Good hire, Bad hire and the Economics of Psychometrics

Sometimes, we are asked,

 “How should I make a business case for the use of psychometrics?”

 “Why should I place so much importance on using psychometrics in hiring?”

 “How much should one spend on hiring the right person”, or,

 “Why should I be concerned about validity of the instrument?”

 

 Like other business decisions, the use of selection methods, including psychometrics, should also be based on due considerations of ROI. Resources (time and money) spent on hiring for a position can be justified by:

 

  • The benefits realized by selecting a good hire (who turns out to be in the top 20% of performers) E.g. Hiring a better sales person is likely to lead to higher revenue gains.
  • The savings by avoiding a bad hire (who turns out to be in the bottom 20% of performers) E.g. hiring a shop floor employee in a heavy machinery factory who is not adequately safety oriented may lead to more accidents with costs as high as three to four times the annual salary of the incumbent.

For better hiring decisions, use the Saville Wave and Aptitude assessments. To know more about the Saville Assessment Accreditation Programme, download the Saville Accreditation Brochure.

 

 Not all selection methods are predictive enough to help you achieve the above objectives. Some are better than others. Even within psychometrics, predictive power can range from very little to very high.

 

 To know the ROI, we need to know how well a tool helps hire more high performers and fewer bottom performers. Taylor & Russell (1939) devised a table to find out the hit rate (probability of selecting the right person) for varying validities of selection methods. Methods with high predictive power or validity have higher hit rates – they select more high performers while reducing the number of poor performers. We can use Taylor-Russell Tables to find the distribution of high, average and low performers hired using different methods.

 

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 Given the ubiquitous nature of unstructured interviews, we can compare the additional value other methods offer over unstructured interviews in a selection process. To find this, we assume the generally accepted predictive power (validity) of each method impacting the selection of 100 candidates:

 

  • Typical Personality test (validity = 0.3): Will help hire 15 more good hires and make 10 fewer bad hires
  • Typical Aptitude test (validity = 0.4): Will help hire 20 more good hires and make 13 fewer bad hires
  • Saville Assessment (validity = 0.57): Will help hire 30 more good hires and make 18 fewer bad hires

 

 Research suggests that the average gains from an incrementally better hire are at least 1.7 times the incumbent’s salary (O’boyle jr., e. & Aguinis, h., 2012). Similarly, research by Chartered Institute for Personnel and Development revealed that the average damages caused by a wrong hire have a direct cost of 2.4 times the incumbent’s salary (CIPD, 2015).

 

 While these figures demonstrate the direct benefits of use of psychometrics, there are other benefits that make a strong case for the use of psychometrics. For example, psychometrics are seen as fair and valid when they can be legally defensible in court, and they take less time and cost to administer.

 

 HR Professionals managing Recruitment and Talent Management can use such analyses to justify both investments and cost savings in acquiring talent and while making selection decisions. Similar analysis can also help them choose the best psychometric tool at a given price.

 

References:

CIPD (2015), Avoiding Bad Hires. People Management, 82-85

O’boyle jr., e. & Aguinis, h. (2012), The Best and the Rest: Revisiting the norm of normality of individual performance. Personnel Psychology, 65: 79–119. Doi:10.1111/j.1744-6570.2011.01239.x

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