Employee Inbreeding Can Sabotage Strategy

Stall Points (Yale University Press, May 2008), one of the more interesting business books that has crossed my desk this year, reminded me of the pitfalls of an extremely popular recruiting practice that has always worried me: Employee Referral Programs. While the theme of the book is broad (it analyzes the performance of Fortune 500 companies to help businesses identify causes of growth stalls), it singles out as one of those causes the failure to recruit, develop, or retain the correct executive or technical capabilities to execute the company's strategy. This begs the question: are referral programs the best way to get the correct talent? Major surveys suggest the answer is often "no."

Workforce Management cites a 2007 survey conducted by Career XRoads that ranks employee referrals as the number one external source of hire, accounting for almost 30 percent of new talent. The reason for its popularity is understandable: Like attracts like. Referred candidates are usually strong cultural fits and share some common denominators with current employees who may have worked for the same company in the past, attended the same college, were members of the same professional association, etc.

It all sounds pretty good -- but that's where Stall Points comes in. If a company has stalled growth, management needs to diagnose the causes, act on them decisively, and regain track quickly, say authors Matthew S. Olson and Derek van Bever. But employee clones are apt to think alike; companies that need to make a change in strategy may be better equipped to make good decisions if its workforce is diverse and offers different perspectives.

But there are steps hiring managers and HR departments can take to keep a referral program from deteriorating into a friends and family sale. One safeguard that CFOs like is paying a modest bonus to employees whose referrals are hired. If the finder's fee is too generous, your accounts receivable manager might become an unofficial full-time recruiter -- a guaranteed contributor to growth stall.