Good question!

According to Merriam Webster dictionary, “Nepotism” means:

The unfair practice by a powerful person of giving jobs and other favors to relatives.

I haven’t bothered to look up “referrals” but the term brings up at least two things readily to my mind: I can think of at least two types of “Referral Programs”:

  1. A Referral Program whereby a company incents its existing employees to refer outsiders to jobs in the company.
  2. A Referral Program whereby a company incents its existing customers to refer outsiders to consume its products / services.

I don’t see any relation between Nepotism and the #2 type of Referral Program.

#1 type of Referral Program pertains to jobs. Therefore it resembles Nepotism.

But the similarity ends right there. I can think of several differences between Nepotism and Referrals:

  1. Nepotism specifically involves a “powerful person” such as CxO level executives in a company. Whereas Referral Program is generally open to all employees. In fact, in many companies, top level execs recuse themselves from Referral Programs.
  2. Nepotism is restricted to “relatives” whereas Referral Program can involve friends and acquaintances apart from relatives.
  3. Nepotism suggests the guarantee of a job whereas Referrers can only refer people they know for jobs. They can give no guarantees. It’s up to the company to select or reject the referred people.
  4. The thrust of Nepotism is to dole out favors to relatives. The thrust of Referral Program is to source candidates that are “good” in the eyes of existing employees. In actual practice, Nepotism can result in good hires and Referral Programs can result in bad hires. But their primary goal is different in principle.

There are probably more differences but the tally has already reached 4:1 i.e. four points against equating Nepotism with Referral versus one point in favoring of doing so.

Therefore, I’m going to stop right here and conclude that Referral is not Nepotism.