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From: Jared Hamilton
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Sherri Riggs

Sherri Riggs Community Manager

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As a hiring manager at a dealership you could be inviting “harsh moral judgments” when you give jobs to friends and acquaintances referred by higher up employees within your company. This is according to new research from the Robert H. Smith School of Business at the University of Maryland.

There are definite advantages to referral-based hiring practices: referrers have inside information about the suggested applicants to help ensure a good cultural fit and have incentive to train, mentor, and monitor the recommended applicant to maintain their reputation. Additionally, the referred applicant is under similar pressure to perform well so they don’t embarrass the employee who referred them in the first place.

Overall, around half of job openings go to friends or acquaintances, and human resources encourage the referral strategy.

However, according to the study, “referral practices can be seen as morally murky territory where special interests and the exchange of favors dominate, above and beyond merit.” This is especially true when hiring managers accommodate referrals from higher-ups in the organization, as it can make the hiring manager look self-serving and unethical, creating drama among teams and weakening support for the new hires.

“When the referrer is powerful, observers will believe the hiring manager is attempting to increase the referrer’s dependence on him/her, ultimately resulting in future benefits for the hiring manager,” the study says.  And because of that, referral practices can present a dilemma.

When it comes to corporate culture, perception tends to matter more than reality. As such, if employees perceive leaders as unethical, they react negatively and could reduce their commitment to the leaders in the organization.

However, there are documented benefits of relying on referrals, and this study does not recommend hiring managers abandon the practice. They suggest hiring managers and referrers be mindful of the power dynamics involved.

“One suggestion could be creating a system in which referrers are anonymous, at least for an initial period of time pre- and post-hire, while simultaneously providing enhanced transparency regarding the reasons for the referral,” the study says. Additionally, “high power referrers should be cognizant that their referrals might receive relatively more scrutiny and they should therefore use this practice cautiously and sporadically.”

The study, “Compromised Ethics in Hiring Processes? How Referrers’ Power Affects Employees’ Reactions to Referral Practices” is based on two laboratory studies and two field studies. It was published by the Academy of Management Journal. Summarized in “The ethical downside of hiring based on internal referrals” at LSE Business Journal.


Authors included Smith School professor Rellie Derfler-Rozin, Smith School PhD candidate Bradford Baker, and Harvard Business School professor Francesca Gino.

David Bowman

Interesting article, it makes sense how it can appear to be a conflict of interest.

Derrick Woolfson

Great article, Sherri! This is a huge problem. Especially when Sales Managers - as mentioned in the article - can, and will use their "referral" to their advantage. Creating a toxic environment. As an employee might feel as if they are walking on egg-shells if they are unable to effectively communicate with the "referral." I have always thought that if a "referral" were to come on board that they would have to do so on their own merit. Ensuring that their role was not directly aligned with their connection. This way you void the risk of nepotism or favorites. 

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