Why referral-based hiring questions employers' moral compasses

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A  new research from the University of Maryland's Robert H. Smith School of Business shows that hiring managers invite harsh moral criticism when they give jobs to friends and acquaintances referred by high-standing individuals within their organisations.

Authors of the study, Smith School professor Rellie Derfler-Rozin and Harvard Business School professor Francesca Gino, state that referral-based hiring practices come with their own set of advantages. Those who are making the referrals tend to have inside information about the applicants they push forward, so as to ensure that the latter would be a good fit for the company's culture.

With their reputation at stake, referrers have the motivation to train the people they had recommended well enough for the job. People who get hired through the referral process also want to perform well so that they would not embarrass the referrers have trusted them enough to recommend them.

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

Employees under the hiring managers react negatively when they perceive their leaders to be unethical, leading to reduced commitment to their leader, which has been shown to be strongly related to performance. "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 shows.

While the authors do not suggest abandoning this practice altogether, they write that having an anonymous referral system can help to improve transparency regarding the reasons for the referral. "High power referrers should be cognizant that their referrals might receive relatively more scrutiny and they should therefore use this practice cautiously and sporadically," they said.

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