What would the Dr. Do?
Dispensing expert HR advice from EPSI’s President, the highly respected author André Durivage, Ph.D.
Q: I’m the Director of Human Resources at a small company and I have been trying for years to convince our management team to introduce standardized tests in our hiring practices. How can I convince my colleagues that the initial investment is worth it?
– M. Jamieson
A: You are definitely on the right track when considering investing financial resources in standardized assessment tools in order to select the right personnel. Increasingly businesses are beginning to realize that regardless of the services or products they offer, their most crucial resource is their human capital. With the dawn of this realization, whether you belong to a small or large organization, the need to move towards more strategic human resources management has increased exponentially. Like any other sector of an organization it is important to ensure that there is a significant return for the time and effort invested in initiatives. Frankly, given the compounding negative impacts of not hiring the right employee, an organization cannot afford to refrain from investing in appropriate and effective assessment tools.
Utility analysis estimates the monetary savings to an organization when they adopt a valid standardized tool in a selection process. In order to assess utility the following formula is used:
U = N x T x Sr x Rxy x Ps
There are a number of elements in this equation; below you will find a short explanation of each:
N = Number of positions to be staffed in a year: The more often that an organization engages in hiring employees the more that the quality of the selection process will have an impact on the organization.
T = Average tenure: This element corresponds to the average number of years that a selected candidate remains in the position, as their individual performance will have an impact on the organization throughout the time that they are an employee.
Sr = Selection Ratio: The proportion of candidates who need to be hired in relation to the number of candidates who applied to the process.
Rxy = Validity Coefficient: This term expresses the validity of the assessment tool; in this case whether it can be psychometrically proven to predict future job performance, job related learning and other criteria. Selection tools that have been statistically analyzed and have a high level of validity are more likely to provide you with the ability to predict which candidate will function best in the position for which they have applied. Regardless of the position being staffed, it is essential to use assessment tools and processes that can provide you with high predictive validity as it is the most important characteristic of personnel selection.
Ps = Performance vs. Salary (Good vs. Mediocre employee): When measuring an employee’s productivity as their mean output, studies have shown that a superior worker in a lower level job produces 19% more than the average worker, a superior skilled worker produces 32% more than an average skilled worker and a superior manager or professional produces 48% more output than their average counterparts. These percentages of increased productivity have a direct impact as studies have shown that when output is expressed in dollar amounts, the average employee typically generates a minimum of 40% of their salary. Thus, if the average salary is $40,000, then the employee generates $16,000. This number increases exponentially when applied to employees who exhibit superior job performance. (Schmidt & Hunter, 1998).
The numbers of positions to be staffed in a year, tenure and selection ratio are all variable elements that are dependent on the organization and the type of positions for which they hire. The aspect that uniformly applies to all organizations and drastically affects the utility of a selection process and consequently the financial implications is the validity coefficient. A higher validity coefficient directly increases utility and results in selection of employees that will engage in higher productivity output. In order to increase the validity coefficient an organization must use assessment tools that have been validated using acceptable professional psychological standards and are proven to have high predictive validity.
Take an organization that selects 20 people each year for one type of position, with an average tenure of 5 years, and a selection ratio of 2.1. If the salary for the position is $75,000, then we can expect each employee’s minimum output to be $30,000 (40% of salary).
Now, let us assume that the organization chooses a selection process that uses an assessment tool with less predictive validity, thus a validity coefficient of 0.33. Using this information in conjunction with the utility formula, we arrive at a sum of $2,079,000; meaning that the organization would save approximately two million dollars over five years by using that particular assessment tool.
In contrast by retaining the same characteristics and simply changing the validity coefficient to 0.60 (achieved through use of assessment tools with greater validity) the utility is equal to $3,780,000, meaning that the organization saves nearly four million dollars over the course of five years.
Therefore, by simply investing in a more valid assessment tool the organization will save on average nearly two million dollars more than if they had used a less valid tool and nearly four million dollars more than if they had not used any validated assessment product.
In order to convince your colleagues to introduce standardized assessment products the important aspect to highlight is the practical value; the fact that the initial venture results in a clear return of investment in aspects such as lower turn-over rates, increased productivity and job performance, and higher employee satisfaction. In order for an organization to remain competitive, utilizing valid standardized assessment tools is not only advantageous it is imperative. The ramifications of not doing so are extensive and the consequences include loss of productivity, profit and resources. Using the utility analysis equation in conjunction with assessment tools with high predictive validity, you should be able to demonstrate to your colleagues that the initial investment is advantageous for the entire organization. By simply choosing an assessment tool with high predictive validity you can potentially save your organization millions of dollars.
Not a bad argument.
To submit a question to be answered by EPSI’s president André Durivage, Ph.D, please send an email to email@example.com with ‘Question for the Doctor’ clearly marked in the subject line.