Utility Analysis: Its Evolution and Tenuous Role in Human Resource Management Decision Making

Article excerpt

Industrial/organizational (I/O) psychologists have long considered it a worthwhile endeavour to try to quantify the value of the contribution of I/O psychology to organizational effectiveness. Utility analysis is a technique that attempts to achieve this objective by providing a way to forecast the net financial benefits of scientifically-based human resource (HR) initiatives. More generally, utility analysis "provides a way of thinking about HR decisions that makes facts, assumptions, and beliefs behind decisions more explicit, systematic, and rational" (Boudreau, 1991, p. 126). As such, utility analysis is considered by many to be a useful tool for management in deciding whether to implement HR decisions and initiatives (Kendrick, 1984; Kopelman, 1986).

Although studies of utility analysis have been applied most frequently to selection procedures (e.g., Cascio, 1991; Cascio & Ramos, 1986; Cascio & Sibley, 1979; Cronshaw, 1986; Cronshaw & Alexander, 1985; Schmidt, Hunter, McKenzie, & Muldrow, 1979), researchers have applied similar cost/benefit analyses to other HR interventions, including performance feedback (Florin-Thuma & Boudreau, 1987; Landy, Farr, & Jacobs, 1982), training (Cascio, 1991; Mathieu Leonard, 1987; Schmidt, Hunter, & Pearlman, 1982), promotion (Cascio & Ramos, 1986), recruitment (Boudreau & Rynes, 1985), and turnover/layoff management (Boudreau & Berger, 1985; Cascio, 1991). These and other studies purport to identify with a high degree of precision the financial payback to be realized through investments designed to improve employee productivity. Few firms, however, appear to use utility analysis in deciding whether to implement new HR policies.

A primary objective of this article is to identify reasons why utility analysis is used infrequently as a managerial decision-making aid. To accomplish this objective, this article first identifies intractable issues that have arisen as utility analysis has evolved. Second, if utility analysis is to be used by managers, they must be convinced that it is relatively accurate. Hence, the reliability and validity of utility analysis is discussed. Specifically, this section examines data that are either included or excluded in the calculation of utility, such as the standard deviation of human performance (SDy) in the former case or information concerning external labour markets and the nonhuman contributions to performance in the latter. Assumptions and implications underlying the concept of human performance measured as an "asset" of the firm are also discussed. Finally, research on decision making is reviewed as it relates to managerial perceptions of the usefulness of utility estimates for decision making. This section identifies reasons why managers are likely to discount the results of a utility analysis when making decisions.

THE EVOLUTION OF UTILITY ANALYSIS

Cost/benefit analyses of HR initiatives first appeared in the scientific literature over forty years ago. Yet a review of research on the intellectual ancestry of utility analysis, namely, the dollar criterion and human resource accounting, reveals issues that continue to be unresolved to this day. These issues were, in part, responsible for the eventual abandonment of both the dollar criterion and human resource accounting, and continue to plague utility analysis as a direct descendant of these two techniques.

THE DOLLAR CRITERION

Utility analysis has its roots in the pioneering research of Brogden and Taylor (1950) on the dollar criterion. They argued that the ultimate criterion for any business firm in evaluating an employee's effectiveness is financial. Dollars and cents were said to be a meaningful metric that is common to employees in most if not all organizations. As Blum and Naylor (1968) noted, however, there are at least two difficulties with this approach. First, many indices of job effectiveness do not lend themselves to a monetary value. …