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Cornell University ILR School

DigitalCommons@ILR
CAHRS Working Paper Series Center for Advanced Human Resource Studies (CAHRS)

9-1-1987

Utility Analysis: A New Perspective on Human Resource Management Decision Making
John W. Boudreau
Cornell University

Boudreau, John W., "Utility Analysis: A New Perspective on Human Resource Management Decision Making" (1987). CAHRS Working Paper Series. Paper 452. http://digitalcommons.ilr.cornell.edu/cahrswp/452

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DRAFT:

DO NOT QUOTE

OR CITE WITHOUT

AUTHOR'S

PERMISSION

UTILITY HUMAN

ANALYSIS:

A NEW PERSPECTIVE DECISION

ON

RESOURCE

MANAGEMENT

MAKING

Working

Paper

87-09

John W. Boudreau

This research was carried out with support from the U.S. Army Research Institute, contract SFRC #MDA903-87-K-0001. The view, opinions and/or findings contained in this chapter are those of the author and should not be construed as an Official Department of the Army policy, or decision. Chapter to appear in L. Dyer (ed.), Human Resource Management: Evolving Roles and Responsibilities, ASPA/BNA Handbook of Human Resource Management, Vol. 1 (Washington: Bureau of National Affairs, 1988).

This paper has not undergone formal review or approval of the faculty of the ILR School. It is intended to make the results of Center research, conferences, and projects available to others interested in human resource management in preliminary form to encourage discussion and suggestions.

DRAFT:

DO NOT QUOTE

OR CITE WITHOUT

AUTHOR'S

PERMISSION

utility

Analysis:

A New Perspective

Page 1

Introduction What do Human Resource Management (HRM) decisions contribute to

organizational programs staffing, labor

objectives?

Are the organizational enhanced justified of total

investments benefits, returns? expenses with

in HRM training,

(such as pay and employee can exceed 1988),

for knowledge, involvement) fifty percent

employee by their operating

Since
(Milkovich same

costs

& Boudreau,

are the human

resources

being

managed

the

accountability, resources? the "people

rationality

and care

as the plant, with

equipment human

and marketing or are

Is such management issues" facing

even possible

resources, and

organizations systematically?

simply

too ill-defined

unpredictable These

to be managed important

questions

face any human

resource most

manager, managers,

whether and resources

a line executive certainly are among most

or a staff

professional. would

Though

HR professionals, important goals,

readily of dollar

agree

that human

the most

in terms

expenditures regarded

and effects as a "cost attention its

on organizational center" devoted

the HRM function budget item,"

is often with

or as an "overhead to its contribution

little goals

systematic (especially

to organizational performance

contribution the question enough

to the financial

of the organization). profit is still

Indeed,
controversial (Gow,

of its contribution recent debate

to corporate

to merit

in a widely-read

professional regarding

journal

1985).

It is difficult Accounting, increased

to imagine

such a debate departments.

the Finance,

Marketing, With that

or Engineering

competition, manage

and evidence their people

from

the U.S.

and abroad organizations are finding human resource

competitive more

companies attention difficult

differently,

are paying

to their

HRM decisions. very large

HR managers year-to-year

it increasingly

to justify

to "cut the overhead" decisions about benefits. go unmeasured. considering may be tempted In contrast. while their but because benefits are often makers visible. programs and plant in other management often marketing. It is to to imagine an engineer process. Lacking a systematic might of the training that program's a top manager is more form the impression such a million-dollar HRM program . account function Yet. of $1. finance.000 course results employees can easily incur per trainee lodging). estimates operations) benefits not only difficult develop quality little of program as well. is a steward And appropriately largest so.. proposing without to spend explaining a million dollars a new production or cost." is being or "done required that way to justify and Korea.g. but dollar accounting.000 travel and the decision to train 1. returns." in Japan "being done by everyone Instead. order to how can a Personnel a million-dollar top management "excess respond program? cutting to top management's What justify say when effort can a Personnel manager in an 30% of the HRM programs justify to reduce budgets staff overhead?" How can an HR manager when increasing is reducing Human returns for training levels and outplacement the organization to cut costs? programs produce potentially the costs lucrative of such programs decision lost program areas consider resource management budgets even when quite are tight. (e. industry. remain without unmeasured. analysis (considering but training development." and the HRM function its existence the HRM for its contributions. costs. because in most for the single manager training proposes resource organizations.utility Analysis: A New Perspective Page 2 programs solely else because in the they are "good for human relations. often instructor time. explicit Yet. its effects are routinely quality on product made with million-dollar of their HRM programs effects consideration on product or cost. costs For example.

and detailed. final to illustrate implications Why section and conclusions. section using for decisions each model's flows. affecting contribution. of cost-benefit discusses general issues important The third to applying section cost-benefit how utility models analysis using benefit to human applies resource decisions. models compared The first to other discusses systems. a decisionof human the cost-benefit (or utility) the costs framework decisions. even when and rational. is unavailable information. Analysis concerned for Human with Resource Management resources Decisions? in HRM programs Use Cost-Benefit Decision makers how to invest . of human programs. it helps into useful decision and determine utility information models is or is not needed. and algebraic algebraic formulas interested be minimized section decision emphasize advantages The second the findings implications. assumptions decisions explicit. It human resource translates when decisions statistics more or uncertain. analysis models studies.utility Analysis: A New Perspective Page 3 expendable Tbis support resource dollar tban programs Cbapter explores that in otber management areas. affecting shows to programs program the existing The fourth employee The stock of employees. illustrating progressively how utility more to encompass Though direct realistic and complete models will HRM decisions. analysis. develops a case presents coststudy a training models as an example. HR decisions more It is a way of thinking and beliefs supports behind that makes systematic information facts. It presents have been this several developed Though Chapter case will analysis their can be complex emphasize managerial implications. (with citations to the to it will draw on sophisticated readers). value explicitly considers and benefits utility resource about analysis provides but formulas it is more for computing than formulas.

Ratios. costly such as turnover half (Cascio.utility Analysis: A New Perspective Page 4 have several types of information cost-benefit Systems could available (utility) to support analysis those in. benefits of these Organizations without benefits an explicit the sheer can lead to unsystematic might be assessed in terms in terms shortcuts. achieve For example. Equal be vulnerable by the regional approach. to hire may behaviors at may as occurs creates opportunities decision highly-qualified to detect informally framework this. but a cost-focused system fail might Informally-defined human but resource management complexity benefits. decisions. employee Of course. resource Costs costs management so reducing activities. of filling of whether to scrutiny a systematic beliefs. competitors a recruitment a selection program while use test might or whether be assessed it will such devices. management are incurred often means attempting to minimize activity. Organizations decisions in every reducing based human on costs. Lacking the analysis may be dominated power. vacancies. Let us examine Alternative where fits Decision Costs. is only the picture. consider or system. first example appear when Human costly turnover activities enhance or employee effectiveness. HR activities also costly 1985). Decision makers HR costs might calculate levels. employees. any of Cost or Head a variety of ratios designed to analyze or staff For . may Reducing but or presumably organizational that for employee behaviors cut costs. by unsubstantiated may not personal influence or political and the decisions organizational Count goals. presumably Flamholtz. the number or scope of human Other typical cost-reduction behaviors this techniques involve reducing 1987. Employment Opportunity office. resource make their human resource them. resource actually it may reduce effectiveness.

high what decision suggest? ratios Is it always bad to have ratios? or rising HR staff-toand employee activities high or HR cost-to-sales in return returns. if the programs levels provided for such cost or staff there count is less cause ratios must are producing than if they a orgqnizational Thus. auditing Such human resource Audits. decision within framework to be useful approach in guiding involves 1974). (Mahler. are being information implemented because they provide the plan to find they may not address It is little whether appropriate in the first program level. of trainees or to other attention 1984). cost for concern be interpreted are not. relationship the effects reporting of human include validation studies the statistical . ratios While compared be useful organizations. employees. costs one might compute the ratio of total employees to HR staff of training are sometimes they can or the ratio of sales to HR costs. The fifth to determine as well as providing studies. If your they provide cost ratio no framework is higher does that for interpretation last year than (or higher a competitor's). was consolation an ill-conceived at the budgeted employees. place. and head Clearly.utility Analysis: A New Perspective Page 5 example. whether However. implemented as planned and incurred or that system it was applied needs to address to the projected costs A decision and benefits an evaluation before framework the activities after they have Formal statistical Examples are implemented. studies approach involves conducting resource formal programs. (Fitz-Enz. levels making. HR decisions. and can demonstrate as planned. competing to staff or decision than or the ratio Such to the number over time. audits can be quite human resource only was that costs number of detailed. for directing or costs. activities systematic programs limited The fourth 1979. and Sheibar. been implemented.

then compute cost-benefit analysis. alternative. different useful theory achieve dollar training However. of merit. a minimum is that or those standard. involves let alone report results in terms The of investments sixth approach would Fully-detailed a full-blown alternatives. Without . on investment) here. who statistics are less their are often with to human than with resource managers. makes They Identifying and evaluating and facts costs more and benefits to all. implemented. exploring to determining benefit. cost-benefit analysis. Human resource decisions are complex. be efficiently Advantages of a Cost-Benefit approach System the following advantages compared to other A cost-benefit approaches: offers 1. a scientific even mention and returns. The best alternatives. The organization identify for each and draw up a list of all the factors measure the factors to be considered (such on a cornmon scale the costs as dollars). that beliefs visible thus questioned and corrected. Consistency. can be discussed. approach precisely and with certainty. the cost-benefit applied. levels and experiments between groups alone concerned limited comparing receiving not very between the test scores and performance in output statistical difference programs. reducing will the assumptions.utility Analysis: A New Perspective Page 6 ratings. factors measuring has a good cannot The problem be evaluated all of the decision Moreover. Explicitness. the benefits and subtract to determine the overall with would net be net value values of each alternative. how to invest Rarely does resources study the greatest values. (or returns exceeding of course. it could still. everything deal may be quite if only costly. the chance incorrect or counter-productive information go undetected. 2.

For example. selection and tradition. it can be applied organization new decision. a cost-benefit systems. A cost-benefit of factors on only system encourages by providing basing a list to be explicitly considered before a decision a few of them.utility Analysis: A New perspective Page 7 a system. organizing the most frees commonlyresources to in a cost-benefit unique factors. make some it is easy decisions based for HR managers based on one and strategic planners to set of issues. approach the use of information the decision makers factors. because the for each 3. as we shall see in the subsequent system improves examples. among decision A cost-benefit makers because it offers a common decision making. Communication. promotes Once efficiency developed. and information a cost-benefit in gathering By identifying allows decision framework and using to set priorities information. some unique considered focus can spend While analysis factors less time decision re-inventing is unique the wheel and may each require effort. and none defensibility to both these factors reflects are relevant decisions. and other recruitment of decisions programs filling programs Yet. system on the really guides Moreover. of these factors the productivity consistency of those hired. It is not necessary . on a different based set. on legal 1986). Efficiency. communication "language" factors and their the data and staff gathering for 4. The identified them set of decision HR managers to redefine the system for applying allows to coordinate. may be chosen vacancies are chosen four on low cost and probability while (Rynes based & Boudreau. A cost-benefit to many system decisions.

resource adopting of tradition. so decision rather makers than can devote and more resources to making decisions identifying organizations locating (at to information. by cost-benefit HR decision information makers used express is expressed in When their contribution functions cross- in the same bottom-line (such as Finance. function Cost-Benefit terms by other management Marketing. these realizes functions objective Finance and Marketing their are not exact effects sciences. Moreover. contribution must do? to the organization. the sales who has tried the stock market or predict of a new product Yet. communication Systems (and perhaps Resource credibility) Management decision may be improved. factors. because are measured resources functions by how well communication they use with dollar-valued management that other is improved dollars. It is certainly Anyone system not the typical to used management functions. terms. Their is to enhance the ambiguous addressing decisions on the isolating or uncertain risk and systematically and explicitly potential and uncertainty. Decision in Human The principal the costs be measured affecting value really approach forecast that that what drawback of a cost-benefit be measured system is that some all and benefits at all). the variety into cannot It is impossible about their human resource to quantify activities of factors dollar is this a single But. least achieve in part) goals. benefits . typically adopted to address programs because they human Unfortunately. decisions expresses a decision in other cannot precisely (indeed. Accounting and Operations). in dollar important typically express programs' by focusing factors.utility Analysis: A New Perspective Page 8 task every time. resource because decisions the simplifications (such and as focusing ignoring only human on costs.

A cost-benefit the decision decision system a way out of this bind. characteristics costs. employee of the attitudes.). it also human It does It too simplifies human situation. (4) a utility used to combine usefulness. into that to address describe the problem. and the aim of the models of different human resource and improve the usefulness Requirements Utility for utility analysis. Resource not require can help measuring To the contrary. proposing to describe resource a great program deal of important consistent and consequences. and techniques the effort to pinpoint to gather to Human information. utility usually function expressed a set of attributes into an overall for combining in dollars. attributes usefulness . is to predict. management "utility" explain decisions. important information. a set of variables but about way. the important on productivity. requires: (1) A problem. (2) or the gap between is currently achieved.utility Analysis: A New Perspective Page 9 are uncertain) offers can have undesirable effects. everything. information systematic cost-benefit thus reduce efficiently summarizes resource programs in an explicit. the system (such as effects function. the attributes utility analysis an overall judgment of each alternative's is generally employed when utility the first models two requirements suggest are met. what Analysis like other is desired decision and what systems. set of alternatives. a set of alternatives or the variables alternatives etc. simply usefulness. (3) a set of attributes. analysis developed extended means is the term by industrial to other for a set of cost-benefit psychologists resource concerned human programs and decisions. Given a and a value. necessary Analysis Applying utility originally and recently utility Decisions models with selection.

requires as college For a framework recruitment or promote (such of programs generating of job candidates that provide or job posting) selection What Makes tests and programs or skill staffing information (such as inventories). resource strategies areas address as staffing to emphasize. flexibility a strategy intended among to increase competing manufacturing in selection. system . and job redesign. broader made programs human Decisions about such programs link between decisions resource resource resource strategies managers. techniques. structures. provide compensation a vital plans. by human are more broader specific issues human resource levels. requires choices programs and job design. or an "activity" that affect by HR professionals) human resource recruiting value. decisions about human about resource individual programs encompass (such At the same time. selection training courses. a set of activities Examples include or procedures tests. employee training For example. and appropriate requires decisions organizational about human strategy implementation programs. Quality and Cost effects. Program resource Useful? programs Quantity. functional But. within which decisions train. more than purely employee occurs deciding operational to hire. employees Each as which decisions example. a Human Resource human Decisions subject about have wide-ranging No decision to the scrutiny of many constituents. on decisions (sometimes A human resource an "intervention" is simply by industrial psychologists. promote or reward).utility Analysis: A New Perspective Page 10 The Unit of Analysis: analysis Human models Resource focus program Programs about called human resource Utility programs. resource of these the framework employee(s) a pool of human to hire programs. than such and the day-to-day operational Human strategies.

and when they minimize required implement three and maintain factors the programs. and top management the long-term can reflect flexibility these and productivity perspectives. and this similarity is not accidental. of the work but each Utility implies analysis different program one a different analysis way of measuring must also Utility programs identify the mechanisms through which HR affect the organization. organizations facing . analysis investing in productive and minimize presented quality (such or increased The utility between the necessary in this cost investment. effects because on unit they staff managers may be concerned costs in the while the the program's run (perhaps and operating expect to be promoted with shortly). For example. many employee quality work large and cost. For example.utility Analysis: A New Perspective Page 11 encompasses important when large they all of these factors: affect effects. also produce and Manufacturing that they produce large Operations' large programs quantities of productivity as sales as or or units reduced produced). quality and cost. to those typically used in other Marketing. behaviors. on the unit's with enhancing statements. financial and accounting financial may be concerned the programs' may be more impact concerned force. and investing resources from other management In considering that these with short different three quantity. payoff. when have behaviors reductions) over they produce (or value) to improvements work (or avoid in the quality the costs of those develop. but utility analysis focuses on three value quantity. models chapter reflect the similarities programs resources in programs in human resource management areas. costs improvements quality). it is important different to recognize of constituents may be concerned operating revenues with aspects factors. HR programs time. value (such to the These management Finance extent are similar functions.

are simply Finally. any more whether do not provide a financial the answers alone power to all human fully plant. models such outcomes to organizational utility emphasize important government represent analysis clearly omit some decision and ignore union factors. product demand use enhanced facing count employee productivity apply to increase while organizations to reduce head cost pressures and compensation effects. They productivity-related factors such outcomes. the This is (or cannot and incorrect imPression cannot that utility be measured analysis Some of the variables at all). decision and political support tool considerations. is to measure even when outcomes have are convenient little relevance or absenteeism) goals.Utility Analysis: A N@w Perspective Page 12 increasing output. or public one valuable They than relations. it can be compared It? Precision models they to these if We Can't Though Measure in utility Analysis on three complex. complexity impractical. expensive to .. other potentially as employee attitudes. simple concepts utility quality can give analysis are all based are nonetheless of quantity. relationships. can encompass and measure in utility sales each of these the analyst the payoff analyses to reflect the appropriate whatever effect.g. costs. very variables measure. be measured prone and cost. must utility carefully A common improvements analysis define mistake (e. in the arsenal They of HR decision decisions about makers. but productivity Again. over could Those that precisely can be measured are often uncertain some to change that time or in different be measured precisely situations. resource analysis a nuclear summarize addresses utility the decision analysis or not to build because so that they models are useful information What a great deal of productivity-related other imPortant factors.

from and when common such as costs. it: Simply put. is useful incorrect large in management. make human Subsequent resource sections decisions illustrate systematic analysis models in the face of uncertainty. investments are quite problems or marketing well (cf. program affects Two Categories The quantity. Resource above Management Programs and Effects human resource resource programs. information resource gathering program is itself effects an investment decision. and cost) can be applied differs to all human on whether the analysis or flows. decisions. makers the In other Uncertainty about human should lead decision that identify not to abandon sources systematic analysis. to invest practices or base will more information. and (3) when of the not outweigh the expected benefit decisions. . only differs on the most measurable beliefs information.Utility Analysis: A New Perspective Page 13 These limitations resource inability analysis and costs are ways Chapters to correct considerations and uncertainty any more are legitimate should and important. employee of Human noted concepts quality but stocks (costs and benefits. (2) when decisions that would without the corrections the cost corrected of the are important information and produce does benefits. strategies. how but to use methods it affects approach of uncertainty. these recognized Bierman. in better that focus (or whether) This decisions. words. systematic stock but measurement analysis prices of human not prevent programs than uncertainty consumer about or the to precisely of financial measure preferences prevents systematic The limitations and there 1981. decisions on inexplicit how utility even or opinions. depending the program Employee stocks. information have been (1) is likely it. Bonnini when & Hausman. Programs affecting employee stocks (such as training. of information to address 4-10).

flows. quality more promotion. through Employee and out of an organization demotion affecting large and transfer. employee and (3) Achieve employee stocks 1 and 2 at minimum "work" by improving Thus.utility Analysis: A New Perspective Page 14 compensation. employee stocks In terms decisions affecting large stocks enhance and time job productivity periods. productivity and cost. by making Most but (2) Achieve better increases and in the value of job behaviors cost. behaviors. decisions In terms enhance flows of quantity. promotions) pattern more . applied Farr Employee models to performance & Jacobs. flows the approach as improved employee (such recruitment. 1982) 1982). current abilities or motivation) to improve and cost. employee flows through selection. Employee flows occur when employees move into. for jobs or the job posting. Schmidt. stocks so that valuable Utility utility employees Analysis have are placed for Decisions been Landy. & Leonard. affecting existing more when they: large (1) Affect of employees of employee (2) Cause average increases in the value cost. on as well numbers of employee and time periods. feedback (Florin-Thuma (Mathieu such models (such and Boudreau. decisions in their behaviors assignments. their job performance. person-job has focused applies (3) Achieve analysis programs 1 and 2 at minimum for selection affecting research utility to other decisions. 1987. Hunter & Pearlman. and training As noted. performance feedback (such and employee involvement) aim to increase among of characteristics employee quality as skills. could in press. separation. also be applied to other programs affecting employee stocks . valuable existing quantity. or incentives Programs that encourage employee employees flows to apply affecting into. "work" by improving of movements through and out of the organization in jobs or work Affecting roles. they: when (1) Affect large matches.

cost pressures Table had convinced the example too expensive. To illustrate utility analysis for such programs. 20 new engineers capacity every years. staff training for The Decision The decision engineers audio-video system it was through a traditional While classroom or through a sophisticated network. . thus could Quantity. only Due to training 40 employees training constraints. The classroom while over building five years and program would cost $451. or 200 over the 5-year target per Audio-Video could accommodate up to 200 persons year. for training added was the 200 currentlyyear for the next training period.031. system.035 network over five cost years. conducted faced this let us examine with a choice is based the case of a large between two training utility manufacturing programs. 1 describes in terms quantity. $1.Utility Analysis: A New Perspective Pag@ 15 as compensation and employee involvement). quality ---------------------------------------Insert Table 1 Here ---------------------------------------- Cost. organization disguised. Classroom per year. employed four train population engineers. Situation involved a choice between delivering system. some training believed the audio-video others that of was a good simply investment. if staffing the audio-video largest portion would (with the occurring advantage by this in up-front To be conservative the entire implemented cost many and ensure system no unfair was borne share to the Audio-Video one program.147 costs). analysis Though application example on an actual in 1986. though of the programs The target plus would it. and cost.

147/280).683 trainee figures suggested that Audio-Video than training much per-trainee Discussions effectiveness concerning Some believed system Classroom this was training likely had effective.) (e. and then for accommodate the additional over 20 new hires future year. Because Audio-Video the first 1. at a time. for 280 engineers that study could be cost-effective.g. of 280 trainees per trainee. a manufacturing rather would than of raw materials goods.031. the accounting trained... its typical trainee cost practice.e.200 200 trainees total are productive for the entire (i. so the work force doesn't until . 5-year 200 plus it affects person-years trains of productivity a total reach etc.Utility Analysis: A New Perspective Pag~ 16 it could easily a total fully train the incumbent work force in the first in each year. spending over one not on a training delivery Moreover. is like evaluating it consumes.035/200) $1. on its production How much productivity be affected by the two training would place into The number force over of trained engineers period the programs is shown more trains the five-year engineer in the middle than more 5 years. required effects a costly some believed experimental cost-benefit to discover the and complex on performance. Classroom training of 200 employees. whether that no definite dollars conclusions.255 per total trainee per Classroom training (i. 200 trainees but only Year 5.e. five years.. people portion we assumed earlier period). 40 1 (because tenure averaged delivery no turnover. 220. Evaluating training programs plant solely based based on the of on Leverage cost-per-trainee amount finished programs? the work of Table Computation. the organization costs by the Cost computed number Following cost per by dividing $2.).e. must $451. demonstrate to be cost reached million possibly analysis program's and Audio-Video These higher training cost $3. (i..

utility Analysis: A New Perspective Page 17 still.853 from Audio-Video for the Classroom training. productivity To explicitly increase sYmbolize this uncertainty. training. available on employee value Typical organizations.031. per person-year For example. etc.500 Classroom investment. the utility of Audio-Video increase up by $1.e. and certainly of improved performance. training offsetting (i. per-year was simply the unknown sYmbolized Video average per-trainee. the effects none to help us estimate of the two training that could forecast programs the dollar quality.965 This training and $168. Payoff formulas.e. would produce an average total productivity increase from utility of $148. was increase programs the program's affect many effect.035 u2) goes quality functions to make value the payoff formulas training The utility every of Classroom increase cost. training leverage demonstrates Leverage faster can substantially resource time. quite in constructing (usefulness) one-dollar the $451.. computation is the leverage how of the two programs... Even without the cost knowing the effects information in Table u1) goes 1. employee quality per person-year. P1 for Option 1 (Classroom Training) and P2 for Option 2 (Audio- Training). represents a 33% return on investment on investment from the Audio- and a 16% return . These employee payoff per person-year. this even Classroom training This affects 600 person-years of productivity and 40 plus 80. up by $600 with in average Similarly. (i.). suggested training its $1. quality.200 for everyone-dollar offsetting in average cost.e.147 program large that quite modest effects might effects be sufficient on employee worthwhile quite and that sizable training would produce returns to the training of $1. of either proved program useful on employee and leverage shown (i. employees of many occurs because human who affect productivity little for a long information Quality.

At higher average productivity increases.031..200).e. the $1. per-trainee justify what computed these values are much the costscould training earlier. the more analysis was enlightening.e.. each training While option the break-even independently. little information was available to precisely from costly either studies estimate training attempting to obtain payoff the dollar program. would in Table at least value The Classroom training (i. was for the Audio-Video Notice training that program $860 per person-year lower than $1.e. The formula payoff formula 1.035/600).. the relative advantage of the Audio-Video analysis. training Of course.e. Relatively appeared modest training large effects necessary had originally to be a very investment. Program it treated the question training break-even comparisons. question. As noted. costs be covered while if it produced the break-even (i.147/1. What be applied training make are the values training training is of the unknown effect equal found payoff (i. we divided by the leverage total shown for P1 and P2 that would with) each program's These values are to equal 1.500 figure used above was Break-Even only a guess. in employee rather than value embark per person-year on potentially the costs cause to measure the values this variable. is enhanced. for these formula the Classroom a payoff in Table from the Audio-Video the difference between producing as shown reflecting the two programs By setting the difference (U2 - . $752 per person-year $451. (i. However. did not address and therefore expensive of whether to substitute Audio-Video the same for the less expensive logic could Classroom to this effect training.Utility Analysis: A New Perspective PagE! 18 Video training.. (or "break-even" its costs. increase However. Classroom P1) and Audio-Video of Audio-Video relative effects P2) that would training? the total utility to Classroom by subtracting formula.

given to the P2 a certain implied for P1 [i. we obtained a formula for the value program payoff value of P2 that would exactly equal be necessary Classroom to make program the Audio-Video payoff.. network. the Audio-Video In light value of the of this could training important training enough to it.000. to better focused the decision and helped whether the critical of training issues.5 x P1) + $484]. analysis Chapter without Decision the break-even define estimate whether measuring training process about effectiveness.. only per person+ 484] exceed $1. Results. = (. was one or another focused switching and the the Audiotraining it could on was right effect work the decision to justify engineers. Even simplified 8). personal computers & Milkovich. The demonstrated that a costly effectiveness analysis) (earlier thought to be essential for applying cost-benefit . done by these undisputed Video for engineering Moreover.000) to justify produces year).e.e. than Classroom that shows The break-even provides investment. from Option from Option 1 (P1) is equal 2 (P2) must expensive to $2. because the fact other that expenditure could be justified. then if the payoff the payoff [i. are year year shown The decision rules 1.utility Analysis: A New Per6p~ctive Page 19 U1) to zero.484 (. greater If Classroom than training productivity (i. by this break-even analysis per person- at the bottom of Table For example.e. equation each program is the better using the computations (Boudreau can be further 1988. effects Instead of arguing or wrong. system year the more large Audio-Video increases training. when to invest average in the faster Audio-Video productivity formula effect per persona simple Moreover. programs also use the Audio-Video alone made be justified break-even study for this program analysis it a worthwhile and complex investment.5 X 2. $968 per persontraining it can be cost-effective even if it has a smaller training.. performance.

g. Rich and reducing effects several on decision other and Boudreau uncertainty (1987) when cost- methods of addressing analyses cost-benefit utility are applied principles to HRM decisions.utility Analysis: A New Perspective Page 20 was not necessary This quantity. turnover/layoff to justify their management. returns to improve selection tests. applications are possible programs such as compensation how an explicit and employee involvement. how the utility analysis concepts of demonstrated and cost can be applied for other to training affecting programs. the existing flows operate HRM decisions of employees. when people into. to decisions We now discuss employee how to apply flows. it demonstrated about program cost-benefit analysis can address making. as affect and transfers). three by affecting which individuals occupy We can consider general processes through which individuals . affect as well that stock However. analysis its is one method detrimental demonstrated benefit these of addressing explicitly. flows promotions. employee flows occur (e. affecting Analysis the costs for Decisions and benefits about Affecting of programs flows? Employee that Flows employee Analyzing stocks whether affect is useful. work by enhancing affecting those of employees work in their current decisions will employee positions. employee Similar stocks. Moreover. through and out of organizational demotions affecting employee stocks positions/jobs selection. decisions decisions affecting differently. resources but what devoted employee How can we determine college recruiting.. such turnover. uncertainty Break-even effects. Uncertainty is a fact of decision uncertainty quality. example quality to improve decisions. expense? and internal staffing offer sufficient As noted earlier. the value flows Whereas employee positions.

the quantity and pattern (3) Internal staffing. 1985b. on choosing Model with and the decision whom to hire addressed by each model. and choosing which involves will be attracting hired of job applicants of them into the organization. 10-13): a pool (1) External recruitment/selection. Milkovich which & Boudreau. subsequent employee models. and that candidates leaves will employment vacancies. movements which between of employee these processes positions the organization. managing which the quantity (2) External and pattern separation/retention. as if they were Effectively effects independent. evaluated closely and planned related. through Ch. one group focuses from among factors of external job applicants. #2 incorporates useful in making HRM decisions to other of re- the financial #3 extends considerations the model typically applied Model to reflect the effects . compatible investments.Utility Analysis: A New Perspective Pag@ 21 flow 1988. affecting simpler The models flow models focus on external selection. the work force (Boudreau & Berger. --------------------------------------Insert Table 2 Here ---------------------------------------The following employee first adding flows. enhancements Table to reflect 2 provides and integrate a summary the other processes. added of the decision the features Model #1 by each one. candidates fill quality and cost of HRM programs that choose who which and for employment opportunities. affect stays the job. section The models solely develops proceed utility from models for decisions to more with complex. of employee which that involves affect separations and employees involves are retained managing within by the organization. each of are obviously depends identify quite managing on the quantity. Though are typically they them that managed.

404 one entry-level above computer level them. may find to substitute that are more own experience The important they to produce point illustrations to them. to illustrate Readers will be used how uncertainty should also keep can be explicitly in mind computer that and systematically the computations (e. (e. analysis. Boudreau.g. Finally. (e. the recruitment-selection the effects of internal utility employee analysis. . process..000 organization data system employing managers 4. Schmidt. that for the staffing Table and summary The Case for the discussion Decision Situation study We will Though studies explore utility this models study for employee uses flows using based a case study. reduce the computational ---------------------------------------Insert Table 3 Here ---------------------------------------Consider programmers. Table a description Hunter. and realistic values familiar case information readers on published it useful assumptions. integrated provides and transfers) framework into the analysis. but the decision break-even analysis systems illustrate.utility Analysis: A New perspective Page 22 applying selection programs over time. an 2 of recruitment incorporates resignations) Model into the external the effects into staffing utility of employee separations turnover.. is not the numbers Throughout the themselves. of the two jobs (adapted 1987b). movements providing Thus. analysis methods burden. McKenzie 1979 and Boudreau. follows. 3 contains from a large and 1. of the characteristics and Muldrow. the effects Model #5 layoffs. hypothetical. #6 incorporates demotions analysis an outline promotions.g. from their However.. behind though the models 1985. 1987a) can become greatly complex.g. addressed. Model #4 incorporates analysis.

the current test? 2. how utility external selection and internal like these. Should more of the good such a change be worth? 4. provide from-within computer fill 100 employees are promoted programmer job to fill vacancies the total managers the vacancies. and has a promotionfrom the entry-level 100 new hires by these to 718. Should quality the recruitment applicants? the pattern of employee performers. Human decisions their of new hires situation in this are called upon how employees should are selected. separations and how much be changed would to retain program be changed to attract higher- 3. leave the entry-level job each year and are The organization data system experiences 100 separations manager job. to make how jobs. how they are recruited. in the upper-level policy. Should system an assessment managers. whether and how they move the outcomes How can managers sufficient additional between staffing? we will determine of these activities How much returns to justify could organizational investments? How should investment be justified? resources be allocated activities such as recruitment. To illustrate consider Should four analysis addresses issues questions: employment interview be augmented by an ability 1. in the programmer number An additional job created per year the entry-level bringing resource about promotions. between the two turnover be managed. Thus.Utility Analysis: A New Perspective Pi5ge 23 Currently. Utility center be used would to promote such programmers to and how much a program be worth? Analysis question for Employee addresses Selection the method used to select new The first strategic . replaced per year 618 programmers by 618 new hires.

dollar values.0. The earliest coefficient. (or validity) 1982." or the probability on a predictor Under would certain turn out to be at least assumptions.g. by setting and when the success higher only passing about on the job.utility Analysis: A New Perspective Page 24 employees into the Programmer by an ability job: "Should Selection the current test employment interview be augmented test?" development and validation managers can be an expensive may be called to address Preliminary utility was only the early to develop of these Cascio. usefulness ignores costs. process. detailed models Hunter can be found & Schmidt. elsewhere (e. Several and human models have resource been to justify proposed this question.g. indicating scores on a selection performance with zero levels. The correlation but coefficient about the any aspect of a test's it says nothing fails of employees quality index and time periods (such affected. between which index of selection the correlation is a statistical device of the linear a predictor) ranges from relationship and subsequent -1. in press. and to reflect testing proposed as dollars). value. Milkovich value measure (called was & Boudreau. Attempts analysis that to Develop models they Selection Utility enjoy Models a long history. more on the predictor (e..0 to +1. is improved by higher validity being coefficients. indicating The validity no linear coefficient relationship and higher values stronger reflects quantity tangible positive one linear relationships. understanding compelled summaries models shows why researchers and managers More were analysis models for selection. 1988). . Boudreau. and time consuming such costs. but it for selection reflected recently utility utility early 1987.. However. by Taylor that someone A second and Russell achieving minimally ratio scores index of selection was the score originally (1939) a passing successful "success ratio. selective).

utility Analysis: A New Perspective Page 25 half of the applicant Though pool would be successful if hired more index without factors because the than simply predictor. works. and those utility Model who do not. Brogden & Taylor. the new selection and to apply it to one of job applicants. and it ignores between those costs. incurred the new system and those who would be selected without costs The cost of the selection to develop group (or acquire) program is equal to the additional device. Cronbach & Gleser. Quality is the product between of three factors: (1) the validity coefficient (or the difference the validity coefficient of the proposed . per-year those it. (B-C-G) 1950. achieve Model Moreover. the Brogden-Cronbach-Gleser 1949. validity. 1946b. in the quantity is equal of person-years of productivity group affected by a selection average to the size of the hired produced multiplied system by their The quality average selected by the new selection productivity is the difference between dollar-valued with per-person. The first utility hired model analysis model focuses using How the utility only on one group (or "cohort") of employees utility with the new test. (Brogden. #1. system tenure. In this model. minimally the success acceptable distinguishes only performance on the job. to examine more but varies recent Let us return models that now to our case these model study utility analysis address issues. the success value ratio incorporates it has limited of employees as a cost-benefit it ignores testing who the quantity and time periods ratio affected. 1946a. performance doesn't simply into two categories. 1965). The One-Cohort These early utility tangible models models units External Selection laid the foundation that present (preferably fall and highlighted of selection the need for selection in more the value investments job dollars) and reflect the fact that widely.

is greatly we would affected by individual over how they (e. the SD of Applicant value symbolized of obtaining higher as SDy). when the consequences expensive of those decisions are important employees handle raw materials). of a one- are multiplied by SDy which performance the dollar value standard-deviation applicants. because Value (SDy) has some based and in industrial is necessary expresses and requires model score explanation.utility Analysis: A New Perspective Page 26 selection accuracy.g.. the device and those without To the standard deviation differences represents dollars per person-year. validity In the quality coefficient computation above. jobs have great when discretion out their decisions).g. on the validity the value variable the utility test coefficient both the selection of job behaviors predicted by the test described in standard deviation of the the units. the dollar to the organization standard applicants other average performance is one deviation than applicants. SDy measurement become a controversial This controversy. which and can be estimated "dollar This value term because standard (Naylor 1965).. (3) the of a one-standard-deviation can be called it reflects whose improvement" Value in new-hire (usually value. is). In general. is very large and when the distribution pool (such of job-relevant characteristics in the applicant . topic The SD of Applicant psychology. (reflecting using system versus that obtained standardized without test it) reflecting score of those prediction selected (2) the average how selective tables the organization & Shine. performance managers difference expect per person-year SDy to be larger differences carry between when job when and make (e. the product score and the average value standardized test equals difference applicants translate they in productive selected with in standard deviation selected into units between it.

As we shall analysis this does not threaten ---------------------------------------Insert Table 4 Here ---------------------------------------- . Under certain and a person assumptions. and found 1986). 1979) SDy measures. most utility of dollar-valued see. Cascio & Ramos.g.g. and 50th percentiles. that different but produce different SDy values. difference. for a managerial former job contains recent college managers). (an average a person is better who 50% of the population than only performer). between Considering existing the difficulties employees in measuring it job performance seems unlikely differences that we will performance limitation on any scale.. on behavioral this did have detailed (e. applications. surveying a person than only Some have measured supervisors who is better of the job. asking than them to estimate the value who 95% of the population.utility Analysis: A New Perspective Page 27 as when graduates the pool as well utility of applicants as experienced analysis (e. (in press) measurement reviewed techniques measurement indeed research. and 15th percentiles and should of a one-standard-deviation 1983) have estimated it as (e. the estimate the estimate represent Schmidt the difference the difference be the same.. 20% of average Still anchors others productivity. by psychologists et al. adopted or 40% of average and complex Boudreau salary methods among based job incumbents. between between and should others of the 95th of the 50th the value & Hunter. however... measure soon discover differences a generally-accepted among job applicants. compares different it by of Most research Schmidt. is better 15% of the population. none offered a convincing case for greater accuracy or validity.g.

. standardized selection times . Table utility is the the and pencil of programming programmers.. each of testing applicant (i.634 percent! Not surprisingly.80 with a 50% selection ratio.910. The quantity the average of employees by multiplying to produce tenure (9.69 years) The quality test 5. a paper Test Let us assume test that the organization ability. between Of course.236). job applicants which equals (calculated et al.e. .9 million divided by the $12. Multiplying 5.9 Subtracting million more testing than of $12. $10) by the number and time periods by the number (1.331 per personbenefit by quantity person-years) produces an estimated costs random of $37. utility 4.988 quality $6.e.028 produces as shown testing for the 9.988 person-years.Utility Analysis: A New Perspective PagQ 28 Application considering Programmer information model using to the case. in average per person-year score from compared is the product to random Shine of the increase (i. by using we assume that . not using the PAT results in essentially to reflect selection). the dollar of a one-standard-deviation by Schmidt. selection Aptitude needed (PAT) to select the one-cohort and one 4 shows model. to be $10.e.69 years.. of $37. computation.413 To simplify this obtained $6. the increase analysis. comparisons Utility year) two selection different (i.76.331 per person-year. the models systems can easily with be modified validity. (i.360...e. the Naylor- tables) times the validity value coefficient (. calculated for selecting by multiplying of applicants is calculated selected (618) programmers.360 represents a return of 306. so we focus Costs equal on the consequences $12. increased increased in Table costs The $37.76 represents not using in validity the PAT versus random it (i. estimated from previous difference per studies) between year). to apply The focuses on one cohort 618 computer the cost tested job.360 selection.e.

39 programmer Thus.'s fewer programmers. might of $10. contain various and thus sources and error. test that using selected the PAT would applicants selection our would an average standardized .g. However.. the to imagine difference would that a one-standard-deviation between a superior $3.360 for SDy that would equal make (1) benefits by 3. Considering expect controversy skepticism this surrounding about measures of SDy.641 X SDy) gives the value utility $12. in value and an average analysis applicant) that the be less than per year.360 equal (3.76. values certainly do not represent Many of the of bias. the testing costs. investment.413 may be too high. with value the quality the same argue to be accomplished Schmidt. validity Break-even we doubted and that can address even greater increase attain Suppose by . We can re-write the payoff leaving parameter unknown: utility Dividing exactly is $3. we might uncertainty function its value. This value still because per person-year. 1 prediction represent of the dollar estimates. value of selection. difference applicant break-even it is difficult (e.utility Analysis: A New Perspective Page 29 these because results caught the attention higher of psychologists people would and some managers have suspected. uncertainty. as the break-even applying analysis of Table uncertainty should not prevent to this decision models. We can the and break-even analysis example as well.641 costs (and total exactly to zero). in improved returns shows only the wisdom magnitude of investing of the positive analysis selection to that is not uncertain. apply uncertainty. and is the lowest Hiring superior value for SDy that would may be valued or allows many applicants of work. they were with much than most These Dealing a perfect parameters uncertainty showed. et al.39 justify $12. While it increases work that the amount of work.

& Kehoe & Zedeck.e.e.236. Pearlman & Hirsh. One consequence of such it draws attention to the financial and those implications functional of human areas investments.236. External leverage affected #2: by this selection Financial One-Cohort Selection Utility framework Model that focuses a focus. Neither Schmitt.80 (which assumes that the top 50% of applicants of these Tenopyr Boudreau parameters will receive scientific Schmidt. value $1.236. be offset because by rather selection (i.e.988).e. years) Model of the large program. (Sackett.000 by 100 times if costs modest are = (5.360): (2) of quantity person-years) and cost Utility The value costs down for QUAL (5.Utility Analysis: A New Perspective Page 30 score of ... the testing boils is $2.000.000 per applicant We could implying a total testing this cost of $1.. Line managers in other . & Rynes. is without 1985. formula $12.. testing costs are uncertain. symbolize and accept controversy Hunter. The previous attention however.360/5. and re-write We can the unknown in terms effect on quality (i. resource analysis provides a systematic on selection is that costs and benefits.07 the value (over of those selected 9. 1985.000/5.988 person-year.988 X at which QUAL) $12.07 to whether per person-year using $12. even (3) to $207 per person100 times higher per person- The break-even year than (i. they will This occurs expected. Suppose $10. 1985). as QUAL.988 the utility (i. consider the possibility be as high that we felt they might as $1.. rather re-write than Finally.69 years).360 benefits break even with the testing (i. of selecting The question randomly will the PAT instead to raise per year improve by an selection average decisions of at least enough $2.988 X QUAL) for QUAL is increased Thus. job offers). Equation 2 to reflect utili ty as follows: $1. effects 5. 5.988).e.

(1) productivity "service value") increases often enhance increased the value "service of goods costs" require to maintain those productivity improvement and increases. (e. these & Alexander...g.e. to income and (3) increases carry in organizational to pay profits some of the taxes an obligation governments. program increased in addition increased to the direct sales may costs of the productivity increased received benefits inventories and costs and costs. The next utility financial model How the utility future projections that Financial analysis typically adjusts of revenue and costs to reflect: sold (i. sales require commissions). Wouldn't implications of increased higher programmers appropriate productivity managers benefit require to value costs to attract increases and retain obtained from may them? Is it equal to productivity obtained next year now? Human increases up to 10 years such questions or even resource cost- unprepared numbers to address find that their lack credibility Cronshaw lead to incorrect 1986). Selection quality state utility or Local Model The Financial 2) adjusts factors. considerations. (2) benefits today's incurred because to in the future benefits earn more the are are worth less than received interest (or costs than incurred) received today later can be invested (this interest earlier rate those is called that increased "discount subject rate").Utility Analysis: A New Perspective PagE! 31 (such factors tax as Finance. Accounting considered and Marketing) by human productive frequently incorporate What hiring financial are the superior not usually resource value? managers. addresses 1983a. One-Cohort the estimate #2 in Table these three of program and cost to reflect ---------------------------------------Insert Table 5 Here . works. conclusions model (Boudreau. (Model profit External to Federal.

of $12. the in presentreturn to investment receives While of $6..43 more selected testing valuable randomly. those programmers selected the PAT must more (i.360 times For an after-tax . values Table 5 applies these additional derived earlier.utility Analysis: A New Perspective Page 32 Application considerations information to the case to the utility situation. an adjusted of $12.798 affected rate by (4) testing. with after-tax.. but also This cost.798/1. the variable suggests cost proportion. produces This (see Boudreau.55).55 million smaller than the results credible of Model to those #1. $12. with and may be more Dealing uncertainty. but also increased . interest rate the corporate reflecting to be 10%). service Necessary costs includes the proportion of variable (assumed (assumed return to be 5% of the increase to be 45%) that in productivity).983 reflects (1. testing service not only costs.983 x QUAL) not only the quantity $6.e. parameters value tax rate and the corporate the yearly can be earned utility on investments Applying (assumed these utility computation.798 an after-tax organization dollar remains financial terms.983) per person-year than the $2.07 than programmers obtained This value is higher that value in Equation must costs 2. tax rate.798 of person-years the discount the $6. of one cohort cost the PAT instead (i. that to justify with and the formula after-tax be $3. factors shown We can rewrite in Table Equation 2 to reflect the financial/economic 5 as follows: Utility Where 1. this accustomed substantial analysis. because offset we now recognize testing the benefits of improved taxes.55 discounted is the after-cost. $6. return of randomly.e. million value 1983a as shown for details) in Table selecting testing 5.

variables are typically organization's & Boudreau. 618 programmers values are job for about only the utility hired large. Model #2 can be used though to explore these uncertainty in the financial/economic estimated (c. a new programs production on its first Selection are typically Managers money might re-applied well ask. example. . experts. in Table How to address model 1983b). In the multiple-cohort for some chosen in each number the selection the than costs only is re-applied applicants Thus.utility Analysis: A New Perspective Page 33 and interest. year. and are relatively certain The point is that break-even a financial Note that analysis allows uncertainty to be explicitly when using addressed within framework these just as it did financial factors the non-financial model.. Thus.f. may not be programs #3 testing as programs are re-applied. works. by the Rich factors themselves. Each future rather is assumed as the in the one-cohort newly-hired cohort to stay for the some number of time periods and then leave. evaluating the effects plant of the first based only group is like evaluating production run. model. to new groups "What's scheme going many of applicants to happen years for several years. Selection affecting employee discussed #3: earlier (see Boudreau. benefits so obvious also rise is that leverage and potential programs concerns of selection Model substantially 2 designed the utility program as selection these are re-applied. financial 1987). (Boudreau. same can also stocks Model be applied to utility analyses for decisions 1983a). of testing once are incurred model. Financial Models Multiple-Cohort #1 and #2 reflect (in this Though External only Utility Model utility one group the consequences who of selecting stay on the of new hires 10 years). to spend as we continue on this costs new testing will increase the in the future?" What Obviously. selection of years.

with variables still constant applicant (i. case. in Year a third better-selected model The multiple-cohort costs of applying from having selection the more utility considers both years the increased selection employees program for several and the benefits derived on the job. each cohort for ten years. the and those times . discussed Moreover.331 than . stays seven years. and is joined by a second group better-selected in Year 3.e. and that we evaluate the testing program for ten years.utility Analysis: A N@w P@rsp@ctiv@ Page 34 selection numbers during selected still program is re-applied. number The work applicants. 618 better-selected selected new hires without are replacing 618 employees the PAT.. selected each hired randomly. are joined by another . program. $10. and financial Thus. the work force contains larger and larger leaves of better-selected the first group three employees.76 of of test #3 to the present costs. are assumed number leaving.413 the PAT costs $10 per it are assumed valuable to average $6. it continues to reflect the financial considerations earlier.80) more per person-year if they were years. In each of the first added Because to the work force. Table 6 shows force the results size. selected times testing selected. assuming no one years of a selection the first group better2. These programmers after one year. number tenure. validity analysis. throughout tested. steadily the number of better-selected There are 618 better618 in programmers selected in the work force increases. cohort We assume the PAT is applied for seven that stays ten years. ---------------------------------------Insert Table 6 Here ---------------------------------------Application applying Model to the case situation. For example.

total values to those 5 illustrates cohorts the substantial of programmers of re-applying Testing costs the PAT as indeed rise subsequent substantially Selection after-cost to a discounted however.404 the selection programmers program 3 years program 31. personis of selected using the PAT.. . 618 times The utility 7.854. 6. after-tax of approximately (i. years so on) analysis.e. human resource trace leverage decision by re-applying seldom even the selection program.000. cost The difference million million benefit and the $40.32 years). than the selection of over is far greater the number selected (i.32 million effects the after-tax. in and interest rates. compute a leverage let alone its effects on program costs and benefits. discounted are now $54. these for each the ten years. and so Year 7. the sum of 618 plus This leverage concept 1. calculated by computing summing the cost-benefit them over all consequences 10 years.236 plus is similar and in Table to the one illustrated program's programmers utility 6 were in Table leverage 1 for training 10 years programs..e. primarily of the increased Yet. when 7 times out of 4. variable Table costs and then adjusting for taxes.e.utility Analysis: A New Perspective Pag@ 35 the second on until have been year for a total 4.282 1. Comparing effects are hired..236). Over The the increased 10-year for the remaining of the selection selection affects is substantial. of productivity as noted (i. values shown at the bottom of Table of computation.326 programmers the la-year analysis.e. over $40. This value after-cost discounted to selecting million gained makers randomly).236. In Year 618) 3 there are 1. benefits. Moreover. in Table is substantially because greater reported 3. figure.282 person- sum of the productivity between the $54.326 of 1.854. All of these 4.000 value than (compared the $12.55 is $54.28 in after-tax.. (i. and we assume stay leverage ended. 31. or 4.

value Once the particular analysis utility may be highly an effect uncertain.331 produced it would per person-year. testing million $40.331 as well this $40. Again. utility Analysis Integrating Selection and Recruitment .. Once again.000 $54. remains constant or the assumption time and as new selected over are added utility to the work force. than investment in new-hire low.e. decision utility explicit.66 per the break-even person-year. likelihood the value programmers between QUAL) regarding The analysis the increased above assumed value per person-year equal $6.580) costs.e. small break-even to render suggests that the risk of producing may be quite value is only enough the PAT a poor improvement least. of . or the that one might question the assumed validity increase of hiring of those the top 50% of applicants.28 (i.. computer because the relationships using are mathematically or other types personal programs spreadsheets of software can greatly reduce computational requirements. suppose there disagreement uncertainty the PAT. rather Moreover.000 discounted. necessary At the very such an analysis the measurement focuses details debate behind on the a particular to be made. We can express value the relationship (sYmbolized total and the increased per person-year as follows: Utility where 8.66 per person-year after-tax of $54. as the financial suggests and reflects considerations.e.Utility Analysis: A New Perspective Page 36 Dealing with with uncertainty.. was break-even some analysis can assist and by using uncertainty.32 million) divided by (6) benefit (i. $6.282 person-years break-even increase with of leverage logic by only using Applying value per must formula $4. though the $40.000/8. because $4.580 the total increase x QUAL) (i. to break-even again. value.76.580 equals (8. that new-hire 31. However. the work the force value per person-year).

value generated recruitment process will A stringent if applied selection new hires and vice to poorly-qualified may be enhanced at betterEven when applicants. Utility selection. Recruitment and Selection utility Model How The Multiple-Cohort External Works The quantity model reflects of person-years in the recruitment-selection utility force the same flow of employees Multiple-Cohort The costs into and out of the work External Selection not only as assumed Model but in the Financial #3 in Table 2). through quality So. be . 1985). the quality of new hires is calculated the average of applicants in the pool (the value that would. polygraph or drug reduce force quality if better-qualified not to apply. based on Finally. work force applicants When find intrusive or insulting. strategies and decide reduce can changes their in selection effects cost actually When value through on applicant pools? are investments in recruitment return? in improved recruitment be #4 (see effective? How can investments the highest and selection Utility Model integrated Table to create combined 2) addresses questions like these. as investments the same. through is used are affected selection operate pool by characteristics activities still yield (Boudreau of the applicant & Rynes. in selection activities tests might For example.utility Analysis: A New Perspective Page 37 Our analysis applicants or not. in better changes recruitment can affect actually them activities the applicant work remain pool. in improved as well as recruiting selection. but would thus far has simply whether don't assumed that the same group system They of be considered programs the new selection in a vacuum. (Model now reflect in each also and recruitment in this model. value programs applied year of the analysis. of lower versa. the quality recruitment of new hires (such investments colleges).

average score. and financial considerations). that don't change tenure. added non-randomly applicant utility Whereas discussed the utility previously selecting by this using value reflected only in the three selection in work models between the difference versus force value systematically Model #4 reflects to randomly. as a result number of the variables the number test of new hires.Utility Analysis: A New Perspective Page 38 produced value by a randomly-hired by selecting values reflected group of job applicants) from that plus the incremental pool. work the utility force value value calculated hired the expected system of those period. with Recruitment methods--recruitment advertising is assumed advertising to produce average audience assumed a higher applicants Table recruitment testing or a recruitment an applicant value. of applicants. employees are selected pool from among applicant but the value of that applicant is in the first ---------------------------------------Insert Table 7 Here ---------------------------------------Applying The be changed the Model second to the Case Situation is: "Should the recruitment Table program the strategic question to attract higher-quality utility with model applicants?" to estimate 7 applies recruitment-selection the PAT in combination the returns from using one of two recruitment agency. them because to screen to the organization. little pre-screening..e. utility . pool with The recruitment less diverse the agency agency an applicant applicant referring qualifications is expected value. pool diverse qualifications advertising but a moderate reaches a wide is but applicant because recruitment but provides to produce average before 7 shows (i. the recruitment-selection includes pool. not only how well during the analysis This the place. costs.

76 and SOy as before. to be less variability SOy to $8.500 per hire (American Association. for agency-recruited utility Computation value of each new hire randomly pool.450 earlier.utility Analysis: A New Perspective Page 39 is assessed and employee Table assuming the same 10-year application of the staffing program flow pattern 7 also shows discussed the variables advertising $4. is expected so validity agency to produce applicant $10.413 pool similar to the present is . per person-year.000 a net applicant value for agency-recruited value applicants per person-year. recruitment 1986. affected costs by recruitment. the average value of those . hiring average-value value produced The expected the value applicants) by systematic produced from (l) by selecting the applicant from (2) the Thus. applicants reducing carefully.500 agency . agencyvalue of $60..065 agency-recruited by service of $15. an applicant The advantage pool of higher of the recruitment To reflect is in identifying in Table service quality. plus is the sum of two values: (i.620 applicants) applicants of $36. this advantage an average service them) 7.445 due to the lack of pre-screening). an is Recruitment advertising one. (somewhat lower for a net applicant than is offset costs value per person-year .e. Management while the Specifically.000 higher recruited applicants are assumed offset to have (due to pre-screening) salaries/benefits producing by average and retain costs (including to attract of $40. recruited The average is assumed service per person-year per person-year for advertising(lower and than applicants to be $52. of $20. Table recruitment agency 55).000 per person-year. more validity Because the recruitment there will is expected among to screen them.60 and reducing per person-year. costs $2. incremental selection that pool. per hire.

60 times to the average - of the agency-generated (i..000 or $20. computer and adjusting that these for the discount were computations software accomplished to reflect a personal spreadsheet programmed the mathematical The results of Random relationships.e. subtracting selection variable using and recruitment costs and taxes. of average ($180. per person-year. are shown (i. per person-year).$36.e. applicants is higher value) the agency-generated the costs are also higher applicant at $8...951 . Note with analysis period.065 produced $10. value or $15. value $60.76 times by systematic or $6.080 selection using the PAT totalling (i.80 times $8.000 per person-year) plus the by systematic or $4. hired from totalling per person-year. pool is equal the agency-generated applicant applicants incremental .000 However.e. testing the agency-generated . the ten-year costs.80 times per person-year).04 discounted from but a recruiting Selection The after-tax.e.e.. (i.080 . minus $40.e. $24. in Table hiring 7..000 produced $40. That we compute total utility new-hire as before in Table is.331 of those value selection (i.500. The after-tax.55 hiring pool million. are computed. Value discounted value) with Value the Selection applicants from advertising-generated cost of $4.32 the advertising-generated million incremental benefit is the same as before testing cost).413.620 the incremental . by multiplying force average by the number summing over of new hires in the work in each of the ten the total rate. The value to the average .e. of average million. Once precisely quality years.utility Analysis: A New Perspective Page 40 hired through advertising is equal $52. applicant pool is $141. these quality levels 6.10 applicants million) million. The value by testing $54..445 value of the advertisingper person-year) using the PAT generated plus applicants (i.. $21.50 added of Random (i.

04 million).45 the PAT produces million plus a total force compared value $172. utility a much pool model higher that the agency-generated value than the advertising-generated $141.28 to advertising-generated million). utility.. However.96 and testing with are integrated.e..e. $54. those recruited through Agency .065) of $7. Considering only selection strategy.935 than service per person-year advertising. identifies that to this outcome..utility Analysis: A New Perspective Page 41 applicant producing cost pool adds less value benefits (because of $35. Again.000 analysis was offers a method that of addressing uncertainty applicants (i. and risk.76 some advertising (i.28 which produces plus a total million million $136.e. recruits.. of the recruitment-selection relationship Dealing With & Rynes. other this utility model be used to explore (Boudreau Uncertainty break-even implications 1985).e. lead the recruitment-utility Of course. testing incremental million.4 million) work force to testing of $190.5 than $54. the same of $40.e.000. Suppose there some doubt more agency-recruited value really minus average $52. value Selecting of $207. $34.. recruiting PAT selection work is clear. applicants the recruitmentapplicant pool selection produces applicant effects combining recruits (i. Sacrificing applicant testing makes sense.00 they are already with pre-screened).48 million). would $60. million versus of recruitment agency with $34. effectiveness for an increase integrating in average quality By systematically and selection conditions also the cost-benefit implications model of recruitment the could decisions. the advantage When of agency million the (i.96 million applicants versus shows average $180. we can see that a smaller the PAT pays payoff applied off under either recruiting but achieves to agency-generated (i.

Selection when rose by $39.. (i..000 million per person-year.e..50 for agency value million with of an average Random million) minus net applicant of $20.87 and reduces $54.46 $141.32 negative Selection value million effect million million. of $22. know the true Isn't to switch between this to an agency difference in value the applicants question is to recruitment how much would costs. per person-year this for the change in average Selection to increase the Value of Random .utility Analysis: A New Perspective Page 42 recruiting attract recruited you don't by each determine applicants and salary the agency million test's $35.5 million The Value minus (i.55 effectiveness.380 $15.00 costs more.04 $20..009 for the Value of Random per person-year of Random equals in the applicant pool Selection = (9.380. instead method? higher One way to address the average net value to offset of agency-recruited the increased recruiting through have to be in order and the reduced of advertising million minus testing increases $4.55 the selection minus (i. was $141. Selection all the other variables affecting the Value of Random are unaffected Selection by recruitment. value a total by $19.620) per person-year.04 million while the The Value with Value an average of Random of Random for advertising of $15. and the PAT is less useful it rather risky when applied to agencywhen generated applicants.e. $180.009 x in the Value in net value formula Net (7) the change of Random Selection--$39. agency recruits require higher service costs to and retain them. was $180. recruitment Recruiting costs by $3.000 the average net applicant Because value rose by $4.620 recruiting net applicant Selection per person-year. $8.e.10 million) (i. as a function as follows: Value) we can write of the average the formula net value Value Where million 9.32 incremental million).e.46 in the applicant net value by divided by the change If we solve necessary per person-year pool--$4.

87 have divided by recruitment). If our recruiting rise for agency-recruited their service value applicants must to $40.87 million (enough we obtain to offset $2.538) per person-year effort.000 per person-year. that adopting Moreover.e. expensive an average or more service net value to justify costs then $15. producing for the agency recruitment The complexity advantages computerized sizable approach more of the recruitment-selection analysis in permitting utility underscores to be the of cost-benefit and calculations in analyzing shown in Table uncertainty 7 suggest systematically. However. pool must of agency $22. the agency-recruited of $18.e. program decisions. 009 ) .158) per person-year to offset the negative effects applicants recruitment. value agency-recruited service of $60.000 of agency had an assumed a sizable plus be at least (i.000 $58.158 per person-year. of improved of turnover How much best nullify the advantages recruitment-selection? designed to retain the should an organization such as higher invest in programs performers. compensation or improved benefits? What . $18. programs may produce substantially valuable utility resource Analysis Integrating Recruitment. recruitment can improve Separations/Retentions and selection staffing enhances the utility model and. per person-year applicants plus So. who leave selection produces better-qualified could the new hires increased costs sooner less-qualified applicants. 9 . an integrated the effects to recruitment human and selection decisions. average advantage In the example. Selection and Employee Integrating as we have about seen.538 the negative effects (i.utility Analysis: A New Perspective Page 43 $22. method.158 the more (i. decisions by employee selection and recruitment If improved than programs affect and are affected separations.620 agency $2...e. $40..

Rather.g. those leaving and then may together. If more than a subset valuable of the employees incumbent separate. which HRM decisions affects and programs affect the pattern work of separations. This is true in turn the value of the retained programs force. to manage directly (Boudreau 1985b). the retained value. How #5 (see Table 2) provides a framework the Financial Multiple-Cohort Utility that Model External Works cohort Recruitment. work is lower the pre-separation how employee and vice we can analyze . employees. is (the average Model But rather retained. force versa. old. work force the organization. acquisitions. designed for both employee selection/recruitment separations more and programs & Berger. it is still Hired oversimplification actually during of actual separation patterns. value Thus. Selection Separation/Retention We have years than assumed each hired simply stays This for a number of (10 years focusing in our example) the first and then hired leaves. #5 considers than focusing the effects on who of separations the model on work focuses is lost.. leave employees stay together each time period in one group. Consider work the group force) of job incumbents of employees before with separations a certain pre-separation value as a pool When to the organization. pool stays with employees separate. Should with and how is it affected in improved in programs to these to by recruitment/selection recruitment/selection simultaneously require effects retain investments investments Answers performers? questions but the as analyzing of employee Model not just the effects (e. for such layoffs) analysis. of employee quits. separations resignations. but is more realistic a vast don't on only cohort. good or bad include new.Utility Analysis: A N@w Perspective Page 44 is an "optimum" level of employee programs? be combined the best turnover. force on who value. and well.

adjusting for taxes. (1) the (2) the we simply consider of recruitment/selection and then the effects of employees added to the work force. and vice To integrate selection. separation/retentions exit interviews includes the cost pay) of the separations as the costs retirement themselves of programs incentives).g. employees produce is the number of employees that tend and time periods to retain versa. releasing utility the separating model The sums the work costs values in each rate.g. each cost average affect work force quality by calculating work the quality force in net value under per person-year) of the retained about who time period different assumptions is retained. minus (3) the and of acquiring the new employees employees force (recruitment/selection (separation/retention costs) costs). The of employee (e. or severance as well designed to affect the pattern of separations affected by (e.. separations/retentions in any given quantity quantity costs on the value the value times of employees of the work their who are retained. separation/retention begins with is similar to recruitment/selection. work force Such from which systematic Separation/retention certain retention individuals is quite decides are apparent who leaves an incumbent by the organization. force consists of time period. value separations/retentions the effects with and on the of employee Briefly. or dismissal decisions. The quantity of person-years separations/retentions in the analysis.. of employees of employees retained added average quality.e. time period. variable and the discount In concept. where the organization . plus times their average quality.utility Analysis: A New Perspective Page 45 separations/retentions (i.. recruitment more involved valuable Decisions higher employee and programs force work value. from which certain Recruitment/selection individuals begins retained in layoff with are chosen an applicant pool to join the organization.

or resignations). stays. through advertising.Utility Analysis: A New Perspective Page 46 and who when Here. value. service average group This applicant service and SDy the same as before.404.620 is the sum of the value plus the incremental selection per person-year) . The financial/economic period is still remain and the analysis Table 10 years. .951 (i.. so the selection to of 8 assumes recruitment and recruitment recruitment parameters reflect 7.g. $15. The number and separations is still 618 and the number considerations of programmers the same.. of $21. the assumptions The PAT has standard test corresponding an assumed score. Each testing cost. The concept also applies. and the number average remain value applicant of applicants. 4.e. of employee and how much MultipleUtility application of be changed a change of the good 8 applies be worth?" the Financial External (Model Recruitment Selection and Separation/Retention this question 1985b). (such that these employees those do the choosing (e. (a similar #5 in Table in detail 2) to address is discussed acquisitions is still in Boudreau & Berger. in the case "chosen.76. advertising in Table validity cost. Application to the Case Situation ---------------------------------------Insert Table 8 Here ---------------------------------------The third separations would Cohort Model such strategic question to retain asks: more Table "Should the pattern performers. of 618 acquisitions has an average of random value added per person-year." who remain are not directly but HRM decisions or pension rights as competitive vest only after compensation extended for star performers are certainly tenure) intended to manage separations. although perhaps of quits less apparently.

000 recruitment and $7.e.045 a net value These pattern of $15.Utility Analysis: A New Perspective Page 47 by systematic Based derived the selection (i. Boudreau & Berger such (1985b) things as on a review of costing literature. average as the pre-separation where those (3) valid selection value retaining the best.. regardless of the quality of the person or leaving. of the acquisition greatly and separation reduced the (Boudreau.500 cost. they were logic 1-2-3 spreadsheet reflecting model the algebraic 1985).707 while than the pre-separation where those (4) valid an average selection yearly the worst. and administrative administrative and severance pay).331 per person-year).000 outplacement are incurred for each acquisition relocation. for each orientation.e. retained have where force. less than retained have value the pre-separation work force..065 and average incumbent service cost is $36. (i.620 assumptions per person-year). Such costs assistance. 8 analyzes (2) valid the same while situations: with random (1) random retention. separation exit (reflecting $2.707 utility retained have work an average force. resembles value At the beginning the applicant of the analysis. we assume yearly the work incumbent population yearly average is $52. selection and retention combinations required a LOTUS are shown The results at the bottom these model utility values of Table Though the computations computed using to generate are complex. (reflecting interviews. greater retaining of $2. Computerization . Computation of the four 8. $6. keeps The separation or poorer determines Table organization contrasting selection value its better performers. and yearly of $2. work selection those and retention. joining force service for activity) activity. a cost of $7. establish all the information pattern needed except whether the the four of separations.

by $2. retains per the highest even that if the organization (i. By the same of improved combined $67. million.10 million minus million). dysfunctional as the random set patterns can disrupt the effects selection value selection. they would compared a $41.81 token. However.707 the effect of separations producing is to lower the average work value per person-year). they effects are based human on a specific programs of assumptions.e. with illustrated worst by the fact produces that valid a work While retaining lower than employees force these million selection and retention.79 selection dollar to random $242. million. affecting suggest that integrating may produce resource selection and retention substantial organizational . The important of valid in work minus a low 10-year force of $132. Option discounted selection the work 3 shows of $200.10 has high and retentions million over value increases ten years. patterns only has some implications.69 retention retention.. where and random after- the organization retention cost valid random.31 million). selection. selection it will Under Option 1.e.76) is introduced to $242.69 selection.59 selection could is combined be realized improved $351.707 force). where remain (validity force . million an additional $242.. it will Finally. those retained work validity more and also valuable attain the best employees than value are $2. 2...e.10 $200.31 million. person-year work with force the per-separation of $351. force value If decision expect makers the effects increase million with (i. value equals the analysis. Option 4 shows that highly-valid if the worst employees are retained programmer value (i. Option (zero experiences separation work force (validity have of zero) a 10-year Under after-tax.Utility Analysis: A New Perspective Page 48 calculation effort.e. and simplified random effect). if improved $109.50 interaction between separation and acquisition considered million (i.

with If the current selection respect to job performance.707 per person-year. the average increase in the difference value of the retained force is worth force and the average of the pre-separation after about cost value over $40. change and $132. (e. to be hired. cause better-qualified are more reduce employees likely However.Utility Analysis: ~ New Perspective Page 49 benefits. effect is zero. managers after-tax..10 the the million when the separation $351.032 . of improved and then better Suppose selection separation selection the likely effect on the separation pattern will is random pattern. assuming the separation Effect remains Equation 8 for the Separation produces necessary to reduce Work by -$41. separation Work where dollar work the following work relationship value: Separation effect force and total force Value $109.488 equals divided between by $2.10 random.707 between in the Separation changes in the Effect.50 Thus. work million force changes This by $109.707 is -$2.488 x million Effect (8) Simply value work put. produces million Solving Utility - an additional $200. every 40.6 40. force per if better-selected job opportunities).6 suggests million for each of $2.79 improved (i.488 in discounted.31 million).e. due to better force between enough the selection $242.79 a break-even Separation Effect of -$1.. to offset Total Work employees could to leave this the value Taking of the work the selection force Value improvement? for Options work force the difference that million pattern 1 and 2 suggests value of $41.g. disagreed 10 years. per person-year. Work is $242. Dealing with Uncertainty in Table when 8 shows the best that the highest value from improved force million The analysis selection value when when value is achieved employees are retained.69 separation separation effect effect is $2.707.

that we be certain us to more more explicit of the value trace of the Separation implications between it enables by making precisely the of our uncertainty selection the relationships recruitment.. for recruitment to simply fill all vacancies. in terms of quantity.e. work random require selection retention. select qualified candidates. where force the retained value minus As long as improved work force value selection is greater a separation the pre-separation improved selection with work will random $1. produces results. force value than produce a higher Thus. for selection with others it is not enough to appear valid. Model #5 does Effect.79 pattern million/$40.032 total using per person-year. and separation/retentions. not In fact. with only one job.Utility Analysis: A New perspective Page 50 person-year causes than then (i. level employees or does When in lower-level their narrow jobs do they focus makes also make good promotion in upperpotential for entry- them poor performers on their jobs? is it better jobs to select rather employees their based to perform level jobs? in higher-level If you promote than qualifications your best technical performers into management.488). -$41. Decisions affect selection and separation move between in one job often affect and are affected If you by how employees and retain highly- jobs within the organization. staffing Decisions Analysis Integrating Internal utility and External model separation-retention and employee gap--it deals integrates but selection. expressed The and separations. . or for the turnover It is the patterns rate to be comparable of employee quality acquisitions that for in the industry. model and cost integrated patterns utility provides a framework considering improvements utility The how these in work and relationships and organizational can produce substantial force value performance. it still that leaves an recruitment important separations/retentions. Clearly.

The final utility for integrating employees How and enter #6 in Table that 2) presents affect a framework how jobs. demotions and transfers. a framework for analyzing model the productivity for internal not only as well consequences movements movements.g.. (e. the effects A decision of internal quality employee staffing and cost on the quantity 1987b). . resource jobs demotions has and transfers focused (Boudreau 1985a).g. desired and projected that (e. allocation but of should did not propose internal consider employees. Milkovich & Tsui. Selection. linked. of internal or other 1981. Rosenbaum. the consequences and leave of decisions force. candidates is partially may by external but it also and involves Downsizing involve redeployment jobs. 1983).. & Berger. gaps includes Human promotions. not only between the work but how they move the Financial Multiple-Cohort utility involves Internal/External Model Works moving Recruitment. Separation/Retention Internal staffing and employees between jobs within the organization. internal Doeringer quantities movements & Piore. between Stewman Such planning of employees identifies jobs. Organizations time and resources staffing takes to promotions. model (Model even if no external place. this quantity & Konda. or rebalancing internal in job assignments staffing devote by moving employees of between external Moreover. some work force value by reducing value valuable strong technical technical The pool hiring often managers? of or building and organizational staffing with internal are closely determined layoffs. models to predict 1984. in various Some have of labor recognized resources affect 1971. is important substantial independent staffing. of but on their (Boudreau. 1980). the efficient Thurow.Utility Analysis: A New Perspective Page 51 are you decreasing performance External promotion separation. Anderson. planning on the quantity 1982) using Markov movements between (Milkovich & Anderson.

decisions of by emphasize or quits. employed. or assessment supply jobs that to external employees. by improved performance in the receiving in any job at a the quality plus (2) the In the utility particular employees quantity time the value of: of the work force is a function when (1) the quantity separations added times of retained times external take place. might consider seniority. ensuring is determined layoffs staffing staffing decisions. the effects of internal movements supply can be as serious as employee separations. minus times the quality internal (5) the costs The model of external internal selection and separation force in each in each activities. that vacancies Yet. plus (i. performance For similar internal selection center decisions scores. retained when internal (3) the quantity take place the quality employees separations jobs). the effects utility value that value to reflect of internal and external employee movements. the effect except of internal that movements of are separation/retention. in the receiving job are filled with qualified on candidates. by internal Internal the pattern instead usually separations dismissals.. receive except whose employees. through times the quality plus of employees external of employees move out of recruitment/selection. the jobs that as we shall candidates see. scores to predict Whereas future external selection might use test performance.utility Analysis: A New Perspective Page 52 For external currently their jobs that selection. job. that the internal "applicant will movement pool" is very much like consists of candidates in part by characteristics work experience be determined current and previous decisions in the organization. The resulting . and may not always be offset model. of the job into other employees and added through (4) the quantity selection. establishes the value and then of the work changes job at the beginning time period of the analysis.e.

producing million per year between to assess all 3. separations. the external as before. the $7. System leave the effects 1. are filled A promotion-from-within by promoting job costs regardless 100 slightly exists. and variable costs.utility Analysis: A New Perspective Page 53 is the sum of the work period analyzed. with orientation and administration). force values in the jobs interest analyzed during the time adjusted for taxes. for the Programmer job are the external except of 618 new hires necessary to replace to replace we now have and the period 718 new hires the 618 and 10- 100 promotions.786 promotion candidates. The financial jobs. ---------------------------------------Insert Table 9 Here ---------------------------------------Application Question promotions to the Case Situation investing Table in an assessment center for internal #4 asks whether is cost-effective. rates. center. and the Each Programmers. 1979). Each promotion from Programmer to Manager (including relocation. 100 of whom policy the organization 100 vacancies each year.000. considered the symmetry the external staffing variables . of applying Selection In Table same the Financial Internal/External Model and Separation/Retention 9. Multiple-Cohort 9 presents the results Recruitment. considerations are the same for both we will consider illustration.000 of internal promotions a Data Manager job containing upper-level employees.000 retained.44 Notice applicant (Cascio & Silbey.000 of the quality also costs of those $8. costing Internal an average a total selection is accomplished an assessment of $380 per tested cost of $1. higher than separation cost from the Manager for Programmers. separations year analysis For into staffing that utility variables instead to the current example. $8.

e. The values the after-tax. 4. increases.786 is the group take for available minus in each year after separations applicants 618 equals 3.. force by ten percent reflecting is increased higher (through the As the value selection of the Programmer and beneficial as promotion the Programmer candidates smaller work external separations candidates work force and retentions). (about higher than SDy for Programmer Because than the Manager job involves more discretion value and responsibility promoted the programmer (i.404 job. job and the internal The "applicant pool" staffing variables considered in of 3.786).454 applicants).786 place for promotions external 3.32 choosy. could SD (standard assumes all Programmers are promotion only but one easily are consider situations in which Performance job than a limited of Programmers to have larger eligible or tested.Utility Analysis: A New perspective Page 54 in the Programmer the Manager Programmers (i.413 candidates is $11. The reflect relationships between Programmer and Manager utility performance. promoted. valid value cost also than they produced when as Programmers.e. an added of the Programmers that improve also Thus. benefit decisions produce by improving model could promotion also for Manager or larger jobs. job. so the average deviations) candidates. test This score the organization of those that promoted can be quite is 2.. differences are assumed job. . consequences promotion in the Manager in the Programmer ten percent so SDy among the $10. the average the value higher rises obtained service with of Programmers to Manager random promotions) is assumed Their average to be ten percent service salaries. number standard above average. Computation of Table 9 shows the effects shown of different represent internal and The bottom external staffing patterns. and vice versa. With 100 job openings.

model and Manager work forces. program to be programmed The values (Boudreau.68 the assessment predicts job performance Programmers internal that for Managers. Though producing utility future of $278.51 million. a validity Option of 2 introduces . equal to It acknowledges of the assessment it still assumes . and enhances the value producing of the Manager a total work the Programmers million.86 PAT with this a personal computer using spreadsheet in Table 1987a). Option the possibility performers from that promoting the Programmers highly-qualified work force.utility Analysis: A New Perspective Page 55 after-cost summed complex. staffing This is not to suggest but assessment the value centers are always poor investments. are rather them 10-year analysis utility While the computations enough the mathematical using is explicit with to allow software. million. on the quality total work assumptions. if it simultaneously would be $12.76. over discounted the value of the Programmer period. but no effect force of $296. Programmers the average a center reducing of the retained work force Programmers by $625 per person-year. 4 considers pulls value total validly removes better high increases to $302. 3 analyzes validity job. 9 were generated such a spreadsheet 1 depicts random value external of each and internal job's work staffing. it illustrates of a decision framework .22 million high-performing off with random the organization (Option 2). remains Under constant such as of the the average and external force movement occur. are promoted.35) for the Manager Programmers Under these has that promoting of the Programmer force value highly-qualified work force. The value external selection of Programmers work force value when is enhanced. producing valid a total 10-year value using million. internal $249. Option a system.90 Option the internal staffing in the typical center (validity manner.

utility may even values based as well as financial require on such a model estimates. How much less would the productivity reduction the decision in favor of the Assessment Center? . consider that quantities or head the fact of employee differences to encompass such movements in work other were force constant value across the four options. #2) is offset figure assessment the $5. decisions affecting internal and external and involving flows.utility Analysis: A New Perspective Page 55 incorporating supply the effects as well of internal as the jobs staffing that decisions on the jobs that employees receive models Despite employees. in the value it would of the 3. and and Obviously. internal For example.61 million advantage #3 minus of better $296.90 internal million selection in Option in Option losses by productivity may be uncertain selection who in the Programmer job. such estimates models. size. selection factors.51 cause assessment-center-based value a reduction million in average Programmer of $625 per person(i. As with the earlier utility can address Table such uncertainty 9 showed that when systematically and explicitly. Dealing With Uncertainty the most integrative utility framework. argue the $625 or controversial.686 Programmers not be $625 per personhave to be change year. These concepts can emerged.. two jobs. promotions year. However. Model encompassing #6 represents both internal and external recruitment. will remain CaUse after Some might that while center some reduction promotions. investment separation/retention. that It also only the illustrates movement quantities substantial be extended employee external more than the limits of internal count staffing levels. break- be uncertain analysis or variable. $302. as "make-or-buy" reductions in work decisions force between and internal systems selection.e.

analysis Models (Tables analyze the productivity application the stock 2 and their of human The training for programs program affecting 1) illustrated of employees.. causes from and the retained the Total dollar Work work force after promotions) by -$23. application analysis For employee to the case can encompass #1 through 3 through #6 in Table 9) showed study not how cost-benefit . could this but change not require determining the Programmer the critical center (i. the analysis on the critical the programmer question work of how Assessment promotions affect force.Utility Analysis: A N@w Perspective Page 57 The results Programmer of Options Effect force to -$625. Promotion $23.ry and Implications Summary This chapter has illustrated how cost-benefit effects (Table utility analysis resource utility flows. measuring it exceeds controversy Effect. we can find the Programmer advantage Promotion of improved Effect Programmer a Programmer exactly offset the $5.. Promotion value -$147 that in rather the decision The utility to adopt model Center the assessment focuses based example). change Value in the Programmer of $38.128 (i. every 3 and 4 in Table (the difference 9 suggest in average that value the when between the the Promotion work zero pre-promotion changes million.61 by $38. with reduces the total random value would be less than Addressing obtained does promotions precisely whether and retentions.83 Effect force Value changes Therefore. This produces of -$147 per person-year. the Programmer work force If promoting work force the highestvalue by $147 per $296.e.61 million million selection Promotion qualified person-year million by dividing Effect -$5. a change .90 the programmers or more. models can systematically programs.128. SUIIIna.83 in Total Knowing Work force million/625) that would this.e.

and to evaluating a framework they offer for planning decisions how resource programs activities. consequences. the of utility human analysis is its ability to make relationships linking resource decisions assumptions to productivity-related and areas of uncertainty outcomes. are only must one consideration by consequences resource makers. including consequences. Several constituents be considered with not only managers concerned productivity . and offers that focuses explicitly systematically However. but the integrated employee the effects movements utility selection. measurement is to the for The break-even may be less important demonstrated commonly precise The believed. seen. Note separations and internal it is also possible with the models that to integrate for employee analysis than stocks for employee parameter flows. and to highlight analysis. The contribution can proceed a definite explicit goal. variables important could task affect identify human risk the critical decision values for those that resource and systematically Then. that that might such have human otherwise or incorrectly are not Rather. jobs. in human decision on productivity-related productivity-related decisions. a framework they implemented. and evaluated managers Utility The way human is likely resource are planned. measurement assess effort their implications with and uncertainty.utility Analysis: A New Perspective Page 58 only the relatively of external between model simple case of selecting employee that one cohort. Are the critical for systematic Decision Systems Planning models Tools offer a way to summarize and integrate a large be ignored utility number analysis of productivity-related evaluated. communicated by to affect such decisions and whether are perceived are throughout analysis the organization. limited As we have programs summaries already and integration been implemented.

completely determine and communities. utility organizations tradition success analysis decision and power or failure models makers often the outcomes 1988. on decisions. "what as they if . can more Limited makers be operating important data appropriately Information management address organizational concerns. and programs' still. when million-dollar legal return against possible animosity.. and can assist between never be negative the the tradeoffs Though it will productivity easy and other less tangible to balance a potential morale. regulatory are never agencies. are as applicable about financial..utility Analysis: A New perspective Page 59 but employees. Furthermore. but the examples and it can also may lead to unsystematic create the impression incorrect decisions. summarize to more productivity-related systematically consider factors. often by to decisions marketing clarify or operational the nature As we have such techniques decisions of uncertainty and can actually enhance . rational." analysis are to decisions seen. of decisions Chapter outcomes. (Milkovich & Boudreau. Techniques than attempting even to precisely as break- analysis and computer-assisted about human resources resources. management operates uncertainty. effects task on employee vulnerability consequences from or union may be easier decision productivity will are better a common specified. Politics. personalities. is No Excuse function for Unsystematic with Decisions yet dollar Believing costs Every and returns "people provides illustrate Moreover. makers to identify sources rather such of Utility risk encourages and examine measure or uncertainty effects variable. set that At least. to stand that analysis here problems" are simply excuse too uncertain to avoid up to rigorous presented a convenient that it. 8). are routinely considered in such decisions. resource such a belief produces analysis only that human "soft" benefits decision their every to the organization.

human information. gamble that or adopting convenient but faulty systems is a dangerous or surprising can cost millions. affect decisions resource often by line and are often the of top managers the first programs to be cut to reduce or employee that consider only leverage costs human periods of programs resource and the substantial numbers decisions ignored. large of employees and time is often If there here. sentiment. consequence resource applies decisions of quantity.utility Analysis: A New perspective Page 60 demonstrating programs Human that only very unlikely events could make human resource unprofitable. resource analyzed essential starting a management such analysis models provides provide a and important point. and that these decisions can be analyzed often are Organizational line managers decisions by supervisors. resources If human and top management. within it is a logical the framework decision. Decisions Are Management Decisions of human resource decisions that "our Resource Though the contributions and importance are often people acknowledged abstractly (as in the common day-to-day Human managers statement are our most often important belie this asset"). behaviors. as it is for marketing. quality simply to any management In many . analysis Ignoring decision resource implications. is one overwhelming resource message decisions from the illustrations a difference presented to it is that human can make organizational systematically ultimately is as true financial these made productivity. production This and for human resources. resource professionals that human and that utility are to influence issues can be managers. within they must demonstrate framework. cases. budgets. and explicitly. This is of not a startling viewing and cost human that conclusion.

decisions. make communicate more effective better HRM supervisors. how a useful program develop to further tools decision actual support using computers. It is hoped decisions using that HRM decision makers will analyze and present their with cost-benefit and utility concepts. such models managerial decisions (Boudreau. more to organizational to employ these productivity concepts and no one competitiveness. line managers and contribute Those to blame human and top managers. and explore & Rynes. line managers and top managers continue to ignore resource management's contribution. but themselves who fail when may have supervisors. used here managers Actual better will decisions involve (Florin-Thuma & Boudreau. Dyer 1986). from those examples decisions different assumptions for illustration. and general is currently improved affect but the principles decision underway system. illustrated A long-term enhance by these integrated the utility provide research models. .utility Analysis: A New perspective Page 61 framing human resource issues toward in these terms clarifies their importance and directs in press).

of human resource productivity Personnel Psychology. H. human J. analysis Handbook external Boudreau. (1983b) Effects of employee improvement flows on utility analysis of resource productivity programs. Decision theory contributions 23. of Industrial-Organizational MOVUTIL: A spreadsheet employee program for analyzing Ithaca. resource management J. Psychology Boudreau.. In press. mobility. EXTMOV: movement A spreadsheet decisions. Bonnini. In M. (1987b). movement: Center An integrated Human theoretical Resource Working of Industrial for Advanced Studies. & Hausman. (1985). program NY: for quantifying to HRM research and practice. employee Ithaca. (1984). NY: the utility of internal and external movement. 396-407.. J. Industrial Relations. & Tsui. Homewood. (2nd ed. W. Association New York: (1986). Boudreau. J. T.. Quantitative J. Cornell University. 36. (in press). Author. H. of intra£. Dunnette. Management A. decisions. J. J. School and external employee paper. Author. Boudreau. W. Economic (1981). Association. Utility in human decisions. Academy organizational Bierman. Journal of Applied Psychology. . Jr. 551-557. Irwin.). C. 68.utility Analysis: A New Perspective Page 62 References American Management report. C. American Hiring strategies and costs: The AHA Anderson. (1987a). Boudreau. W. (1981). the utility J. Milkovich. P. 529-538. Boudreau. Utility analysis applied to internal framework. considerations improvement in estimating programs. W. Ill: analysis Boudreau. J. W. for business (1983a). 198-217. A model Review. W. of Management w. and Labor Relations. W. G.

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Dollar Value of the increase in productivity due to classroom training.200 = $860 .035 over five years (no start-up costs because system already exists). allowing up to 200 to be trained per year Option 1 Classroom Delivery Option Audio-Video 2 Delivery Costs: $451. consisting of one broadcast studio and 10 remote conference rooms (one-way video. Train 40 students per year $1. two-way audio). per person-year (Symbolized P2).147/1. or (2) An Audio-Video network. class sizes of 40.031.147 P1 $451.031. with twenty half-day sessions.035 Break-Even u2 = (1.200 X P2) Analysis . Payoff Formulas u1 = (600 X P1) - $451.031. per person-year (Symbolized P1). in the Work Force (Leverage) Quantity: Number of Trained Employees Year Year Year Year Year Totals Quality: 1 2 3 4 5 40 80 120 160 200 600 200 220 240 260 280 1. training up to 40 students per year.$1.utility Analysis: A New P@rspective Page 67 Table 1. Decision Affecting Should training for engineers in basic production processes be delivered through: (1) Classroom-based training.200 Dollar Value of the increase in productivity due to Audio-Video training.147 over five years (very high startup costs). Train 200 incumbents in the first year. and 20 new hires in Years 2 through 5.035/600 = $752 P2 = $1. utility and Break-Even Analysis Applied to Decisions Employee stocks: A Training Delivery Decision. conducted by experienced engineering employees.

5 X P1) + $484. If both P1 and P2 are less than break-even. 2.(600 X P1) . do Option 1. and P2 is more than (. If P1 exceeds $752. do neither program.200 X P2) . do Option If P2 exceeds $860.147 . (Concluded) Payoff Formula for the Difference . and P2 is less than (.$451.5 X P1) + $484.031.$484 Rules [P2 . 2. utility and Break-Even Analysis Applied to Decisions Affecting Employee stocks: A Training Delivery Decision. .utility Analysis: A New Perspective Page 68 Table 1.(.U1 (1.035) U2 . 3.5 X P1)] Decision 1.($1.

Model #2: Financial One-Cohort External Selection utility Model (Boudreau. Financial value of deciding how to attract the applicant pool. Summary of Cost-Benefit Decision Models for Employee Flows Decision Model Added Features Decision Addressed the Model by Model #1: One-Cohort External Selection utility Model (Schmidt. selection and separation management programs are applied. . and how to manage employee separations/retentions during each future time period during which recruitment. Effects of re-applying the selection program to subsequent applicant Financial value of deciding how to choose which external applicants should be hired in a particular time period. 1983a) Model #3 Financial Multiple-Cohort External Selection utility Model (Boudreau. Effects of recruitment decisions on the outcomes of selection. Financial value of deciding how to attract the applicant pool. and Separation/Retention utility Model (Boudreau & Berger. as well as how to choose which external applicants should be hired in each future time period during which recruitment and selection programs are applied. 1985) . 1983b) Effects of taxes. interest rates. and vice versa. et al. Model #4 Financial Multiple-Cohort External Recruitment and Selection utility Model (Boudreau & Rynes. and vice versa. 1979) Deciding how to choose which external applicants should be hired in a particular time period. 1985) Model #5 Financial Multiple-Cohort External Recruitment. and costs of maintaining and improving employee performance. how to choose which external applicants should be hired. Selection. groups.. Financial Value of deciding how to choose which external applicants should be hired in each future time period during which a selection program is applied. Effects of employee separation/retention patterns on recruitment and selection.utility Analysis: A New Perspective Page 69 Table 2.

during each future time period in which internal/external recruitment. choose and manage separations when employees move between jobs within the organization. . and vice versa. how to choose which external applicants should be hired.utility Analysis: A New Perspective Pag@ 70 Table 2. and Separation/Retention utility Model (Boudreau. as well as how to attract. 1987b) Effects of recruitment. Financial value of deciding how to attract the applicant pool. selection and separation/retention of employees moving between jobs within the organization on external staffing decisions. Selection. selection and separation management programs are applied. and how to manage employee separations/retentions from the organization. Summary of Cost-Benefit (Concluded) Decision Models for Employee Flows Decision Model Added Features Decision Addressed the Model by Model #6: Financial Multiple-Cohort Internal/External Recruitment.

000 100 0 100 4. Entry-Level Programmers Computer Upper-Level Data System Manager 1. Situation to be Analyzed Cost-Benefit Information Current Employment Number Separating Number Selected Number Promoted Adapted from: . McKenzie & Muldrow Schmidt. (1979) and Boudreau (1987b) .utility Analysis: A New Perspective Page 71 Table 3.404 618 718 100 Hunter.

9 million PAT Adapted from: Schmidt. . Hunter.80 SO $10.404 618 618 9.236 .413/yr. & Muldrow (1979).utility Analysis: A New Perspective Page 72 Table 4.76 $10/applicant Cost Testing One-Cohort utility Increase over Random Selection without the $37. McKenzie. One-Cohort External Selection utility Model Cost-Benefit Information Entry-Level Programmers Computer Current Employment Number Separating Number selected Average Tenure Number of Applicants Average Test Score SO of Applicant Value (SOy) Abili ty Validi ty 4.69 years 1. Test .

55 million (1983a).76 $10/applicant After-Cost. After Tax.404 618 618 10 years 1. 413/yr. One-Cohort utility Increase over Random Selection Without the PAT. Rate 5% 45% 10% Validi ty Testing Cost . Financial One-Cohort Entry-Level Selection Utility Model Cost-Benefit Information Entry-Level Programmers Computer Current Employment Number Separating Number Selected Average Tenure Number of Applicants Average Test Score SD of Applicant Value (SDy) Variable Costs Corporate Tax Rate Corporate Interest Abili ty Test 4.utility Analysis: A New Perspective Page 73 Table 5. . Discounted. Adapted from: Boudreau $12.80 SD $10.236 .

76 $10/applicant Benefit - Cost $. Financial Multiple-Cohort External Selection utility Model Cost-Benefit Information Entry-Level Programmers Computer Current Employment Number Separating Number Selected Average Tenure Number of Applicants Average Test Score SD of Applicant Value (SDy) Variable Costs Corporate Tax Rate Corporate Interest Analysis Period 4.28 (1983b).404 618 618 10 years 1. Rate 5% 45% 10% 10 years Test Application Period Person-Years Affected Abili ty Test 7 years 31.282 Validity Testing Cost After-Cost. Discounted utility Increase over Random Selection Without the PAT (Millions) Adapted from: Boudreau .413/yr.236 .04 $54. After Tax.80 SD $10 .32 - = $54.utility Analysis: A New Perspective Page 74 Table 6. .

Net Applicant Value SD of Applicant Value $ 2.000 $20.413 $ 4.80 SD 5% 45% 10% 7 years 31. Applicant Service Value Avg. Financial Multiple-Cohort utility Model Cost-Benefit Information Entry-Level Programmers Computer Current Employment Number Separating Number Selected Average Tenure Number of Applicants Average Test Score Variable Costs Corporate Tax Rate Corporate Interest 4.55 $ 54.236 .04 $190.50 -$ 8.00 -$ .065 $36.404 618 618 10 years 1.000 $40.76 (1985).60 $10japplicant Recruitment Cost/Hire Avg.04 -$ 4.445 $15. Recruitment Agency Recruitment .45 .450 $60.500 $52.76 $10japplicant .04 (sn" ) Value of Random Selection Cost of Random Selection Value Added by Testing Cost Added by Testing Total After-Tax.000 $ 8. Applicant Service Cost Avg. $207.utility Analysis: A New Perspective Page 7S External Recruitment and Selection Table 7.500 $180.620 $10.282 10 years Rate Test Application Period Person-Years Affected Analysis Period Work Staffing Ability Testing Variable Test Validity Cost force utility Results Advert. After-Cost Discounted Work force Value (Millions) Adapted from: Boudreau & Rynes $141.32 -$ 0.10 $ 35.

utility Analysis: A New Perspective Page 76 Table 8. $10/applicant 5% Rate 45% 10% 10 years Work force utility Results Staffing Variable Test Validity Separation Effect After-Tax.80 SO $10.000 $7.413/yr.76 $0 Option 3 0 .10 $351.445 618 618 $7.404 $52.707 $200. Financial Multiple-Cohort External Separation/Retention utility Model Recruitment.445/year .76 $2. $242.236 $52.50 .00 $0 Option 2 0 .065/year $35.76 -$2. Selection and Cost-Benefit Information Entry-Level prograrmners Computer Current Employment Beginning Average Service Value Beginning Average Service Cost Number Separating Number Selected Acquisition Cost Separation Cost Number of Applicants Average Applicant Service Value Average Applicant Service Cost Average Test Score SO of Applicant Value (SOy) Testing Cost Variable Costs Corporate Tax Rate Corporate Interest Analysis Period 4. 69 $132.000 1.31 & Berger (1985a).707 Option 4 0 . After-Cost Discounted Work force Value (Millions) Adapted from: Boudreau Option 1 0.065 $36.

00 2 0.272 $40.786 1.445/yr.000 NA 1. Selection.000 $57.404 $52.utility Analysis: A New Perspective P<lge 77 Table 9.000 $7.10 times average Programmer value 1.35 $249. Cost-Benefit Information Current Employment Beginning Average Service Value Beginning Average Service Cost Number Separating Number Selected Number Promoted Acquisition Cost Separation Cost Promotion Cost Number of Applicants Average Applicant Service Value Average Applicant Service Cost Average Test Score SD of Applicant Value (SDy) Testing Cost Assessment Center Cost Variable Costs Corporate Tax Rate Corporate Interest Rate Analysis Period Entry-Level Computer Programmers 4.413/yr. Financial Multiple-Cohort and Separation/Retention Internal/External utility Model Recruitment. Upper-Level Data System Managers 1.065 $36.80 SD $10 .000 $8. 1 0.00 3 0. NA $1.10 times average Programmer cost 2.000 3.436 $52.76 $0 0. $10/ applicant NA 5% 45% 10% 10 years Total Work force Utility Results Options HRM Activity Programmer Selection Validity Programmer Promotion Effect Manager Promotion Validity After-Cost.454/yr.51 $278.000 100 0 100 NA $8.68 . After-Tax.90 $302.35 4 0.44 million/yr. 5% 45% 10% 10 Years $36.76 -$625 0.32 SD $11. Discounted Total Work force Value (Millions) Adapted from: Boudreau (1987b).76 $0 0.86 $296.00 $0 0. .065/yr.445 618 718 100 $7.