Question

Problem #1 – Utility Analysis

A company wants to determine if their use of an assessment center for identifying upper-level managers was producing the results anticipated. They provide you – their newest and brightest HR analyst - with the following information:

Number of Applicants Selected	10
Test validity	.30
Average Salary for this job	$100,000
Average Z score of those selected	1.25
# applicants tested	25
Cost of testing each applicant	$4,000

You search through your old Staffing class notes and find the following equation.

Utility = N_s r_xy SD_y Z_x - N_T C

Unfortunately, you didn’t write down what any of the letters stand for. But, you think awhile, and recall how to use the equation.

Based on the results of this analysis (which you will show below), would you recommend your company continue to use assessment centers for these managers? Why or why not?

Answer 1

Solution :

Utility analysis is a method which is used to calculate the Return to the Organisation for a valid Selection procedure. This is calculated by the following equation:

Utility = Ns rxy SDy Zx - NT C

Where

Ns = Number of Applicants Selected

rxy = Validity Coefficient of Selection Procedure or Test Validity

SDy= Standard deviation of Job performance ( It is 40% of Average Salary for the job )

ZX = Average score on Selection procedure of those applicants who were selected )

NT = Total number of Applicants Tested

C = Cost of testing each Applicant

So according to Above problem :

Ns= 10

rxy= 0.3

SDy= $100,000 x40/100 = $ 40,000

ZX= 1.25

NT= 25

C= $ 4,000

Utility = Ns rxy SDy Zx - NT C

= 10 (0.3) ($ 40,000) (1.25) - 25 ($ 4,000)

= $ 150,000 - $ 100,000

= $ 50,000

From above Analysis we find that Utility of above Program is $ 50,000.

So we Shall recommend your company to continue to use assessment centers for these managers because above Procedure results in a return of $ 50,000 per year to the Company.