Hiring from Internal Referrals Risks Harsh Moral Judgments: New Study

COLLEGE PARK, Md., June 20, 2018 /PRNewswire-USNewswire/ -- Hiring managers invite harsh moral judgments when they give jobs to friends and acquaintances referred by high-powered individuals within their organizations, new research from the University of Maryland's Robert H. Smith School of Business shows.

The paper bases its findings on two laboratory studies and two field studies. Authors include Smith School professor Rellie Derfler-Rozin, Smith School PhD candidate Bradford Baker, and Harvard Business School professor Francesca Gino.

Referral-based hiring practices have many advantages. People who make referrals, for example, tend to have inside information about the applicants they push forward, which helps to ensure a good cultural fit.

Referrers also put their reputations on the line, so they have incentives to train, mentor and monitor the people they recommend. People who get hired through the referral process feel similar pressure. They want to perform well so they don't embarrass the referrers who put trust in them. Overall, about half of job openings go to friends and acquaintances, and many human resource departments encourage the strategy. 

However, "Referral practices can be seen as morally murky territory in which special interests and the exchange of favors dominate, above and beyond merit," the authors write. This is especially true when hiring managers accommodate referrals from higher-ups in the organization. In such cases hiring managers appear self-serving and unethical, which creates discord on their teams and weakens support for the new recruits. "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 authors write.

"Referral practices therefore present a fundamental dilemma," the authors write. Their paper builds understanding of the issues involved by focusing on third-party reactions to referrals coming from people who can influence future perks like raises, promotions and cushy assignments.

Perception often matters more than reality when it comes to corporate culture, and followers react negatively when they perceive their leaders to be unethical. Possible downstream consequences include reduced commitment to the leader, which has been shown to be strongly related to performance. Therefore, while many scholars have looked at how employees perceive high (versus low) power employees in the organization, in the current paper the authors advocate for looking also at how third-party individuals perceive the power dynamics between two other employees in the organization. 

Given the documented benefits of relying on referrals, the authors do not suggest that companies should abandon the practice. But hiring managers and the people who give referrals should 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 authors write. 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 published by Academy of Management Journal. The authors also have summarized the work, via "The ethical downside of hiring based on internal referrals," at LSE Business Journal.

Visit Smith Brain Trust for related content at http://www.rhsmith.umd.edu/faculty-research/smithbraintrust and follow on Twitter @SmithBrainTrust.

About the University of Maryland's Robert H. Smith School of Business
The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and part-time MBA, executive MBA, online MBA, specialty masters, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

Contact: Greg Muraski at [email protected] or 301-405-5283

SOURCE University of Maryland's Robert H. Smith School of Business