can be a double-edged sword

Research shows that people who are hired based on a referral are happier with their work situation and less likely to leave. So it seems like a no-brainer that companies would take advantage of these recommendations. In fact, many companies now offer financial rewards — in some cases, thousands of dollars — to employees who provide successful referrals.

But as PayScale cautions: Basing hiring decision on referrals can result in a less diverse workforce. The report calls this “the ugly side of referrals.”

Their survey found that holding all else constant, women of any race and men of color are much less likely to receive referrals than their white male counterparts: White woman are 12 percent less likely, men of color are 26 percent less likely, and women of color are 35 percent less likely to be referred.

“While it can be tempting to lean on employee referrals as a primary source, it’s important for organizations to understand who is not getting referred this way,” Frank said. “Relying too heavily on referrals can come at a cost to businesses and result in a homogenous culture with a deficit of diverse thinking.”

“We’re referring people who look like us or who are like us — our friends and neighbors, people we like."

“We’re referring people who look like us or who are like us — our friends and neighbors, people we like."

Elizabeth Umphress, associate professor of Management at the University of Washington’s Foster School of Business, was not surprised by these findings.

“Referrals can be very discriminatory,” Umphress told NBC News. “We’re referring people who look like us or who are like us, our friends and neighbors, people we like. This is actually one of the reasons that we see systematic hiring discrimination against women and other minorities within our society.”

Experts agree that diversity in the workplace is more than a politically correct goal. It has intrinsic value to the organization.

“We know that access to a diverse set of perspectives is important for improving how the organization functions,” said Stephanie Creary, an assistant professor at the University of Pennsylvania’s Wharton School. “Without diversity, you don’t get that same level of information, so you're going to operate in the same ways you’ve always done. And in this era of competition, how we've been doing it is not necessarily enough to get to the next level.”

Dan Eaton, an employment attorney and management lecturer at San Diego State University’s Fowler School of Business, expects the “old-boy network” will have less influence in the future. As more women and minorities climb the corporate ladder, the result should be a more diverse group of candidates being referred.

In the meantime, companies that value diversity and want to broaden the makeup of their workforce need to think outside the box and proactively search out women and minority candidates, he said.

“It’s not enough to just put something on their Facebook page and hope for the best,” Eaton told NBC News. “You can’t simply rely on employee referrals. You really need to recruit and not from the same shallow pool. You get better outcomes from a business standpoint with a diverse workplace — and that’s why this is an imperative.”

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.

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