Utility Theory In considering investments in human resources in terms of

hiring or development of current employees in order to pursue given

strategies, there must be a method for evaluating the financial
attractiveness of such investments. There must also be a method to be
used in “selling” the investment to senior management. These tasks may
be accomplished by determining the returns for such investments through
cost– benefit analytical approaches such as utility analysis. Utility theory
attempts to determine the economic value of human resource programs,
activities, and procedures. As such, utility theory might be used to
determine the dollar value of a selection test that enables an employer to
identify and hire Page 11 STRATEGIC HUMAN RESOURCE MANAGEMENT Section One managers for a
specific job whose productivity is higher than those hired without the test.
The calculations of utility might involve several variables. For example,
validity of the selection test would be a critical variable, in that it provides
an indication of the predictive ability of the test. Additionally, the increased
production, its contribution to profitability, and the standard deviation of
the contribution, would be variables in the calculations. Finally, other
variables might be included in the analysis, such as the cost of testing
enough applicants to obtain a sufficient number having scores above the
cut-off point.15 Brian Becker and Mark Huselid’s study in a national retailing
company provides another example of an application of utility theory.
Becker and Huselid’s analysis explained return on sales for each store on
the basis of the performance appraisals of the store supervisors. Their
statistical analysis also controlled for differences in the supervisors’
educational levels and their commitment to the company. Their study
demonstrated that better estimates of the standard deviation of the
performance appraisal variable could be obtained through a model based
on the use of accounting data (return on sales) rather than the more
commonly used subjective approaches. This study helps to enhance the
legitimacy of utility theory for applications in real business environments.16
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