Employee referrals were formerly considered a somewhat risky practice – an invitation to nepotism and favoritism. But, in reality, employee referrals can be a very reliable recruiting source for small businesses. Most employees would rather walk across a bed of hot coals than recommend a friend or relative who is a bad fit for a role. The evidence suggests, too, that the turnover rate among employees whom other staff recommend is typically low.

No surprise, then, that more small businesses today have instituted employee referral programs, with rewards (e.g., extra vacation days, trips, cash bonuses, etc.) for employees who recommend someone whom you eventually hire and who stays with the company for a specific period.

Before you launch an employee referral program, make sure that you consider the ramifications and establish a systematic process for administering it. Some questions to consider include:

• What incentives are you going to offer employees who refer someone to you, and are you going to vary the incentives based on the importance of the job?
• How long does any referred employee need to remain with your company before the person who made the referral becomes eligible for the incentive? (The norm at most companies is between three and six months.)
• What procedure must an employee who's making a referral follow?

After you set up an employee referral program, don't keep it a secret. Publicize it in every way that you can – through posters, e-mails and newsletters, for example. Keep in mind that your objective is to generate as many quality referrals as possible. Remind staff about the program and make sure everyone knows when an employee receives a bonus for a referral.