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

This Article is brought to you for free and open access by the Center for Advanced Human Resource Studies (CAHRS) at DigitalCommons@ILR. It has been accepted for inclusion in CAHRS Working Paper Series by an authorized administrator of DigitalCommons@ILR. For more information, please contact jdd10@cornell.edu. Please take our short DigitalCommons@ILR user survey.

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DO NOT QUOTE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DO NOT QUOTE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

utility

Analysis:

A New Perspective

Page 2

programs

solely else

because in the

they

are "good

for human

relations," in Japan

"being

done

by everyone Instead, account function Yet,

industry," is being

or "done required

that way to justify

and Korea." and

the HRM function

its existence the HRM

for its contributions. is a steward

And appropriately largest

so, because in most

for the single manager training proposes

resource

organizations. 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, while their

but because benefits

are often makers

visible,

remain without

unmeasured, considering

may be tempted In contrast,

to "cut the overhead" decisions about

benefits. (e.g.,

programs and plant

in other

management often

marketing, costs,

finance, but dollar

accounting, estimates

operations) benefits

not only difficult develop quality little

of program

as well.

It is
to

to imagine

an engineer process,

proposing without

to spend explaining

a million

dollars

a new production or cost. 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, of $1,000 travel and

the decision

to train

1,000 course results

employees

can easily

incur

per trainee lodging), analysis

(considering but training

development, often

instructor

time,

go unmeasured. returns,

Lacking

a systematic might

of the training that

program's

a top manager is more

form the impression

such a million-dollar

HRM program

utility

Analysis:

A New Perspective

Page 3

expendable Tbis support resource dollar

tban programs Cbapter explores that

in otber

management

areas. analysis, a decisionof human the

cost-benefit

(or utility) the costs

framework decisions. value

explicitly

considers

and benefits

utility resource about

analysis

provides but

formulas it is more

for computing than formulas.

of human

programs, HR decisions more

It is a way of thinking and beliefs supports behind

that makes systematic information

facts,

assumptions

decisions

explicit, even when

and rational. is unavailable information,

It

human

resource translates when

decisions statistics more

or uncertain, it helps

into useful

decision

and

determine utility

information models

is or is not needed. and detailed, It presents have been this several developed

Though Chapter case will

analysis their

can be complex

emphasize

managerial

implications. analysis models

studies,

illustrating progressively

how utility more

to encompass Though direct

realistic

and complete models will

HRM decisions. (with citations to the to

it will

draw on sophisticated readers), and algebraic

algebraic formulas

interested

be minimized section decision

emphasize advantages The second

the findings

implications. models compared

The first to other

discusses systems.

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. affecting

shows

to programs program

the existing The fourth employee The

stock

of employees, develops a case presents coststudy

a training models

as an example. affecting contribution.

section using

for decisions each model's

flows, final

to illustrate implications Why

section

and conclusions. Analysis concerned for Human with Resource Management resources Decisions? in HRM programs

Use Cost-Benefit Decision makers

how to invest

utility

Analysis:

A New Perspective

Page 4

have

several

types

of information cost-benefit Systems could

available (utility)

to support analysis

those in.

decisions.

Let us examine Alternative

where

fits

Decision

Costs. Organizations
decisions in every reducing based human on costs, resource

make

their

human

resource them.

management are incurred often means

attempting

to minimize activity, resource

Costs costs

management

so reducing activities.

the number

or scope

of human

Other

typical

cost-reduction behaviors this

techniques

involve

reducing 1987,

presumably Flamholtz, HR activities also

costly 1985).

employee Of course, costly

such as turnover half

(Cascio,

is only

the picture. may

Reducing but

or presumably organizational that for

employee

behaviors

cut costs, resource actually

it may

reduce

effectiveness. first example appear when

Human costly turnover

activities enhance

or employee effectiveness, to hire may

behaviors

at

may

as occurs

creates

opportunities decision

highly-qualified to detect informally framework this. consider or system,

employees,

but a cost-focused

system

fail might

Informally-defined human but resource management complexity

benefits. benefits of these

Organizations without benefits

an explicit

the sheer

can lead to unsystematic might be assessed in terms in terms

shortcuts. of filling of whether to scrutiny a systematic beliefs, achieve

For example, vacancies, competitors

a recruitment a selection

program

while use

test might or whether

be assessed it will

such devices, Equal

be vulnerable

by the regional approach,

Employment

Opportunity

office.

Lacking

the analysis

may be dominated power,

by unsubstantiated may not

personal

influence

or political

and the decisions

organizational Count

goals. Ratios. Decision makers HR costs might calculate levels. any of

Cost or Head a variety

of ratios

designed

to analyze

or staff

For

utility

Analysis:

A New Perspective

Page 5

example, 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, (Fitz-Enz, competing to staff or decision than

or the ratio Such

to the number over time,

of trainees or to other attention

1984).

ratios While

compared be useful

organizations. levels making.

for directing

or costs, If your

they provide cost ratio

no framework is higher does that

for interpretation last year

than

(or higher

a competitor's), 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, and head

Clearly,

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, cost

for concern be interpreted

are not. decision

within

framework

to be useful approach

in guiding involves 1974).

HR decisions. auditing Such human resource

Audits.
activities systematic programs limited

The fourth 1979;

(Mahler, and

Sheibar,

audits

can be quite human resource only was that costs number of

detailed,

and can demonstrate as planned.

whether However,

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,

place. was

consolation

an ill-conceived at the budgeted

employees.

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, been implemented. The fifth to determine

as well

as providing

studies. studies

approach

involves

conducting resource

formal programs. relationship

the effects reporting

of human

include

validation

studies

the statistical

utility

Analysis:

A New

Perspective

Page 6
ratings, levels and experiments between groups alone concerned limited comparing receiving not very

between the

test

scores

and performance in output

statistical

difference programs.

different useful theory achieve dollar

training

However, who

statistics are less their

are often with

to human than with

resource

managers,

exploring to

determining benefit.

how to invest Rarely does

resources study

the greatest values,

a scientific

even mention and returns. involves

let alone

report

results

in terms The

of investments sixth approach would

Fully-detailed a full-blown alternatives, alternative, then compute

cost-benefit

analysis.

cost-benefit

analysis.

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),

the benefits

and subtract

to determine

the overall with would net be

net value values

of each

alternative. on investment) here,

The best

alternatives, a minimum is that

or those standard,

(or returns

exceeding of course,

implemented. factors measuring has a good cannot

The problem be evaluated

all of the decision Moreover, approach

precisely

and with

certainty.

everything deal

may be quite if only

costly. it could

still,

the cost-benefit applied.

of merit,

be efficiently

Advantages

of a Cost-Benefit approach

System the following advantages compared to other

A cost-benefit approaches:

offers

1.

Explicitness. makes They

Identifying

and evaluating and facts

costs more

and benefits to all. reducing will

the assumptions, can be discussed, that

beliefs

visible thus

questioned

and corrected,

the chance

incorrect

or counter-productive

information

go undetected.

2.

Consistency.

Human

resource

decisions

are complex.

Without

utility

Analysis:

A New perspective

Page 7

a system, make some

it is easy decisions based

for HR managers based on one

and strategic

planners

to

set of issues, For example,

and other recruitment of

decisions programs filling programs Yet,

on a different based

set.

may be chosen vacancies are chosen four

on low cost

and probability while

(Rynes based

& Boudreau, on legal

1986),

selection and tradition. and none

defensibility to both

these

factors reflects

are relevant

decisions,

of these

factors

the productivity consistency

of those

hired.

cost-benefit of factors on only

system

encourages

by providing basing

a list

to be explicitly

considered

before

a decision

a few of them. A cost-benefit to many system decisions. promotes Once efficiency developed, because the for each

3.

Efficiency.

it can be applied organization new decision. some unique considered focus

can spend While analysis factors

less time decision

re-inventing is unique

the wheel and may

each

require

effort,

organizing

the most frees

commonlyresources to

in a cost-benefit unique factors.

system

on the really guides

Moreover,

a cost-benefit systems.

approach

the use of information the decision makers factors,

and information a cost-benefit in gathering

By identifying allows decision

framework and using

to set priorities

information,

as we shall

see in the subsequent system improves

examples. communication "language" factors and their the data and staff gathering for

4.

Communication. among decision

A cost-benefit makers because

it offers

a common

decision

making.

The identified them

set of decision HR managers to redefine

the system

for applying

allows

to coordinate.

It is not necessary

utility

Analysis:

A New Perspective

Page 8

task

every

time,

so decision rather

makers than

can devote and

more

resources

to making

decisions

identifying organizations

locating (at to

information. least achieve in part) goals,

Moreover,

because

are measured resources functions

by how well communication

they use with

dollar-valued management that

other

is improved
dollars.

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,

Accounting

and Operations),

communication Systems

(and perhaps Resource

credibility) Management decision

may be improved.

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). decisions expresses a decision in other

cannot

precisely

(indeed, the variety into

cannot

It is impossible about their human resource

to quantify activities

of factors dollar is this

a single But,

contribution must do?

to the organization. It is certainly Anyone

system

not the typical to

used

management

functions. the sales

who has tried

the stock

market

or predict

of a new product Yet, these

realizes functions objective

Finance

and Marketing their

are not exact effects

sciences. in dollar important

typically

express

programs' by focusing factors,

terms. factors,

Their

is to enhance the ambiguous addressing

decisions

on the

isolating

or uncertain risk

and systematically

and explicitly

potential

and uncertainty. typically adopted to address programs because they human

Unfortunately, resource because decisions

the simplifications (such and as focusing ignoring

only human

on costs, resource

adopting

of tradition,

benefits

utility

Analysis:

A New Perspective

Page 9

are uncertain) offers

can have

undesirable

effects.

A cost-benefit the decision

decision

system

a way out of this bind. a set of variables but about way. it also human It does

It too simplifies human

situation,

proposing

to describe

resource a great

program deal of important consistent and

consequences, information systematic cost-benefit thus reduce

efficiently

summarizes

resource

programs

in an explicit, everything. important information. Resource

not require can help

measuring

To the contrary, and

techniques the effort

to pinpoint to gather to Human

information,

necessary Analysis

Applying utility originally and recently

utility

Decisions models with selection,

analysis developed extended means

is the term by industrial to other

for a set of cost-benefit psychologists resource concerned

human

programs

and decisions. is to predict, management

"utility" explain
decisions.

simply

usefulness,

and the aim of the models of different human resource

and improve

the usefulness

Requirements Utility

for utility analysis, what

Analysis like other is desired decision and what systems, requires: (1) A problem, (2)

or the gap between

is currently

achieved;

a set of alternatives or the variables alternatives etc.); into that

to address describe

the problem;

(3) a set of attributes, characteristics costs, employee of the attitudes,

the important on productivity, the system

(such

as effects function,

(4) a utility

used

to combine usefulness.

the attributes utility analysis

an overall

judgment

of each

alternative's

is generally

employed

when utility

the first models

two requirements suggest

are met.

Given a
and a value,

set of alternatives, utility usually function expressed

a set of attributes into an overall

for combining in dollars.

attributes

usefulness

utility

Analysis:

A New Perspective

Page 10

The Unit

of Analysis: analysis

Human models

Resource focus program

Programs about called human resource

Utility programs.

on decisions (sometimes

A human

resource

an "intervention" is simply

by industrial

psychologists,

or an "activity" that affect

by HR professionals) human resource recruiting value.

a set of activities Examples include

or procedures tests,

selection

training

courses,

techniques, provide

compensation a vital

plans,

and job redesign. broader made programs human

Decisions

about

such programs

link between decisions resource

resource resource

strategies managers. than such

and the day-to-day

operational Human strategies. functional But,

by human

are more broader

specific issues

human

resource levels, structures. resource

strategies areas

address

as staffing

to emphasize,

and appropriate requires decisions

organizational about human

strategy

implementation

programs. employee training

For example, flexibility

a strategy

intended among

to increase competing

manufacturing in selection,

requires

choices

programs

and job design. decisions about human about resource individual programs encompass (such

At the same time, more than purely employee occurs deciding

operational to hire, within which

decisions train,

employees Each

as which decisions example,

promote

or reward). resource

of these

the framework employee(s) a pool

of human to hire

programs. 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). Program resource Useful? programs Quantity, Quality and Cost effects,

a Human

Resource human

Decisions subject

about

have wide-ranging No decision

to the scrutiny

of many

constituents.

system

utility

Analysis:

A New Perspective

Page 11

encompasses important when large they

all of these factors: affect

effects,

but utility

analysis

focuses

on three value

quantity, many employee

quality work large

and cost.

HR programs time, when

have

behaviors reductions)

over

they produce (or value) to

improvements work

(or avoid

in the quality the costs

of those develop,

behaviors,

and when

they minimize

required

implement three

and maintain factors

the programs. to those typically used in other Marketing, value (such to the

These management Finance extent

are similar

functions,

and this

similarity

is not accidental. also produce

and Manufacturing that they produce large

Operations' large

programs

quantities

of productivity

as sales as or

or units reduced

produced), costs

improvements quality), analysis investing

in productive and minimize presented

quality

(such

or increased The utility between

the necessary in this

cost

investment.

models

chapter

reflect

the similarities programs

resources in programs

in human

resource

management areas.

and investing

resources

from other

management

In considering that these with short different three

quantity,

quality

and cost,

it is important different

to recognize of

constituents

may be concerned operating revenues

with

aspects

factors.

For example, 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),

financial

and accounting financial

may be concerned

the programs' may be more

impact concerned force.

on the unit's with enhancing

statements,

and top management

the long-term can reflect

flexibility these

and productivity perspectives, payoff.

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.

For example,

organizations

facing

Utility

Analysis:

A N@w Perspective

Page 12

increasing output,

product

demand

use enhanced facing count

employee

productivity apply

to increase

while

organizations to reduce head

cost pressures and compensation effects, but

productivity Again, must utility carefully A common

improvements analysis define mistake (e.g.,

costs.

can encompass and measure in utility sales

each of these

the analyst

the payoff analyses

to reflect

the appropriate whatever

effect.

is to measure even when

outcomes have

are convenient little relevance

or absenteeism) goals. models

such outcomes

to organizational utility emphasize important government represent

analysis

clearly

omit

some decision and ignore union

factors.

They

productivity-related factors such

outcomes,

other

potentially

as employee

attitudes,

relationships,

or public one valuable They than

relations, decision

and political support tool

considerations. in the arsenal

They
of HR decision decisions about

makers.
any more whether

do not provide a financial

the answers alone power

to all human fully plant.

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.

it can be compared It? Precision models they

to these

if We Can't Though

Measure

in utility

Analysis on three complex. simple concepts

utility quality can give

analysis

are all based are nonetheless

of quantity, complexity impractical. be measured prone

and cost, the

This
is (or cannot and

incorrect

imPression cannot

that utility be measured

analysis

Some of the variables at all). over could Those that

precisely

can be measured

are often

uncertain some

to change that

time or in different be measured precisely

situations. are simply

Finally, very

variables measure.

expensive

to

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, 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,

investments are quite problems

or marketing well (cf.

strategies.

of information to address 4-10). these

recognized Bierman, is useful incorrect large

in management, Bonnini when

& Hausman, it:

Simply

put,

information have been

(1) is likely it; (2) when

decisions

that would

without

the corrections the cost corrected of the

are important information

and produce does

benefits;

and

(3) when of the

not outweigh

the expected

benefit

decisions. words, information resource gathering program is itself effects an investment decision. makers the

In other Uncertainty

about

human

should

lead decision that identify

not to abandon sources

systematic

analysis, how

but to use methods it affects approach

of uncertainty, in better that focus

(or whether) This

decisions, from

and when common such as costs,

to invest practices or base will more

information. only

differs

on the most measurable beliefs

information,

decisions

on inexplicit how utility even

or opinions. make human

Subsequent resource

sections decisions

illustrate systematic

analysis

models

in the face of uncertainty. Resource above Management Programs and Effects human resource resource programs; program affects

Two Categories The quantity, decisions, employee

of Human noted

concepts quality but stocks

(costs

and benefits;

and cost)

can be applied differs

to all human on whether

the analysis or flows.

depending

the program

Employee

stocks.

Programs

affecting

employee

stocks

(such

as training,

utility

Analysis:

A New Perspective

Page 14

compensation, valuable existing quantity,

performance

feedback (such

and employee

involvement)

aim to increase among of

characteristics employee quality

as skills, current

abilities

or motivation)

to improve and cost,

their

job performance. employee stocks

In terms

decisions

affecting large

stocks

enhance and time job

productivity periods; behaviors; affecting existing

more when they:

large

(1) Affect

of employees of employee

(2) Cause

average

increases

in the value cost. employee

and (3) Achieve

employee stocks

1 and 2 at minimum "work" by improving

Thus,

decisions in their

behaviors

assignments. flows. Employee flows occur when employees move into, through

Employee

and out of an organization demotion affecting large and transfer. employee flows

through

selection,

separation, quality more

promotion, decisions

In terms enhance flows

of quantity, productivity

and cost, they:

when

(1) Affect large matches, on as well

numbers

of employee

and time periods, by making Most but

(2) Achieve better

increases and

in the value

of job behaviors cost.

person-job has focused applies

(3) Achieve analysis programs

1 and 2 at minimum for selection affecting

research

utility to other

decisions, flows

the approach as improved

employee

(such

recruitment, for jobs or the

job posting, promotions) pattern more

.

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. stocks

so that

valuable Utility utility

employees Analysis have

are placed

for Decisions been Landy, applied Farr

Employee

models

to performance & Jacobs, 1982) 1982).

feedback

(Florin-Thuma (Mathieu such models (such

and Boudreau, & Leonard, could

in press; Schmidt,

and training As noted,

1987;

Hunter

& Pearlman,

also be applied

to other

programs

affecting

employee

stocks

Utility

Analysis:

A New Perspective

Pag@ 15

as compensation

and employee

involvement).

To illustrate

utility

analysis

for such programs, organization disguised, conducted faced this

let us examine with a choice is based

the case of a large between two training utility

manufacturing programs. analysis

Though
application

example

on an actual

in 1986. Situation involved a choice between delivering system, staff training for

The Decision

The decision engineers audio-video system it was through

a traditional While

classroom

or through

a sophisticated

network.

some training

believed

the audio-video others that of

was a good simply

investment,

cost pressures Table

had convinced the example

too expensive. and cost.

1 describes

in terms

quantity,

quality

---------------------------------------Insert Table 1 Here

----------------------------------------

Cost. The classroom

while over building five years and

program

would

cost

$451,035 network

over

five cost

years, $1,031,147 costs). system, 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, though

of the

programs The target plus

would

it. for training added was the 200 currentlyyear for the next training period. thus could

Quantity. employed four train

population

engineers,

20 new engineers capacity

every

years. only

Due to training 40 employees training

constraints,

Classroom

per year,

or 200 over

the 5-year

target per

Audio-Video

could

accommodate

up to 200 persons

year,

Utility

Analysis:

A New Perspective

Pag~ 16

it could easily a total

fully

train

the

incumbent

work

force

in the first in each

year,

and then for

accommodate

the additional over

20 new hires

future

year,

of 280 trainees per trainee. the accounting trained.

five years. its typical trainee cost practice, the organization costs by the

Cost computed number

Following cost per

by dividing $2,255 per

total trainee per

Classroom

training

(i.e., (i.e., must

$451,035/200) $1,031,147/280). demonstrate to be cost reached million possibly analysis program's

and Audio-Video These higher

training

cost

$3,683

trainee

figures

suggested

that Audio-Video than

training

much

per-trainee Discussions

effectiveness concerning Some believed system

Classroom this was

training likely had

effective.

whether that

no definite dollars

conclusions.

spending

over

one not

on a training

delivery Moreover,

for 280 engineers that study

could

be cost-effective. required effects a costly

some believed experimental

cost-benefit to discover the

and complex

on performance. Evaluating training programs plant solely based based on the of on

Leverage cost-per-trainee amount finished programs? the work of Table

Computation.

is like evaluating it consumes,

a manufacturing rather would than

of raw materials goods.

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, people

portion we assumed earlier period), 220, 40

1 (because

tenure

averaged delivery

no turnover.) (e.g.,

Because

Audio-Video

the first 1,200

200 trainees total

are productive

for the entire (i.e.,

5-year 200 plus

it affects

person-years trains

of productivity a total reach

etc.).

Classroom

training

of 200 employees, 200 trainees

but only Year 5.

at a time,

so the work

force

doesn't

until

utility

Analysis:

A New Perspective

Page 17

still, (i.e., this

even

Classroom

training This

affects

600 person-years

of productivity and

40 plus

80, etc.). computation

is the leverage how

of the two programs, training

leverage

demonstrates Leverage

faster

can substantially resource time. was

increase programs

the program's affect many

effect. employees of many

occurs

because

human

who affect

productivity little

for a long information

Quality. available on employee value

Typical

organizations, the effects none

to help

us estimate

of the two training that could forecast

programs the dollar

quality,

and certainly

of improved

performance. productivity

To explicitly increase

sYmbolize

this uncertainty, per-year was simply

the unknown sYmbolized Video

average

per-trainee,

P1 for Option

1 (Classroom

Training)

and P2 for Option

2 (Audio-

Training). Payoff formulas. quality, Even without the cost knowing the effects information in Table u1) goes 1. of either proved program useful

on employee

and leverage shown (i.e.,

quite

in constructing (usefulness) one-dollar the $451,035 u2) goes quality functions to make value

the payoff

formulas training

The utility every

of Classroom increase cost.

up by $600 with

in average Similarly,

employee

quality

per person-year, training

offsetting (i.e.,

the utility

of Audio-Video increase

up by $1,200

for everyone-dollar offsetting

in average cost. These

employee payoff

per person-year, suggested training

its $1,031,147 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 $1,500 Classroom

investment. per person-year

For example, would produce

an average total

productivity

increase from

utility

of $148,965 This

training

and

$168,853

from Audio-Video for the Classroom

training. training,

represents

a 33% return on investment

on investment from the Audio-

and a 16% return

Utility

Analysis:

A New Perspective

PagE! 18

Video

training.

At higher

average

productivity

increases,

the relative

advantage

of the Audio-Video analysis. As noted,

training Of course,

is enhanced. the $1,500 figure used above was

Break-Even only a guess.

little

information

was available

to precisely from costly either studies

estimate training attempting to obtain payoff

the dollar program.

increase However,

in employee rather than

value embark

per person-year on potentially the costs cause

to measure the values

this variable,

we divided

by the

leverage total shown

for P1 and P2 that would with)

each program's These values are

to equal 1.

(or "break-even"

its costs. would

in Table at least value

The Classroom

training (i.e.,

costs

be covered while

if it produced the break-even (i.e.,

$752 per person-year

$451,035/600), was

for the Audio-Video Notice

training that

program

$860 per person-year lower than

$1,031,147/1,200). per-trainee justify what computed

these

values

are much

the costscould training

earlier.

Relatively appeared

modest

training large

effects necessary

had originally

to be a very

investment. Program it treated the question training break-even comparisons. each training While option the break-even independently, the more analysis was enlightening, 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. question. (i.e.,

However, What

be applied training make

are the values training training is

of the unknown effect equal found payoff (i.e.,

Classroom

P1) and Audio-Video of Audio-Video relative effects

P2) that would training?

the total

utility

to Classroom by subtracting formula,

The formula payoff formula 1.

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 -

utility

Analysis:

A New

Per6p~ctive

Page 19

U1)

to zero,

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, given

to the P2

a certain implied

for P1 [i.e.,

(.5

x P1) + $484]. are year year shown

The decision

rules 1.

by this break-even

analysis per person-

at the bottom

of Table

For example, then

if the payoff the payoff [i.e.,

from Option from Option

1 (P1) is equal 2 (P2) must expensive

to $2,000, only

per person+ 484]

exceed

$1,484

(.5 X 2,000)

to justify produces year), system year

the more large

Audio-Video increases

training. greater

If Classroom than

training

productivity

(i.e.,

$968 per persontraining

it can be cost-effective even if it has a smaller training. when

to invest average

in the faster

Audio-Video

productivity formula

effect

per persona simple Moreover,

than

Classroom that shows

The break-even

provides investment.

equation

each program

is the better using

the computations (Boudreau

can be further 1988, Even

simplified 8).

personal

computers

& Milkovich, Results. analysis

Chapter without

Decision the break-even define estimate whether

measuring

training process about

effectiveness, to better

focused

the decision

and helped whether

the critical of training

issues. effects

Instead

of arguing or wrong, was

one or another focused switching and the the Audiotraining it could on

was right effect work

the decision to justify engineers,

the Audio-Video In light value of the of this could

training important training

enough

to it.

done by these

undisputed Video

for engineering Moreover, network,

performance, because the fact other that

expenditure could

be justified.

programs

also use the Audio-Video alone made

be justified break-even study

for this program analysis

it a worthwhile and complex

investment.

The

demonstrated

that a costly

effectiveness analysis)

(earlier

thought

to be essential

for applying

cost-benefit

utility

Analysis:

A New Perspective

Page 20

was not necessary This quantity, example quality

to improve

decisions. how the utility analysis concepts of

demonstrated and cost

can be applied for other

to training affecting

programs. employee

Similar
stocks,

applications

are possible

programs

such as compensation how an explicit

and employee

involvement.

Moreover,

it demonstrated about program

cost-benefit

analysis

can address making.

uncertainty Break-even

effects.

Uncertainty

is a fact of decision uncertainty quality.

analysis its

is one method detrimental demonstrated benefit these

of addressing

explicitly, 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. to decisions

We now discuss employee

how to apply flows.

affecting

Analysis the costs

for Decisions and benefits about

Affecting of programs flows?

Employee that

Flows employee

Analyzing stocks whether

affect

is useful, resources

but what devoted

employee

How can we determine college recruiting, returns

to improve

selection

tests,

turnover/layoff to justify their

management, expense?

and internal

staffing

offer

sufficient

As noted

earlier,

employee

flows

occur (e.g.,

when

people

into,

through

and

out of organizational demotions affecting employee stocks

positions/jobs

selection, such

turnover, flows

promotions, as affect

and transfers). the existing flows operate

HRM decisions of employees.

affect

as well that

stock

However, decisions

decisions affecting

differently. the value flows

Whereas

employee positions,

work by enhancing affecting those

of employees work

in their

current

decisions will

employee positions. three

by affecting

which

individuals

occupy

We can consider

general

processes

through

which

individuals

Utility

Analysis:

A New Perspective

Pag@ 21

flow 1988,

through Ch.

the work

force

(Boudreau

& Berger,

1985b;

Milkovich which

& Boudreau,

10-13): a pool

(1) External

recruitment/selection, and choosing which

involves will be

attracting hired

of job applicants

of them

into the organization; managing which the quantity

(2) External and pattern

separation/retention, of employee

which that

involves affect

separations and

employees involves

are retained managing within

by the organization; the quantity and pattern

(3) Internal

staffing, movements

which between

of employee these processes

positions

the organization.

Though

are typically they them that

managed,

evaluated closely

and planned related.

as if they were Effectively effects

independent, each of

are obviously depends identify

quite

managing

on the quantity, candidates fill

quality

and cost

of HRM programs that choose who which and

for employment

opportunities, and that

candidates leaves

will

employment

vacancies,

affect

stays

the job. --------------------------------------Insert Table 2 Here

---------------------------------------The following employee first adding flows. section The models solely develops proceed utility from models for decisions to more with complex. affecting

simpler

The
models flow

models

focus

on external

selection,

subsequent employee models,

enhancements Table

to reflect 2 provides

and integrate a summary

the other

processes. added

of the decision

the features Model #1

by each one, on choosing Model with

and the decision whom to hire

addressed

by each model. one group

focuses

from among factors

of external

job

applicants. compatible investments.

#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

utility

Analysis:

A New

perspective

Page 22

applying

selection

programs

over

time.

Model

#4 incorporates analysis. (e.g.,

the effects Model #5 layoffs, Finally, (e.g., an 2

of recruitment incorporates resignations) Model

into the external the effects into

staffing

utility

of employee

separations

turnover,

the recruitment-selection the effects of internal

utility employee

analysis. movements providing Thus, follows.

#6 incorporates demotions analysis an outline

promotions, integrated provides

and transfers) framework

into the analysis, process. 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.

hypothetical, and realistic values familiar

case

information readers

on published it useful

assumptions. from their

However,

may

find

to substitute that are more

own experience The important they

to produce point

illustrations

to them.

is not the numbers Throughout the

themselves, analysis,

but the decision break-even analysis

systems

illustrate. to illustrate Readers

will be used

how uncertainty should also keep

can be explicitly in mind computer that

and systematically the computations (e.g.,

addressed. behind

though

the models 1985, 1987a)

can become greatly

complex,

analysis

methods burden.

Boudreau,

reduce

the computational

---------------------------------------Insert Table 3 Here

---------------------------------------Consider programmers, 3 contains from a large and 1,000 organization data system employing managers 4,404 one entry-level above computer

level

them.

Table

a description Hunter,

of the characteristics and Muldrow,

of the two jobs

(adapted 1987b).

Schmidt,

McKenzie

1979 and Boudreau,

Utility

Analysis:

A New Perspective

Pi5ge 23

Currently, replaced per year

618 programmers by 618 new hires. in the upper-level policy. Thus,

leave

the entry-level

job each

year

and are

The organization data system

experiences

100 separations

manager

job, and has a promotionfrom the entry-level 100 new hires by these to 718. to make how jobs. provide

from-within computer fill

100 employees

are promoted

programmer

job to fill vacancies the total managers

the vacancies. in the programmer number

An additional job created per year

the entry-level bringing resource about

promotions, Human decisions their

of new hires situation

in this

are called

upon

how employees should

are selected,

how they

are recruited, between the two

turnover

be managed, 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, how utility

external

selection

and internal like these,

To illustrate consider Should four

analysis

addresses

issues

questions: employment interview be augmented by an ability

1.

the current

test? 2.
Should quality the recruitment applicants? the pattern of employee performers, separations and how much be changed would to retain program be changed to attract higher-

3.

Should more

of the good

such a change

be worth?

4.

Should system

an assessment managers, 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

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,

and time consuming such costs.

process, Several

and human models have

resource been

to justify

proposed

this question. Attempts analysis that to Develop models they Selection Utility enjoy Models a long history, However, but it

for selection reflected

recently utility utility early 1987,

dollar

values.

understanding compelled summaries

models

shows

why researchers

and managers More

were

analysis

models

for selection. elsewhere (e.g.,

detailed

models Hunter

can be found & Schmidt,

Boudreau,

in press; 1988). (or validity)

1982; Milkovich value measure (called was

& Boudreau,

The earliest coefficient, between which

index

of selection

the correlation

is a statistical device

of the linear a predictor) ranges from

relationship and subsequent -1.0 to +1.0, indicating

scores

on a selection

performance with zero

levels. indicating

The validity no linear

coefficient

relationship

and higher

values

stronger reflects quantity tangible

positive one

linear

relationships. value,

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, and

to reflect testing proposed

as dollars), usefulness

ignores

costs. 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,"

or the probability

on a predictor Under

would certain

turn out to be at least assumptions, by setting and when the success higher only passing about

on the job.

is improved

by higher

validity being

coefficients, more

on the predictor

(e.g.,

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. validity,

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,

and it ignores between those

costs.
achieve Model

Moreover, minimally

the success acceptable

distinguishes

only

performance

on the job, and those utility Model

who do not.

#1, 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.

performance

doesn't

simply

into two categories, to examine more

but varies recent

Let us return models that

now to our case these model

study

utility

analysis

address

issues. works. 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, 1946a,

the Brogden-Cronbach-Gleser 1949; Brogden & Taylor,

(B-C-G) 1950;

(Brogden, 1965).

1946b,

Cronbach

& Gleser,

In this model, system tenure. 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,

per-year

those it. 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,

the new selection

and to apply

it to one

of job applicants. Quality is the product between of three factors: (1) the validity coefficient

(or the difference

the validity

coefficient

of the proposed

utility

Analysis:

A New Perspective

Page 26

selection accuracy; (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,

is), 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.

the SD of Applicant value

symbolized of obtaining higher

as SDy),

the dollar

to the organization standard

applicants other

average

performance

is one

deviation

than

applicants. SDy measurement become a controversial This controversy. topic The SD of Applicant psychology, because Value (SDy) has some based and

in industrial is necessary expresses

and requires model score

explanation. 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.
validity

In the quality coefficient

computation

above,

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.

the device

and those

without

To

the standard

deviation

differences represents

dollars

per person-year, of a one-

are multiplied

by SDy which performance

the dollar

value

standard-deviation applicants. performance managers

difference expect

per person-year SDy to be larger differences carry

between when job when and make (e.g.,

In general, is greatly

we would affected

by individual over how they

(e.g., jobs

have great when

discretion

out their

decisions), when

the consequences expensive

of those

decisions

are important

employees

handle

raw materials), is very large

and when

the distribution pool (such

of job-relevant

characteristics

in the applicant

utility

Analysis:

A New

Perspective

Page 27

as when graduates

the pool as well utility

of applicants as experienced analysis (e.g.,

for a managerial former

job contains

recent

college

managers). compares different it by of

Most

research Schmidt,

by psychologists et al., 1979)

SDy measures. 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, (an average

a person

is better who

50% of the population than only

performer), Under certain

and a person assumptions,

is better

15% of the population. the estimate the estimate represent Schmidt

the difference the difference be the same, difference.

between between and should others

of the 95th of the 50th the value & Hunter,

and 50th percentiles, and 15th percentiles

and should

of a one-standard-deviation 1983) have estimated it as

(e.g.,

20% of average Still anchors others

productivity, adopted

or 40% of average and complex Boudreau

salary methods

among based

job incumbents. on behavioral this did

have

detailed

(e.g.,

Cascio

& Ramos, and found

1986).

(in press) measurement

reviewed techniques

measurement indeed

research,

that different but

produce

different

SDy values,

none offered

a convincing

case

for greater

accuracy

or validity. between

Considering existing

the difficulties employees

in measuring it

job performance seems unlikely

differences that we will performance limitation

on any scale, measure

soon discover differences

a generally-accepted among job applicants. most utility

of dollar-valued see, however, applications.

As we shall analysis

this

does not threaten

---------------------------------------Insert Table 4 Here

----------------------------------------

Utility

Analysis:

A New Perspective

PagQ 28

Application considering Programmer information model using

to the case. a paper Test

Let us assume test

that

the organization ability, Table utility

is the the

and pencil

of programming programmers. selection

Aptitude needed

(PAT) to select the one-cohort and one

4 shows model.

to apply

The

focuses

on one cohort 618 computer the cost tested

job, so we focus Costs equal

on the consequences $12,360, calculated

for selecting by multiplying of applicants is calculated selected (618)

programmers. each

of testing

applicant

(i.e.,

$10) by the number and time periods by the number

(1,236).

The quantity the average

of employees

by multiplying to produce

tenure

(9.69 years) The quality test

5,988

person-years. in average

per person-year score from compared

is the product to random Shine

of the increase (i.e.,

standardized

selection times

.80 with

a 50% selection

ratio,

the Naylor-

tables) times

the validity value

coefficient

(.76, estimated

from previous difference per

studies) between year),

the dollar

of a one-standard-deviation by Schmidt,

job applicants which equals

(calculated

et al. to be $10,413 To simplify this obtained

$6,331

per person-year. the increase

analysis, by using

we assume

that

.76 represents not using

in validity

the PAT versus random

it (i.e.,

not using

the PAT results

in essentially to reflect

selection). between

Of course,

the models systems

can easily with

be modified validity.

comparisons Utility year)

two selection

different (i.e.,

computation. (i.e.,

Multiplying 5,988

quality

$6,331

per personbenefit

by quantity

person-years)

produces

an estimated costs random

of $37,910,028 produces as shown testing

for the 9.69 years. utility 4. of $37.9

Subtracting million more

testing than

of $12,360 selection, increased

increased in Table costs

The $37.9

million

divided

by the $12,360

represents

a return

of 306,634

percent!

Not surprisingly,

utility

Analysis:

A New Perspective

Page 29

these because

results

caught

the attention higher

of psychologists people would

and some managers have suspected.

they were with

much

than most These

Dealing a perfect parameters uncertainty showed, apply

uncertainty.

values

certainly

do not represent Many of the of bias, 1

prediction represent

of the dollar estimates, However,

value

of selection. contain various

and thus

sources

and error.

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.

Considering expect

controversy skepticism this

surrounding about

measures

of SDy, we might

uncertainty function

its value.

We can re-write

the payoff

leaving

parameter

unknown:

utility
Dividing exactly is $3.39 justify $12,360 equal

(3,641 X SDy)
gives the value utility

$12,360
for SDy that would equal make

(1)
benefits

by 3,641

costs

(and total

exactly

to zero).

This value still because

per person-year, the testing costs.

and is the lowest Hiring superior

value

for SDy that would may be valued or allows many

applicants of work, While

it increases work that

the amount

of work, with value

the quality

the same argue

to be accomplished Schmidt, et al.'s

fewer

programmers.

might

of $10,413

may be too high, difference applicant break-even

it is difficult (e.g., the

to imagine difference would

that a one-standard-deviation between a superior $3.39 programmer Thus,

in value

and an average analysis

applicant) that the

be less than

per year. in improved returns

shows only

the wisdom magnitude

of investing of the positive analysis

selection to that

is not uncertain,

investment. uncertainty. validity

Break-even we doubted and that

can address

even greater increase attain

Suppose
by .76, test

that using selected

the PAT would applicants

selection

our

would

an average

standardized

Utility

Analysis:

A New Perspective

Page 30

score

of

.80 (which

assumes

that the top 50% of applicants of these Tenopyr Boudreau parameters

will

receive scientific Schmidt, symbolize

and accept controversy Hunter,

job offers). (Sackett,

Neither Schmitt, 1985;

is without 1985;

& Kehoe

& Zedeck, 1985).

Pearlman

& Hirsh,

& Rynes, and re-write

We can

the unknown in terms

effect

on quality (i.e.,

as QUAL, 5,988

the utility (i.e.,

formula
$12,360): (2)

of quantity

person-years)

and cost

Utility
The value costs down for QUAL

(5,988 X
at which

QUAL)

$12,360
benefits break even with

the testing (i.e.,

the testing boils

is $2.07 to whether

per person-year using

$12,360/5,988). of selecting

The question randomly will

the PAT instead to raise per year

improve by an

selection average

decisions of at least

enough $2.07

the value (over

of those

selected

9.69 years). testing costs are uncertain. rather re-write than

Finally, Suppose $10,

consider

the possibility be as high

that

we felt

they might

as $1,000

per applicant We could

implying

a total

testing this

cost of $1,236,000.

Equation

2 to reflect
utili ty

as follows: $1,236,000 by 100 times if costs modest are

(5,988 X QUAL)
for QUAL is increased Thus, even

(3)
to $207 per person100 times higher per person-

The break-even year than (i.e.,

value

$1,236,000/5,988). they will This occurs

expected,

be offset because

by rather

selection (i.e.,

effects 5,988

person-year. years)
Model

of the large program. External

leverage

affected
#2:

by this

selection

Financial

One-Cohort

Selection

Utility framework

Model that focuses a focus,

The previous attention however, resource

analysis

provides

a systematic

on selection is that

costs

and benefits.

One consequence

of such

it draws

attention

to the financial and those

implications functional

of human areas

investments.

Line managers

in other

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. 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).

conclusions model

(Boudreau, addresses

1983a; these

& Alexander, considerations. works.

The next utility

financial model

How the utility future projections that

Financial

analysis

typically

adjusts

of revenue

and costs

to reflect: sold (i.e.,

(1) productivity "service value")

increases often

enhance increased

the value "service

of goods costs"

require

to maintain

those

productivity improvement and

increases, program increased

in addition increased

to the direct sales may

costs

of the productivity increased received benefits inventories and costs and costs,

(e.g., sales

require

commissions);

(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"); to income

and

(3) increases carry

in organizational to pay

profits some of the

taxes

an obligation governments. (Model

profit External

to Federal, Selection quality

state utility

or Local Model

The Financial 2) adjusts factors.

One-Cohort the estimate

#2 in Table these three

of program

and cost

to reflect

---------------------------------------Insert Table 5 Here

utility

Analysis:

A New

Perspective

Page 32

Application considerations information

to the case to the utility

situation. values

Table

5 applies

these additional

derived

earlier. service

Necessary costs

includes

the proportion

of variable

(assumed (assumed return

to be 5% of the increase to be 45%) that

in productivity), interest rate

the corporate reflecting to be 10%). parameters value

tax rate

and the corporate

the yearly

can be earned utility

on investments Applying

(assumed these utility

computation. produces This

(see Boudreau, million value

1983a as shown

for details) in Table selecting testing 5.

an adjusted

of $12.55 discounted

is the after-cost, with

after-tax,

of

one cohort cost

the PAT instead (i.e., return

of randomly. $12,360 times

For an after-tax .55), the in presentreturn to

investment receives While

of $6,798 an after-tax

organization dollar remains financial terms.

of $12.55

million

smaller

than

the results credible

of Model to those

#1, this accustomed

substantial analysis. with

and may be more

Dealing

uncertainty. factors shown

We can rewrite in Table

Equation

2 to reflect

the

financial/economic

5 as follows:

Utility
Where 1,983 reflects

(1,983 x QUAL)
not only the quantity

$6,798
of person-years the discount the $6,798 affected rate by

(4)

testing,
tax rate.

but also This cost,

the variable suggests

cost proportion, that to justify with

and the

formula

after-tax be $3.43 more selected

testing valuable randomly.

those

programmers

selected

the PAT must more

(i.e.,

$6,798/1,983)

per person-year than the $2.07

than programmers obtained

This value

is higher that

value

in Equation must costs

2, because offset

we now recognize testing

the benefits

of improved taxes,

testing service

not only

costs,

but also

increased

utility

Analysis:

A New Perspective

Page 33

and

interest. Model #2 can be used though to explore these uncertainty in the financial/economic estimated (c.f., by the Rich

factors

themselves,

variables

are typically

organization's & Boudreau,

financial 1987).

experts,

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.

same

can also stocks Model

be applied

to utility

analyses

for decisions 1983a). Selection

affecting

employee

discussed #3:

earlier

(see Boudreau,

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).

example,

618 programmers values are

job for about only

the utility hired

large,

evaluating

the effects plant

of the first based only

group

is like evaluating production run.

a new programs

production

on its first

Selection

are typically Managers money might

re-applied well ask,

to new groups "What's scheme going many

of applicants to happen years

for several

years. to spend

as we continue

on this costs

new testing will increase the

in the future?" What

Obviously, may not be programs #3

testing

as programs

are re-applied. 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. (Boudreau,

in Table How

to address model

1983b). selection of years. year, model,

works.

In the multiple-cohort for some chosen in each number

the selection the than costs only

is re-applied applicants

Thus,

of testing once

are incurred model. 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.

Thus,

utility

Analysis:

A N@w P@rsp@ctiv@

Page 34

selection numbers during selected still

program

is re-applied,

the work

force

contains

larger

and larger leaves

of better-selected the first group three

employees.

For example, program,

assuming

no one

years

of a selection

the first group

better2, and

is joined

by a second group

better-selected in Year 3.

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. discussed

Moreover,

it continues

to reflect

the financial

considerations

earlier.

---------------------------------------Insert Table 6 Here

---------------------------------------Application applying Model to the case situation. case. Table 6 shows force the results size, number tenure, the and those times .76 of of test

#3 to the present costs, number

The work

applicants, validity analysis. selected times

testing

selected, are assumed

number

leaving,

and financial Thus, with

variables still

constant applicant (i.e.,

throughout tested, $10,413

the PAT

costs

$10 per

it are assumed valuable

to average

$6,331 than

.80) more

per person-year

if they were years,

selected each hired

randomly. cohort

We assume

the PAT is applied

for seven

that

stays

ten years,

and that we evaluate

the testing

program

for ten

years.
In each of the first added Because to the work force, stays seven years, 618 better-selected selected new hires without are

replacing

618 employees

the PAT.

each cohort

for ten years, steadily

the number

of better-selected There are 618 better618 in

programmers selected

in the work

force

increases. These

programmers

after

one year.

are joined

by another

utility

Analysis:

A New Perspective

Pag@ 35

the second on until have been

year

for a total 4,326

of 1,236. (i.e.,

In Year 618)

3 there

are

1,854,

and so

Year

7, when

7 times

out of 4,404 the selection

programmers program 3 years program 31,282 1,854, personis of

selected

using

the PAT,

and we assume stay leverage

ended. All of these 4,326 programmers

the la-year analysis. Over The the increased 10-year

for the remaining of the selection selection affects

is substantial. years so on)

analysis,

of productivity as noted

(i.e., 6.

the sum of 618 plus This leverage concept

1,236 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.

Moreover, than

the selection of

over

is far greater

the number

selected

(i.e.,

618 times The utility

7, or 4,236). values shown at the bottom of Table of

computation.

calculated

by computing summing

the cost-benefit them over all

consequences 10 years, these

for each

the ten years, variable Table costs

and then

adjusting

for taxes, in

and interest

rates.

Comparing effects are hired. 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,

after-tax

of approximately (i.e., over

$40,000.

benefits, discounted

are now $54.32

million effects

the after-tax, 31,282 person-

sum of the productivity between the $54.32

years).
cost

The difference million

million

benefit

and the $40,000 value than (compared the $12.55

is $54.28

in after-tax, This value

after-cost

discounted

to selecting million gained makers

randomly). in Table

is substantially because

greater

reported

3, primarily

of the increased Yet, human resource trace

leverage decision

by re-applying seldom even

the selection

program. figure,

compute

a leverage

let alone

its effects

on program

costs

and benefits.

Utility

Analysis:

A New Perspective

Page 36

Dealing with

with

uncertainty. Again,

Once

again, was

break-even some

analysis

can assist and by using

uncertainty.

suppose

there

disagreement

uncertainty the PAT. However, likelihood the value programmers between QUAL)

regarding The analysis

the increased above assumed

value

per person-year equal $6,331

produced

it would

per person-year. of .76, or the that

one might

question

the assumed

validity

increase

of hiring of those

the top 50% of applicants, remains constant

or the assumption time and as new

selected

over

are added utility

to the work

force.

We can express value

the relationship (sYmbolized

total

and the increased

per person-year

as follows:

Utility
where 8,580 equals

(8,580
the total increase

QUAL)
(i.e., $6,331 as well this

$40,000
$54.32 million) divided by

(6)

benefit (i.e.,

the work the

force

value

per person-year), as the financial suggests

and reflects considerations. that new-hire

31,282

person-years break-even increase with

of leverage logic by only using

Applying value per must

formula

$4.66

per person-year after-tax of $54.28

(i.e., testing million

$40,000/8,580) costs.

to break-even again, though

the $40,000

discounted, value

Once

the particular analysis

utility

may be highly an effect

uncertain, small

break-even to render

suggests

that

the risk of producing may be quite value is only

enough

the PAT a poor improvement least, than

investment in new-hire

low, because $4.66 per

the break-even person-year. decision utility explicit,

necessary At the very

such an analysis the measurement

focuses details

debate behind

on the a particular

to be made, value.

rather

Moreover, computer

because

the relationships using

are mathematically or other types

personal

programs

spreadsheets

of software

can greatly

reduce

computational

requirements.

utility Analysis Integrating Selection and Recruitment

utility

Analysis:

A New Perspective

Page 37

Our analysis applicants or not, 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. through

is used are affected

selection

operate pool

by characteristics activities still yield (Boudreau

of the applicant & Rynes, of lower versa. 1985). value

generated

recruitment process will

A stringent if applied

selection

new hires and vice

to poorly-qualified may be enhanced at betterEven when

applicants, through quality

So, the quality recruitment

of new hires (such

investments colleges),

in improved as well

as recruiting selection.

as investments the same,

in better changes

recruitment can affect actually them

activities the applicant work

remain pool.

in selection

activities tests might

For example,

polygraph

or drug

reduce

force

quality

if better-qualified not to apply. 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. 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).

Utility selection,

(Model

now reflect in each

also

and recruitment in this model, value

programs

applied

year

of the analysis. based on

Finally,

the quality

of new hires

is calculated

the average

of applicants

in the pool

(the value

that would. be

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.

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, work

the utility force value

value

calculated hired

the expected system

of those period.

the recruitment-selection includes pool, not only how well

during

the analysis

This
the place.

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. 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, pool

diverse

qualifications advertising

but a moderate reaches a wide is but

applicant

because

recruitment

but provides to produce average before 7 shows (i.e.,

little

pre-screening. pool with

The recruitment less diverse the agency

agency

an applicant applicant referring

qualifications is expected

value, them

because

to screen

to the organization. that don't change tenure, as a result number of

the variables the number test

of new hires,

of applicants,

costs,

average

score,

and financial

considerations).

utility

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 $4,450

earlier. affected costs by recruitment. per hire, Management while the

Specifically, recruitment 1986, Table

recruitment agency 55). costs

$2,500

per hire

(American

Association, an is

Recruitment

advertising one,

is expected so validity agency

to produce

applicant $10,413

pool

similar

to the present

is .76 and SOy

as before. more validity

Because

the recruitment there will

is expected among

to screen them,

applicants reducing

carefully, to

be less variability SOy to $8,500 agency

.60 and reducing

per person-year. an applicant

The advantage pool of higher

of the recruitment To reflect

is in identifying in Table service

quality.

this

advantage an average service them)

7, agencyvalue of $60,000 higher

recruited

applicants

are assumed offset

to have

(due to pre-screening) salaries/benefits producing

by average and retain

costs

(including

to attract

of $40,000

per person-year, of $20,000

a net applicant

value

for agency-recruited value

applicants

per person-year. recruited

The average is assumed

service

per person-year per person-year

for advertising(lower and than

applicants

to be $52,065

agency-recruited by service of $15,620

applicants)

applicants of $36,445

due to the lack of pre-screening), per person-year, (somewhat lower for a net applicant than

is offset

costs

value

per person-year
.

for agency-recruited

utility

Computation value of each new hire randomly pool, plus is the sum of two values: (i.e., hiring average-value value produced

The expected the value applicants) by systematic produced from

(l)

by selecting the applicant from

(2) the Thus,

incremental

selection

that pool.

the average

value

of those

utility

Analysis:

A New Perspective

Page 40

hired

through

advertising

is equal $52,065 produced $10,413, The value

to the average - $36,445

value

of the advertisingper person-year) using the PAT

generated plus

applicants

(i.e., value

or $15,620

the incremental .76 times

by systematic or $6,331 of those value

selection

(i.e., $21,951

.80 times

per person-year), hired from

totalling

per person-year. pool is equal

the agency-generated

applicant applicants incremental .60 times

to the average
-

of the agency-generated

(i.e., value

$60,000 produced

$40,000 or $20,000 per person-year) plus the

by systematic or $4,080 selection using the PAT totalling (i.e., $24,080

.80 times

$8,500,

per person-year),

per person-year. Once precisely quality years, these quality levels 6. are computed, That we compute total utility new-hire

as before

in Table

is, by multiplying force

average

by the number summing over

of new hires

in the work

in each of the ten the total rate,

the ten-year costs, Note with

analysis

period,

subtracting

selection variable using

and recruitment costs and taxes. 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. are shown (i.e., in Table hiring 7. The after-tax, of average million, Value discounted value) with Value the

Selection

applicants

from

advertising-generated cost of $4.55 hiring pool million.

applicant

pool

is $141.04 discounted from but

a recruiting Selection

The after-tax, of average ($180.50 added

of Random

(i.e.,

applicants is higher

value)

the agency-generated the costs are also higher

applicant at $8.10 applicants

million)

million.

The value

by testing $54.32

the advertising-generated million incremental benefit

is the same as before testing cost).

(i.e.,

minus

$40,000

However,

testing

the agency-generated

utility

Analysis:

A New Perspective

Page 41

applicant producing cost

pool

adds

less value benefits

(because of $35.00

they

are already with

pre-screened), testing

incremental

million,

the same

of $40,000. Considering only selection strategy, utility, we can see that a smaller the PAT pays payoff applied off

under

either

recruiting

but achieves

to agency-generated (i.e., $34.96 million

applicants versus shows average $180.5

than $54.28

to advertising-generated million). However,

applicants

the recruitmentapplicant pool

selection produces applicant effects combining recruits (i.e.,

utility a much pool

model higher

that the agency-generated value than

the advertising-generated $141.04 million). the advantage When of agency million the

(i.e.,

million

versus

of recruitment agency with $34.96

and testing with

are integrated,

recruiting

PAT selection work

is clear. value

Selecting of $207.45

the PAT produces million plus

a total

force compared value

$172.4

million) work force

to testing of $190.76 some

advertising (i.e.,

recruits, $54.28

which

produces plus

a total

million

million

$136.48

million).

Sacrificing applicant

testing makes sense.

effectiveness

for an increase integrating

in average

quality

By systematically and selection conditions also

the cost-benefit

implications model

of recruitment the could

decisions, lead

the recruitment-utility Of course,

identifies

that

to this outcome. other

this utility

model

be used

to explore (Boudreau Uncertainty break-even

implications 1985).

of the recruitment-selection

relationship Dealing With

& Rynes,

Again, and risk. would $60,000

analysis was

offers

a method that

of addressing

uncertainty applicants (i.e.,

Suppose

there

some doubt more

agency-recruited value

really minus

average $52,065)

of $7,935 than

service

per person-year advertising.

those

recruited

through

Agency

utility

Analysis:

A New Perspective

Page 42

recruiting attract recruited you don't by each determine applicants and salary the agency million test's $35.00

costs

more,

agency

recruits

require

higher

service

costs

to

and retain

them,

and the PAT is less useful it rather risky

when

applied

to agencywhen generated

applicants. 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, 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

effectiveness. recruitment

Recruiting costs

by $3.55 the selection minus

(i.e.,

$8.10

million) (i.e., of $22.87

and reduces $54.32

incremental million),

value a total

by $19.32 negative Selection value

million effect

million

million. was $141.04 million while the

The Value with Value an average of Random

of Random

for advertising of $15,620 recruiting

net applicant Selection

per person-year, was $180.50

for agency value

million

with of

an average Random million) minus

net applicant

of $20,000 million

per person-year. (i.e., $180.5 million

The Value minus (i.e.,

Selection when

rose by $39.46

$141.04 $20,000

the average

net applicant Because

value

rose by $4,380

$15,620)

per person-year. Selection

all the other

variables

affecting

the Value

of Random

are unaffected Selection

by recruitment, as a function as follows:

Value)

we can write of the average

the formula net value Value Where million 9,009

for the Value

of Random

per person-year of Random equals

in the applicant

pool

Selection

= (9,009 x
in the Value in net value formula

Net

(7)

the change

of Random

Selection--$39.46 in the applicant net value by

divided

by the change If we solve necessary

per person-year

pool--$4,380. per person-year

this

for the change

in average Selection

to increase

the Value

of Random

utility

Analysis:

A New Perspective

Page 43

$22.87

million

(enough we obtain

to offset $2,538

the negative

effects (i.e., pool must

of agency $22.87 have divided by

recruitment),
9 , 009 ) .

per person-year applicants plus

So, the agency-recruited of $18,158 the more (i.e., expensive

an average or more service

net value to justify costs then

$15,620 agency

$2,538)

per person-year effort. If our

recruiting rise

for agency-recruited their service value

applicants must

to $40,000 $58,158

per person-year, $40,000 of agency had an assumed a sizable plus

be at least

(i.e.,

$18,158)

per person-year

to offset

the negative

effects applicants

recruitment. average advantage

In the example, value

agency-recruited

service

of $60,000

per person-year, method.

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. that adopting

Moreover, an integrated

the

effects

to recruitment human

and selection decisions.

programs

may produce

substantially

valuable utility

resource

Analysis

Integrating

Recruitment,

Selection

and

Employee Integrating as we have about seen, recruitment can improve

Separations/Retentions and selection staffing enhances the utility model and,

program

decisions.

However,

decisions by employee

selection

and recruitment If improved than

programs

affect

and are affected

separations. who leave

selection

produces

better-qualified could the

new hires increased costs

sooner

less-qualified

applicants, 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

Utility

Analysis:

A N@w Perspective

Page 44

is an "optimum"

level

of employee programs? be combined the best

turnover, 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.g.,

of employee quits,

acquisitions,

separations

resignations, for such

layoffs) analysis. and

well.
How

#5 (see Table

2) provides

a framework

the Financial

Multiple-Cohort Utility that Model

External Works cohort

Recruitment,

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. but

is more

realistic a vast don't

on only

cohort,

it is still Hired

oversimplification actually during

of actual

separation

patterns. leave

employees

stay together each time period

in one group, those leaving

and then may

together. old,

Rather,
good or bad

include

new,

employees. which

HRM decisions affects

and programs

affect

the pattern work

of separations, This is true

in turn

the value

of the retained programs

force. designed

for both employee

selection/recruitment separations more

and programs & Berger,

to manage

directly

(Boudreau

1985b). force on who value; is (the average

Model But rather retained.

#5 considers than focusing

the effects on who

of separations the model

on work focuses

is lost,

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, If more than

a subset valuable

of the employees

incumbent separate, work force

the organization. force versa. value Thus,

the retained value,

work

is lower

the pre-separation how employee

and vice

we can analyze

utility

Analysis:

A New Perspective

Page 45

separations/retentions (i.e., 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.

The

of employee (e.g.,

separation/retentions exit interviews

includes

the cost pay)

of the separations as the costs retirement

themselves of programs incentives).

or severance

as well

designed

to affect

the pattern

of separations affected by

(e.g.,

The quantity

of person-years

separations/retentions in the analysis. employees produce

is the number

of employees that tend

and time periods to retain versa. recruitment more

involved valuable

Decisions higher employee

and programs force

work

value,

and vice

To integrate selection, value

separations/retentions the effects

with

and on the of employee Briefly, (1) the (2) the

we simply

consider

of recruitment/selection and then the effects

of employees

added

to the work

force,

separations/retentions in any given quantity quantity costs

on the value the value times

of employees of the work their

who are retained. force consists of

time period,

of employees of employees

retained added

average

quality,

plus

times

their

average

quality,

minus

(3) the and

of acquiring

the new employees employees force

(recruitment/selection (separation/retention

costs) costs).

releasing utility

the separating model

The

sums the work costs

values

in each rate.

time period,

adjusting

for taxes,

variable

and the discount

In concept,

separation/retention begins with

is similar

to recruitment/selection. from which certain

Recruitment/selection individuals begins retained in layoff with are chosen

an applicant

pool

to join the organization. work force Such from which systematic

Separation/retention certain retention individuals is quite decides are apparent who leaves

an incumbent

by the organization. or dismissal

decisions,

where

the organization

Utility

Analysis:

A New Perspective

Page 46

and who when Here,

stays.

The concept

also

applies,

although

perhaps of quits

less apparently, or resignations). (such that these

employees those

do the choosing

(e.g.,

in the case "chosen,"

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. 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 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). (a similar

#5 in Table in detail

2) to address

is discussed acquisitions is still

in Boudreau

& Berger,

The number

and separations

is still

618 and the number considerations

of programmers the same,

4,404.

The financial/economic period is still

remain

and the analysis Table

10 years. through advertising, so the selection to of

8 assumes

recruitment

and recruitment recruitment

parameters

reflect 7.

the assumptions The PAT has standard test

corresponding an assumed score,

advertising

in Table

validity cost,

.76, and the number average remain value applicant

of applicants, value, Each

testing cost,

service

average group This

applicant

service

and SDy

the same as before. of $21,951 (i.e.,

of 618 acquisitions

has an average of random value added

per person-year. $15,620

is the sum of the value plus the incremental

selection

per person-year)

Utility

Analysis:

A New Perspective

Page 47

by systematic Based derived the

selection

(i.e.,

$6,331

per person-year). Boudreau & Berger such (1985b) things as

on a review

of costing

literature,

a cost of $7,000 recruitment and $7,000 outplacement are incurred

for each acquisition relocation, separation exit

(reflecting

$2,500

cost, for each

orientation, (reflecting interviews,

and administrative administrative and severance pay). joining force service for

activity) activity, Such costs

assistance, regardless

of the quality

of the person

or leaving. resembles value

At the beginning the applicant

of the analysis, (i.e.,

we assume yearly

the work incumbent

population yearly

average

is $52,065

and average

incumbent

service

cost

is $36,045

a net value These pattern

of $15,620 assumptions

per person-year). establish all the information pattern needed except whether the the four

of separations. keeps

The separation or poorer

determines Table

organization contrasting selection value

its better

performers.

8 analyzes (2) valid the same while

situations: with random

(1) random retention, work

selection those

and retention; retained have

where force;

average

as the pre-separation where those

(3) valid

selection value

retaining

the best, greater retaining of $2,707 utility

retained

have work

an average force; and

yearly

of $2,707 while

than

the pre-separation where those

(4) valid an average

selection yearly

the worst, less than

retained

have

value

the pre-separation

work

force.

Computation of the four 8. 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,

they were logic

1-2-3

spreadsheet

reflecting model

the algebraic 1985).

of the acquisition greatly

and separation reduced the

(Boudreau,

Computerization

Utility

Analysis:

A New

Perspective

Page 48

calculation

effort,

and simplified random effect), value equals

the analysis. selection it will

Under

Option

1, where and random after-

the organization retention cost valid random, Option (zero

experiences separation work force

(validity have

of zero)

a 10-year Under

after-tax, Option

discounted selection the work 3 shows

of $200.31

million.

2, where remain

(validity force

.76) is introduced to $242.10 has high

and retentions million over

value

increases

ten years. retains per the highest even

that

if the organization (i.e., those retained work

validity more

and also valuable attain

the best

employees than value

are $2,707 force),

person-year work with force

the per-separation of $351.69 selection, million.

it will

Finally,

Option

4 shows

that

highly-valid

if the worst

employees

are retained programmer value

(i.e., by $2,707

the effect

of separations producing

is to lower

the average work

value

per person-year), million. The important of valid in work minus

a low 10-year

force

of $132.50

interaction

between

separation

and acquisition considered million (i.e.,

patterns only

has

some

implications. selection, force value

If decision expect

makers

the effects increase million with (i.e.,

they would compared

a $41.79 selection

dollar

to random

$242.10

$200.31

million).

However,

if improved $109.59

selection could

is combined be realized

improved $351.69 retention

retention, million

an additional $242.10

million

minus

million).

By the same of improved combined $67.81

token,

dysfunctional as the random set

patterns

can disrupt

the effects selection value

selection, with

illustrated worst

by the fact produces

that valid a work While

retaining lower than

employees

force these

million

selection

and retention. they

effects

are based human

on a specific programs

of assumptions, affecting

suggest

that

integrating may produce

resource

selection

and retention

substantial

organizational

Utility

Analysis:

~ New Perspective

Page 49

benefits. 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. effect is zero,

Work

is $242.10 the the

million

when

the separation

$351.69

separation separation

effect effect

is $2,707 is -$2,707

per person-year, per person-year. change

and $132.50 Thus, work

million force

changes This

by $109.6 suggests

million

for each

of $2,707 between

in the Separation changes in the

Effect.
separation Work where dollar work

the following work

relationship value:
Separation

effect force

and total

force

Value $109.6

40,488 x
million

Effect

(8)
Simply value work put, every

40,488

equals

divided between

by $2,707. 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

$40,488

in discounted, managers

after-tax, disagreed

10 years. of improved and then better

Suppose selection separation selection

the likely

effect

on the separation pattern will is random

pattern. with

If the current

selection

respect

to job performance, to be hired. (e.g.,

cause

better-qualified are more reduce

employees likely

However, due to better force between enough the selection $242.10 random. force per

if better-selected job opportunities), 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 $41.79

improved (i.e.,

produces million Solving Utility

-

an additional $200.31

million),

assuming

the separation Effect

remains

Equation

8 for the Separation produces

necessary

to reduce

Work

by -$41.79

a break-even

Separation

Effect

of -$1,032

Utility

Analysis:

A New perspective

Page 50

person-year causes than then

(i.e.,

-$41.79 pattern

million/$40,488). 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

$1,032 total using

per person-year, force value than

produce

a higher Thus,

work

random require

selection

retention.

Model

#5 does Effect.

not
In fact,

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,

and separation/retentions. Clearly, for selection with others it is not enough to appear valid, for recruitment to simply fill all vacancies,

or for the turnover It is the patterns

rate to be comparable of employee quality acquisitions that for

in the industry. expressed The

and separations, produces results.

in terms

of quantity, 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. staffing Decisions

Analysis

Integrating

Internal utility

and External model

separation-retention and employee gap--it deals

integrates but

selection, it still that leaves an

recruitment important

separations/retentions, with only one job.

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.

select

qualified candidates, 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,

Utility

Analysis:

A New Perspective

Page 51

are you decreasing performance External promotion separation. 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,

linked.

candidates

is partially may

by external but it also

and involves

Downsizing

involve

redeployment jobs.

or rebalancing internal

in job assignments staffing devote

by moving

employees of

between external

Moreover,

is important substantial

independent

staffing.

Organizations

time

and resources staffing takes

to promotions,

demotions

and transfers, model (Model

even

if no external

place. The final utility

for integrating employees How and enter

#6 in Table that

2) presents affect

a framework how jobs.

the consequences and leave

of decisions force,

not only between

the work

but how

they move

the Financial

Multiple-Cohort utility involves

Internal/External Model Works moving

Recruitment,

Selection,

Separation/Retention Internal staffing and

employees

between

jobs within

the

organization, & Berger, of internal or other 1981; gaps

includes Human

promotions, resource jobs

demotions has

and transfers focused

(Boudreau

1985a).

planning

on the quantity 1982) using Markov

movements

between

(Milkovich

& Anderson, Anderson,

models

to predict 1984;

this quantity & Konda,

(e.g., 1983).

Milkovich

& Tsui,

Rosenbaum, between

Stewman

Such planning of employees

identifies jobs.

desired

and projected that (e.g., internal Doeringer

quantities movements & Piore,

in various

Some have of labor

recognized resources

affect 1971;

the efficient Thurow, 1980),

allocation but of should did

not propose internal consider employees,

a framework

for analyzing model

the productivity for internal not only as well

consequences movements

movements. the effects

A decision of internal quality

employee

staffing and cost

on the quantity 1987b).

of

but on their

(Boudreau,

utility

Analysis:

A New Perspective

Page 52

For external currently their

jobs that selection, employed,

receive except whose

employees, 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. scores to predict

Whereas
future

external

selection

might

use test

performance, performance For similar

internal

selection center

decisions scores.

might

consider

seniority,

or assessment supply

jobs that to external

employees,

the effect except

of internal that

movements of

are

separation/retention, by internal Internal

the pattern instead usually

separations dismissals, ensuring

is determined layoffs

staffing staffing

decisions, decisions

of by emphasize

or quits.

that vacancies Yet,

in the receiving

job are filled

with

qualified on

candidates. the jobs that

as we shall candidates

see, the effects

of internal

movements

supply

can be as serious

as employee

separations, job.

and may

not always

be offset model,

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, through times

the quality plus

of employees

external of employees move out of

recruitment/selection, retained when internal

(3) the quantity take place

the quality employees

separations jobs); plus

(i.e.,

of the job into other employees and added through

(4) the quantity selection; minus

times

the quality

internal

(5) the costs The model

of external

internal

selection

and separation force in each in each

activities.

establishes

the value and then

of the work changes

job at the beginning time period

of the analysis, the effects utility value

that value

to reflect

of internal

and external

employee

movements.

The resulting

utility

Analysis:

A New Perspective

Page 53

is the sum of the work period analyzed,

force

values

in the jobs interest

analyzed

during

the

time

adjusted

for taxes,

rates,

and variable

costs.

---------------------------------------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. Multiple-Cohort

9 presents

the results Recruitment,

of applying Selection In Table same

the Financial

Internal/External Model

and Separation/Retention 9, the external as before, separations, separations year analysis For into staffing that

utility variables instead

to the current

example.

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.

The financial jobs.

considerations

are the same for both we will consider

illustration, System leave

the effects 1,000

of internal

promotions

a Data

Manager

job containing

upper-level

employees,

100 of whom policy

the organization 100 vacancies

each year. are filled

A promotion-from-within by promoting job costs regardless 100 slightly

exists,

and the Each

Programmers. higher than

separation cost

from the Manager for Programmers,

$8,000,

the $7,000

of the quality also costs

of those $8,000

retained.

Each

promotion

from Programmer

to Manager

(including

relocation, with

orientation

and administration). center, 1979), costing

Internal an average a total

selection

is accomplished

an assessment

of $380 per tested cost of $1.44 Notice

applicant

(Cascio

& Silbey,

producing

million

per year between

to assess

all 3,786

promotion

candidates. considered

the symmetry

the external

staffing

variables

Utility

Analysis:

A New perspective

Page 54

in the Programmer the Manager Programmers (i.e., 4,404 job.

job and the internal The "applicant pool"

staffing

variables

considered

in of 3,786 place

for promotions external 3,786

is the group take for

available minus

in each year

after

separations applicants

618 equals

3,786).

With

100 job

openings, test This score

the organization of those that promoted

can be quite is 2.32

choosy,

so the average deviations) candidates, number

standard above average. 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.

differences

are assumed job,

consequences promotion

in the Manager

in the Programmer ten percent

so SDy among the $10,413

candidates

is $11,454 applicants).

(about

higher

than

SDy for Programmer Because than

the Manager

job involves

more

discretion value

and responsibility promoted

the programmer (i.e.,

job, 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. valid value cost also

than

they produced when

as Programmers. promoted, 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), increases. an added

of the Programmers that improve

also

Thus,
benefit

decisions

produce

by improving model could

promotion also

for Manager or larger

jobs,

and vice

versa.

The

reflect

relationships

between

Programmer

and Manager utility

performance.

Computation of Table 9 shows the effects shown of different represent internal and

The bottom external staffing

patterns.

The values

the after-tax,

utility

Analysis:

A New Perspective

Page 55

after-cost summed complex, over

discounted the

value

of the Programmer period. model

and Manager

work

forces, are rather them

10-year

analysis utility

While

the computations enough

the mathematical using

is explicit with

to allow software. program

to be programmed The values (Boudreau, Option a system, internal $249.86 PAT with this

a personal

computer using

spreadsheet

in Table 1987a).

9 were

generated

such a spreadsheet

1 depicts

random value

external of each

and internal job's work

staffing. remains

Under constant

such as of the

the average and external

force

movement

occur,

producing valid

a total

10-year

value using

million. a validity

Option of

2 introduces .76. The value

external

selection

of Programmers work force value when

is enhanced,

and

enhances

the value producing

of the Manager a total work

the Programmers million.

are promoted, 3 analyzes validity job, but no effect

force

of $296.90

Option
the

internal

staffing

in the typical center (validity

manner. equal to

It acknowledges

of the assessment it still assumes

.35) for the Manager Programmers Under these has

that promoting of the Programmer force value

highly-qualified work force.

on the quality total work

assumptions, 4 considers pulls value total validly removes better high

increases

to $302.51

million.

Option

the possibility performers from

that promoting the Programmers

highly-qualified work force,

Programmers the average a center

reducing

of the retained work force

Programmers

by $625 per person-year, million. Though

producing

utility future

of $278.68

the assessment

predicts

job performance Programmers internal that

for Managers,

if it simultaneously would be $12.22 million

high-performing off with random

the organization (Option 2).

staffing

This

is not to suggest but

assessment the value

centers

are always

poor

investments,

it illustrates

of a decision

framework

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. that

It also
only the

illustrates movement quantities substantial be extended employee external more than

the limits

of internal count

staffing levels.

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, These concepts can

emerged.

decisions

affecting

internal

and external and involving

flows,

as "make-or-buy" reductions in work

decisions force

between and

internal systems

selection, two jobs.

size,

Dealing

With

Uncertainty the most integrative utility framework, selection factors. and and Obviously,

Model encompassing

#6 represents both internal

and external

recruitment, investment

separation/retention, utility may even values based

as well

as financial require

on such a model

estimates,

such estimates models, break-

be uncertain analysis

or variable.

As with

the earlier

utility

can address Table

such uncertainty 9 showed that when

systematically

and explicitly. internal

For example, promotions year, $302.51 cause

assessment-center-based value

a reduction million

in average

Programmer

of $625 per person(i.e., #2) is offset figure assessment

the $5.61 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.

However, argue

the $625

or controversial. will remain CaUse after

Some might

that while

center

some reduction promotions,

in the value it would

of the 3,686

Programmers

not be $625 per personhave to be change

year.

How much

less would

the productivity

reduction

the decision

in favor

of the Assessment

Center?

Utility

Analysis:

A N@w Perspective

Page 57

The results Programmer

of Options Effect force to -$625, 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. causes from

and the retained the Total dollar Work

work

force

after

promotions) by -$23.83 Effect

force

Value

changes

Therefore, a change .

change Value

in the Programmer of $38,128 (i.e.,

Promotion $23.83

in Total Knowing

Work

force

million/625) that would

this,

we can find

the Programmer advantage

Promotion of improved

Effect Programmer a Programmer

exactly

offset

the $5.61 million million

selection Promotion qualified person-year million

by dividing Effect

-$5.61

by $38,128.

This produces

of -$147

per person-year. the Programmer work force

If promoting work force

the highestvalue by $147 per $296.90 the

programmers or more, with

reduces the total random

value

would

be less than Addressing

obtained does

promotions precisely whether

and retentions. measuring it exceeds

controversy Effect, could this but change

not require determining

the Programmer the critical center (i.e.,

Promotion value -$147 that in

rather

the decision The utility

to adopt model Center

the assessment focuses based

example).

the analysis

on the critical the programmer

question work

of how Assessment

promotions

affect

force.
SUIIIna.ry

and Implications

Summary
This chapter has illustrated how cost-benefit effects (Table utility analysis resource utility flows, models

can systematically programs. analysis Models (Tables

analyze

the productivity application the stock 2 and their

of human

The training for programs

program affecting

1) illustrated

of employees. application analysis

For employee to the case can encompass

#1 through 3 through

#6 in Table 9) showed

study not

how cost-benefit

utility

Analysis:

A New Perspective

Page 58

only

the relatively of external between model

simple

case of selecting employee that

one

cohort,

but the

integrated employee the

effects movements utility

selection, jobs. Note

separations

and internal

it is also possible with the models that

to integrate

for employee analysis than

stocks

for employee parameter

flows. measurement is to the for

The break-even may be less important

demonstrated commonly

precise The

believed. variables

important could

task affect

identify human risk

the critical decision

values

for those

that

resource

and systematically Then, measurement

assess effort

their

implications with

and uncertainty. The contribution

can proceed

a definite explicit

goal.
the

of utility human

analysis

is its ability

to make

relationships

linking

resource

decisions assumptions

to productivity-related and areas of uncertainty

outcomes,

and to highlight analysis. 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.

consequences, seen, that

that might such have human

otherwise

or incorrectly are not Rather, limited

As we have programs

summaries already

and integration been implemented. and

to evaluating a framework

they offer

for planning decisions how

resource

programs

activities. and evaluated managers Utility

The way human is likely

resource

are planned,

communicated by

to affect

such decisions and whether

are perceived are

throughout analysis

the organization, a framework

they

implemented. and

offers

that

focuses

explicitly

systematically However, in human decision

on productivity-related productivity-related decisions. including

consequences. are only must one consideration by

consequences

resource makers,

Several

constituents

be considered with

not only managers

concerned

productivity

utility

Analysis:

A New perspective

Page 59

but

employees,

regulatory are never

agencies, completely determine

and communities. rational. Politics,

Furthermore, personalities, and programs' still, utility

organizations tradition success analysis decision

and power or failure models makers

often

the outcomes 1988,

of decisions Chapter outcomes, 8).

(Milkovich

& Boudreau,

summarize to more

productivity-related systematically consider factors.

and can assist between never be negative the

the tradeoffs Though it will

productivity easy

and other

less tangible

to balance

a potential morale, when

million-dollar legal

return

against

possible animosity,

effects task

on employee

vulnerability consequences from

or union

may be easier decision

productivity will

are better a common

specified. set that

At least, can more Limited

makers

be operating important

data

appropriately Information management

address

organizational

concerns.

is No Excuse function

for Unsystematic with

Decisions yet dollar Believing costs

Every and returns "people provides illustrate Moreover, management

operates

uncertainty,

are routinely

considered

in such decisions. to stand

that analysis here

problems"

are simply excuse

too uncertain to avoid

up to rigorous presented

a convenient that

it, but

the examples and

it can also may

lead to unsystematic create the impression

incorrect

decisions. resource

such a belief produces analysis only

that human

"soft"

benefits decision their every

to the organization. makers to identify sources rather such of

Utility risk

encourages and examine measure

or uncertainty

effects variable.

on decisions, Techniques

than

attempting even

to precisely

as break-

analysis

and computer-assisted about human resources resources.

"what as they

if ..." analysis are to decisions seen,

are as applicable about financial, often by

to decisions marketing clarify

or operational the nature

As we have

such techniques decisions

of uncertainty

and can actually

enhance

utility

Analysis:

A New perspective

Page 60

demonstrating programs Human

that

only

very

unlikely

events

could

make

human

resource

unprofitable. 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"), sentiment. budgets, behaviors, 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,

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, and explicitly.

and that

these

decisions

can be analyzed often are

Organizational line managers

decisions

by supervisors, resources If human

and top management. production

This
and

for human resources.

as it is for marketing, resource professionals that human and that utility

are to influence issues can be

managers, within

they must

demonstrate framework,

resource

analyzed essential starting

a management

such analysis models

provides provide a

and important point. human

information.

analysis

Ignoring decision

resource

implications, gamble that

or adopting

convenient

but

faulty

systems

is a dangerous or surprising

can cost millions.

This is
of

not a startling viewing and cost human that

conclusion, within

it is a logical the framework decision.

consequence

resource applies

decisions

of quantity, cases,

quality simply

to any management

In many

utility

Analysis:

A New perspective

Page 61

framing

human

resource

issues toward

in these

terms

clarifies

their

importance

and directs in press). used here

managers Actual

better will

decisions involve

(Florin-Thuma

& Boudreau, 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, how

a useful program develop

to further tools

decision actual

support

using

computers,

and explore & Rynes,

such models

managerial

decisions

(Boudreau,

Dyer

1986).
It is hoped decisions using that HRM decision makers will analyze and present their with

cost-benefit

and utility

concepts; make

communicate more effective

better HRM

supervisors, decisions;

line managers and contribute Those to blame human

and top managers; more

to organizational to employ these

productivity concepts

and no one

competitiveness. but themselves

who fail when

may have

supervisors,

line managers

and top managers

continue

to ignore

resource

management's

contribution.

utility

Analysis:

A New Perspective

Page 62

References American Management report. Association New York: (1986). American Hiring strategies and costs:

The AHA Anderson,

Management A. (1981).

Association. A model Review, of intra, 529-538. Quantitative

J. C., Milkovich, mobility.

G. T. & Tsui, Academy

organizational Bierman,

of Management w. H.

H. Jr., Bonnini, for business (1983a).

C. P., & Hausman, decisions. Economic

(1981). Ill:

analysis Boudreau,

Homewood,

Irwin.
the utility

J. W.

considerations improvement

in estimating programs.

of human

resource

productivity

Personnel

Psychology, Boudreau, human J. W.

36, 551-557. (1983b) Effects of employee improvement flows on utility analysis of

resource

productivity

programs.

Journal

of Applied

Psychology, Boudreau, J. W.

68, 396-407. (1984). Decision theory contributions 23, 198-217. program NY: for quantifying to HRM research

and practice. Boudreau, J. W.

Industrial

Relations.

(1985).

EXTMOV:
movement

A spreadsheet decisions. analysis Handbook

external Boudreau,

employee

Ithaca,

Author.
resource management

J. W.

(in press).

Utility

in human

decisions. Psychology Boudreau, J. W.

In M. J. Dunnette, (2nd ed.). (1987a).

In press.

of Industrial-Organizational

MOVUTIL:

A spreadsheet employee

program

for analyzing Ithaca, NY:

the utility

of internal

and external

movement.

Author.
Boudreau, J. W. (1987b). Utility analysis applied to internal framework. School and external

employee paper,

movement: Center

An integrated Human

theoretical Resource

Working
of Industrial

for Advanced

Studies,

and Labor

Relations,

Cornell

University.

Utility

Analysis:

A New Perspective

Page 63

Boudreau,

J. W. & Berger, applied

C. J. (1985a). employee

Decision-theoretic movement. Journal

utility of Applied

analysis Psychology Boudreau,

to external

[Monograph],

70, 581-612. Toward a model of employee (Eds.), Research

J. W. & Berger, utility.

C. J. (1985b). In K. M. Rowland resource

movement

& G. R. Ferris

in personnel

and human

management

(pp. 31-53).

Greenwich,

Conn.: JAI Press.

Boudreau, J. W., Dyer, models L. D. & Rynes, S. L. (1986). Development making, of utility and

analysis

for manpower

and personnel on decision Contract SFRC

decision processes

investigation u.s. Boudreau, Army

of their

effects

and outcomes.

Research

Institute,

#MDA903-87-K-OOOI. resource decisions: resource

J. W. & Milkovich, computer

Plano,

G. T. (1988).

Human

Personal

(PC) exercises
TX:

in personnel/human Publications, Inc.

management. Boudreau,

Business (1985).

J. W. & Rynes, analysis. (1946a).

S. L. Journal On the

The role of recruitment Psychology,

in staffing

utility Brogden,

of Applied

70, 354-366.

H. E.

interpretation

of the correlation Journal of

coefficient Educational Brogden, H. E.

as a measure Psychology, (1946b).

of predictive 37, 65-76.

efficiency.

An approach

to the problem

of differential

prediction. Brogden, H. E.

Psychometrika,

14, 169-182. testing pays off. Personnel Psychology,

(1949).

When

, 171-183. Brogden, H. E. & Taylor, E. K. concept (1950). The dollar criterion--Applying Personnel

the cost-accounting Psychology, Cascio, W. F.

to criterion

construction.

~, 133-154. Costing human resources: The financial impact of

(1987).

utility

Analysis:

A New Perspective

Page 64

behavior Cascio,

in organizations. R.

(2nd ed.)

Boston,

MA:

Kent.
of a new terms.

W. F. & Ramos,

(1986).

Development

and application

method Journal Cascio,

for assessing of Applied

job performance Psychology,

in behavioral/economic

71, 20-28. utility of the assessment Psychology, 64, tests center 107-118. and personnel Press. for as

W. F. & Silbey

V.

(1979). Journal

a selection Cronbach,

device.

of Applied

L. J. & Gieser, (2nd ed.).

G. C. (1965). Urbana, R. A. IL:

Psychological University

decisions Cronshaw,

of Illinois

S. F. & Alexander,

(1985).

One answer

to the demand decision.

accountability: Organizational Doeringer,

Selection Behavior M.

utility

as an investment Decision Processes, markets

and Human

35, 102-118. and manpower

P. & Piore,

(1971). MA:

Internal

labor

analysis.

Lexington,

Heath-Lexington. human resources management. New York:

Fitz-Enz,

J. (1984).

How to measure

McGraw-Hill. Flamholtz, E. (1985). Human resource accounting (2nd ed.). San Francisco,

CA:

Jossey-Bass. B. C. & Boudreau, utility J. W. (in press). Effects of performance Personnel

Florin-Thuma, feedback

on managerial

decision

processes.

Psychology.
Gow, J. F. ( 1985 ) .

Human

resource

managers

must

remember

the bottom

line.

Personnel Hunter,

Journal,

April, F. L.

30-32. (1982). Fitting people to jobs: The impact

J. E. & Schmidt,

of personnel

selection

on national Human

productivity.

In M. D. Dunnette (Vol.

& E. A. Fleishman 1, pp. Landy, 233-284).

(Eds.),

performance

and productivity

F. J., Farr,

J. L. & Jacobs,

R. R.

(1982).

utility

concepts

in

utility

Analysis:

A New Perspectiv@

Page 65

performance Performance, Mahler,

measurement. 30, 15-40. Auditing

Organizational

Behavior

and Human

W. R. (1979).

PAIR.

In D. Yoder

& H. Heneman, Washington,

Jr., DC:

ASPA

handbook Bureau Mathieu,

of personnel of National

and industrial

relations.

Affairs. R. L., Jr. (1987). Applying utility concepts approach.

J. E. & Leonard, program

to a training Academy Milkovich,

in supervisory Journal,

skills:

A time-based

of Management G. T. & Andersen,

30, 316-335. Career planning and development management

J. C. (1982).

systems.

In K. M. Rowland

& G. R. Ferris and Bacon. (1988).

(Eds.),

Personnel

(pp. 364-388). Milkovich,

Boston:

Allyn J. W.

G. T. & Boudreau, A diagnostic

Personnel/human
Plano, TX:

resource Publications,

management:

approach.

Business

Inc.
Naylor, J. C. & Shine, criterion L. C. (1965). score obtained A table by using for determining a selection the increase

in mean

device.

Journal

of Industrial Rich,

Psychology, J. W.

1, 33-42. (1987). The effects A Monte Carlo of variability analysis and risk

J. R. & Boudreau, on selection Personnel utility

analysis: 40, 55-84. Career

and comparison.

Psychology, (1984).

Rosenbaum,

J. E.

mobility

in a corporate

hierarchy.

New

York:
Rynes, S. L.

Academic

Press. J. W. (1986). evaluation College recruiting in large

& Boudreau,

organizations: Personnel Sackett,

Practice,

and research

implications.

Psychology,

39, 729-757. N., Tenopyr, questions M. L., Kehoe, validity N. & Zedeck, S. (1985). and meta-

P. R., Schmitt, on forty

Commentary

about

generalization

Utility

Analysis:

A New Perspective

Page 66

analysis.

Personnel

Psychology, J. E. (1983).

38, 697-798. Individual differences derived from in studies 68,

Schmidt,

F. L. & Hunter,

productivity: of selection 407-414. Schmidt,

An empirical procedure

test of estimates Journal

utility.

of Applied

Psychology,

F. L., Hunter, about

J. E., Pearlman,

K. & Hirsh,

H. R. (1985).

Forty

questions Psychology, Schmidt,

validity

generalization

and meta-analysis.

Personnel

38, 697-798. J. E., McKenzie, procedures R. C., & Muldrow, on work-force T. W. (1979).

F. L., Hunter, of valid

Impact Journal Schmidt,

selection

productivity.

of Applied Hunter,

Psychology,

64, 609-626. K. (1982). Assessing the

F. L.,

J. E. & Pearlman, programs

economic Personnel Sheibar, P.

impact

of personnel

on work-force

productivity.

Psychology,

35, 333-347. practices March. Careers and organizational behavior. labor American review: a personnel audit

(1974).

Personnel

activity. Stewman,

Personnel S. L.

Journal, (1983). models

S. & Konda,

markets: Journal Taylor,

Demographic of Sociology,

of organizational

40, 298-321. J. T. (1939). The relationship of tests Psychology, of validity in selection: 23, 565-578.

H. C. & Russell,

coefficients Discussion Thurow, L.

to the practical and tables. Generating

New

effectiveness of Applied

Journal

(1980).

inequality:
York:

Mechanisms Books.

of distribution

in the U.S.

economy.

Basic

utility

Analysis:

A New

P@rspective

Page 67

Table

1.

utility and Break-Even Analysis Applied to Decisions Employee stocks: A Training Delivery Decision. Decision

Affecting

Should training for engineers in basic production processes be delivered through: (1) Classroom-based training, with twenty half-day sessions, class sizes of 40, conducted by experienced engineering employees, training up to 40 students per year; or (2) An Audio-Video network, consisting of one broadcast studio and 10 remote conference rooms (one-way video, two-way audio), allowing up to 200 to be trained per year Option 1 Classroom Delivery Option Audio-Video 2 Delivery

Costs:

$451,035 over five years (no start-up costs because system already exists). Train 40 students per year

$1,031,147 over five years (very high startup costs). Train 200 incumbents in the first year, and 20 new hires in Years 2 through 5. 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 1,200

Dollar Value of the increase in productivity due to Audio-Video training, per person-year (Symbolized P2).

Dollar Value of the increase in productivity due to classroom training, per person-year (Symbolized P1). Payoff Formulas

u1

(600 X P1)

$451,035
Break-Even

u2 = (1,200 X P2)
Analysis

- $1,031,147

P1

$451,035/600

$752

P2

$1,031,147/1,200

= $860

utility

Analysis:

A New Perspective

Page 68

Table

1.

utility and Break-Even Analysis Applied to Decisions Affecting Employee stocks: A Training Delivery Decision. (Concluded)

Payoff

Formula

for the Difference - $451,035)

U2

- U1

(1,200

X P2) - (600 X P1) - ($1,031,147 - $484 Rules

[P2 - (.5 X P1)]

Decision

1. 2. 3.

If both P1 and P2 are less than break-even, do neither program. If P1 exceeds $752, and P2 is less than (.5 X P1) + $484, do Option If P2 exceeds $860, and P2 is more than (.5 X P1) + $484, do Option

1. 2.

utility

Analysis:

A New Perspective

Page 69

Table

2.

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, et al., 1979)

Deciding how to choose which external applicants should be hired in a particular time period.

Model #2: Financial One-Cohort External Selection utility Model (Boudreau, 1983a) Model #3 Financial Multiple-Cohort External Selection utility Model (Boudreau, 1983b)

Effects of taxes, interest rates, and costs of maintaining and improving employee performance. 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. 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. Financial value of deciding how to attract the applicant pool, 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. Financial value of deciding how to attract the applicant pool, how to choose which external applicants should be hired, and how to manage employee separations/retentions during each future time period during which recruitment, selection and separation management programs are applied.

groups.

Model #4 Financial Multiple-Cohort External Recruitment and Selection utility Model (Boudreau & Rynes,

Effects of recruitment decisions on the outcomes of selection, and vice versa.

1985)

Model #5 Financial Multiple-Cohort External Recruitment, Selection, and Separation/Retention utility Model (Boudreau & Berger,

Effects of employee separation/retention patterns on recruitment and selection, and vice versa.

1985)

utility

Analysis:

A New

Perspective

Pag@ 70

Table

2.

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, Selection, and Separation/Retention utility Model (Boudreau, 1987b)

Effects of recruitment, selection and separation/retention of employees moving between jobs within the organization on external staffing decisions, and vice versa.

Financial value of deciding how to attract the applicant pool, how to choose which external applicants should be hired, and how to manage employee separations/retentions from the organization; as well as how to attract, choose and manage separations when employees move between jobs within the organization, during each future time period in which internal/external recruitment, selection and separation management programs are applied.

utility

Analysis:

A New Perspective

Page 71

Table

3.

Situation

to be Analyzed

Cost-Benefit Information Current Employment Number Separating Number Selected Number Promoted Adapted from:
.

Entry-Level Programmers

Computer

Upper-Level

Data

System

Manager 1,000 100 0 100

4,404 618 718 100

Hunter, McKenzie & Muldrow

Schmidt,

(1979)

and Boudreau

(1987b)

utility

Analysis:

A New Perspective

Page 72

Table

4.

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

4,404 618 618

9.69 years

1,236 .80 SO
$10,413/yr.

Test

.76
$10/applicant Cost Testing

One-Cohort utility Increase over Random Selection without the

$37.9

million

PAT
Adapted from: Schmidt, Hunter, McKenzie, & Muldrow (1979).

utility

Analysis:

A New Perspective

Page 73

Table

5.

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

4,404 618 618

10 years

1,236 .80 SD
$10, 413/yr.

Rate

5% 45% 10%

Validi ty Testing Cost

.76
$10/applicant

After-Cost, After Tax, Discounted, One-Cohort utility Increase over Random Selection Without the PAT. Adapted from: Boudreau

$12.55

million

(1983a).

utility

Analysis:

A New Perspective

Page 74

Table

6.

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

4,404 618 618

10 years

1,236 .80 SD
$10 ,413/yr.

Rate

5% 45% 10%
10 years

Test Application Period Person-Years Affected

Abili ty Test

7 years 31,282

Validity Testing Cost After-Cost, After Tax, Discounted utility Increase over Random Selection Without the PAT (Millions) Adapted from: Boudreau

.76
$10/applicant Benefit
-

Cost $.04

$54.32

$54.28

(1983b).

utility

Analysis:

A New Perspective

Page 7S
External Recruitment and Selection

Table

7.

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

4,404 618 618

10 years

1,236 .80 SD 5% 45% 10% 7 years 31,282

10 years

Rate

Test Application Period Person-Years Affected Analysis Period

Work Staffing Ability Testing Variable Test Validity Cost

force

utility

Results Advert. Recruitment Agency

Recruitment

.76
$10japplicant

.60
$10japplicant

Recruitment Cost/Hire Avg. Applicant Service Value Avg. Applicant Service Cost Avg. Net Applicant Value SD of Applicant Value

$ 2,500 $52,065 $36,445 $15,620 $10,413

$ 4,450 $60,000 $40,000 $20,000 $ 8,500

$180.50 -$ 8.10 $ 35.00 -$ .04

(sn" )
Value of Random Selection Cost of Random Selection Value Added by Testing Cost Added by Testing Total After-Tax, After-Cost Discounted Work force Value (Millions) Adapted from: Boudreau & Rynes

$141.04 -$ 4.55 $ 54.32 -$ 0.04

$190.76
(1985).

$207.45

utility

Analysis:

A New Perspective

Page 76

Table

8.

Financial Multiple-Cohort External Separation/Retention utility Model

Recruitment,

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

4,404 $52,065 $36,445 618 618 $7,000 $7,000 1,236

$52,065/year $35,445/year .80 SO $10,413/yr. $10/applicant

5%
Rate

45% 10%
10 years

Work force utility Results Staffing Variable Test Validity Separation Effect After-Tax, After-Cost Discounted Work force Value (Millions)
Adapted from: Boudreau

Option 1 0.00 $0

Option 2 0 .76 $0

Option 3 0 .76 $2,707

Option 4 0 .76 -$2,707

$200.31
& Berger (1985a).

$242.10

$351. 69

$132.50

utility

Analysis:

A New Perspective

P<lge 77

Table

9.

Financial Multiple-Cohort and Separation/Retention

Internal/External utility Model

Recruitment,

Selection,

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 4,404 $52,065 $36,445 618 718 100 $7,000 $7,000 NA 1,436 $52,065/yr.

Upper-Level Data System Managers 1,000 $57,272 $40,000 100 0 100 NA $8,000 $8,000 3,786 1.10 times average Programmer value 1.10 times average Programmer cost 2.32 SD $11,454/yr. NA $1.44 million/yr. 5% 45% 10% 10 Years

$36,445/yr. .80 SD
$10 ,413/yr. $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, After-Tax, Discounted Total Work force Value (Millions) Adapted from: Boudreau (1987b). 1 0.00 $0 0.00 2 0.76 $0 0.00 3 0.76 $0 0.35 4 0.76 -$625 0.35

$249.86

$296.90

$302.51

$278.68