Utility Analysis: Assessing the Organizational

Value of HR Practices
Edward R. Kemery, Ph.D.

08/28/16

Copyright Edward R. Kemery, Ph.D., 1998

HRM at UB

HR Utility Analysis -- defined

A process designed to provide quantitative
estimates of the dollar impact of an HR practice
on an organization.

HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998

Uses of HR Utility Analysis

To decide if a certain HR
practice is cost effective
To compare cost
effectiveness of two or
more HR practices

HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998

Utility Analysis -- a general model

Anticipated Benefits of HR Practice
- Anticipated Costs of HR Practice
Utility of HR Practice

HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998

HR Value Paths
Knowledge

HR increases
organizational
value by increasing
attitude
knowledge
motivation
skill
job performance
ability

Skill

Job
Performance

Ability

Value
to
Organization

Attitude
Motivation

HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998

Direct effect
Indirect effect

Assessing Anticipated Benefits of HR

Practice
Increase in performance
Decrease in absence
Decrease in mistakes
Decrease in health care costs
Improved job satisfaction and
commitment
Increase in organizational
citizenship activities
HRM at UB

Copyright Edward R. Kemery, Ph.D., 1998

Assessing the Costs of an HR Practice

Costs of implementing the

practice -- e.g., needs analysis,
job analysis, training, test
development
Costs of maintaining the
practice -- e.g. on-going training,
salaries, data collection

HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998

HR Utility of a Training Program

Potential Benefits
increased satisfaction
increased knowledge
increased skill
increased ability
increased motivation
increased performance
HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998

LESS

Costs
trainer(s)
employee time
room/food
materials
travel

Measuring Skill Change

SC = SA/SB
or
SC = SA-SB
where SC = skill change
SA = skill after training
SB = skill before training

From Fitz-enz, J. (1995). How to measure human resource management. 2nd e., New York: McGraw-Hill

HRM at UB

Copyright Edward R. Kemery, Ph.D., 1998

Measuring Performance Change

PC = PA/PB
or
PC = PA-PB
where PC = performance change
PA = performance after training
PB = performance before training

From Fitz-enz, J. (1995). How to measure human resource management. 2nd e., New York: McGraw-Hill

HRM at UB

Copyright Edward R. Kemery, Ph.D., 1998

What does a % increase in attitude,

knowledge, skill, motivation, or performance
mean to an organizations bottom-line?
Question: If I increase my employees skill 10%,
how much will my organization benefit?

HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998

Quantifying the relationship between skill

change and job performance change
If skill and job performance are measured in the same units:
Change in job performance level = Change in skill level * correlation
between skill and job performance

JPC = SC * r s/jp
HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998

Job
Performance

Relating Skill to Job Performance

Correlation between
skill and job performance

PC
PA
}
PB

Copyright Edward R. Kemery, Ph.D., 1998

SA

HRM at UB

SB

SC

Skill Level

Quantifying the relationship between skill

and job performance:
Lets say after training, your skill score improved 20 points, and the
average skill score improvement was 18. So, like the inhabitants of
Lake Wobegon, you were above average. Whew! But, how far
above average were you?
Well, 2 units, right? Yes, but your interpretation of this would
depend on how everyone else did. If most of the scores were about
average (between 17 and 19), then you were great! But, hold
on.What if most of the scores were between 15 and 21? Then you
were not all that outstanding.

HRM at UB

Copyright Edward R. Kemery, Ph.D., 1998

Quantifying the relationship between skill

and job performance: Putting the measures
on a common metric -- Standard Scores -Standard
Score = (score - average)/standard deviation
(aka z-scores)
To make a comparative judgment, you could figure out
how far above average you were, relative to the actual
spread of scores. To find this, you would calculate
a standard score by subtracting the mean from your
score and then dividing by the standard deviation of the
scores
(20-18)/4= .5
Copyright Edward R. Kemery, Ph.D., 1998

Ok, now what does this mean? HRM at UB

Quantifying the relationship between skill

and job performance: Putting all measures
on a common metric -- Standard Scores -Standard
Score =contd.
(score - average)/standard deviation
aka Z-scores,
A z-score of 0.5 means you were 1/2 standard deviation
above average
To find out where you stood relative to your peers, you
look up z=0.5 on a z-table. You will find that you are at
the 69th percentile. In other words your skill was better
than 68% of the people in the comparison group.
HRM at UB

Copyright Edward R. Kemery, Ph.D., 1998

More about standard scores

Standard scores have a
mean of zero and a
standard deviation of 1

Standard Score = (score - average)/standard deviation

Average is the 50th
percentile (z=0)
1 SD below average is at
the 34th percentile (z=-1.0)

HRM at UB

Copyright Edward R. Kemery, Ph.D., 1998

-1 sd

You, at the 69th

percentile (z=.5)
average

+1 sd

1 SD above average is at
the 84th percentile (z=1.0)

A Modified Z-table*

HRM at UB

Z
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0

%
.50
.54
.58
.62
.66
.69
.73
.76
.79
.82
.84

Copyright Edward R. Kemery, Ph.D., 1998

Z
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0

%
.86
.88
.90
.92
.93
.95
.96
.96
.97
.98

Z
2.1
2.2
2.3

%
.98
.99
.99

*Consult almost any elementary

statistics text for a more detailed table.

Estimating job performance score from skill

score
After computing a standard (z-) score
on skill, you can guess-timate what the
standard (z-) score will be on job performance.

Zjp = Zs * rs/jp
In other words, the z-score on job performance
will be reduced by the amount of the correlation
between job performance and skill
HRM at UB

Copyright Edward R. Kemery, Ph.D., 1998

Quantifying the relationship between skill

and job performance: Putting all measures
on a common metric -- Standard Scores -After computing a standard (z-) score
aka Z-scores,
contd.
on skill, you
can guesstimate what the
standard (z-) score will be on job performance.

Zjp = Zs * rs/jp

Zjp = .5 * .4 = .2
This means that your skill score of .5 sds above the
average, translates to .2 sds above average on job
performance

HRM at UB

Copyright Edward R. Kemery, Ph.D., 1998

Relating Skill to Job Performance

If the correlation between skill and job performance were perfect,
i.e., 1.0, then if we increase skill, the level of job performance would
increase by the same degree
Correlation between
skill and job performance = 1.0

Job
Performance

Pc = .5 sd
PA
PB

}
Sc = .5 sd
SB

Copyright Edward R. Kemery, Ph.D., 1998

HRM at UB

SA

SC

Skill Level

Relating Skill to Job Performance

Job
Performance

Because the correlation between skill and job performance is

less-than-perfect, e.g., 0.4, then if we increase skill, the level of job
performance would increase only by a factor of 0.4.
Correlation between
skill and job performance = .4

Pc = .2 sd

Sc = .5 sd
SB
Copyright Edward R. Kemery, Ph.D., 1998

HRM at UB

SA

SC

Skill Level

The question now is: How much will that .2

sd change improve the company?
Your skill improved by 0.5 sds. Lets assume that on average, your
peers skill also improved by 0.5 sds. The payoff to your company
depends on

how many employees are involved

how much a .2 standard deviation change in job

performance benefits the company
So, how do you estimate how much a change in
job performance will improve the company? The
relevant concept is the Standard Deviation of Performance
in Dollars (SD$).
Copyright Edward R. Kemery, Ph.D., 1998
HRM at UB

The Standard Deviation of Performance in

Dollars -- SD$
For jobs with specific output,
e.g. sales, simply calculate the
standard deviation of sales
performance for a time period.
Example -- average sales/year
is $100 million, standard
deviation is $20 million
Thus, the SD$ for this
job is $20 million. If you
increase sales performance
1 SD, you can expect to
increase sales performance by
$20 million, per person, on average.
HRM at UB

Copyright Edward R. Kemery, Ph.D., 1998

What if I increase the level of performance

of the sales force by 1/2 standard deviation?

The benefit is an increase of

$10 million per salesperson, on
average
Suppose there are 50
salespeople who went through
training
The anticipated benefit is 50*
$10 million or $500 million.

HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998

SD$ = $20 million;

If I increase job performance
by .5, then the economic
benefit of the increase is
$10 million per person, on
average, for a year
If 50 sales employees go through
training, the anticipated benefit
for a year = 50*SD$*.5

The Economic Benefit of Training

Benefit = N * SD$ * Pc
Number of employees

Change in Job Performance

(in standard deviation units)

Standard Deviation of
Job Performance in $s
HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998

What did the training cost?

2 trainers ($1500/day/trainer) * 5 days

50 employees @ $300/day/employee
training materials ($150) per
employee
room and meals ($3000) for the five
days
support staff (planning, coordinating,
organizing) -- 2 employees -- total
$750

HRM at UB

Copyright Edward R. Kemery, Ph.D., 1998

10*1500 = $15,000
50*5*300 = $75,000
50*150 = $7500
$3000
$750
_________________
$101,250

What was the benefit of the training?

Training Benefits =
Training Costs =
Anticipated
Bottom-line Impact
for One Year

HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998

$500 million
$101,250
_____________
$499,898,750

What if you didnt know Pc?

Training Benefits =
Training Costs =
Anticipated
Bottom-line Impact
for One Year
HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998

$????????
$101,250
_____________
$??????????

Assuming various levels of Pc

Benefit = N * SD$ * Pc

HRM at

$500,000,000
$450,000,000
$400,000,000
$350,000,000
$300,000,000
$250,000,000
$200,000,000
$150,000,000
$100,000,000
$50,000,000
$0
UB

Copyright Edward R. Kemery, Ph.D., 1998

SD$=0.1
SD$=0.2
SD$=0.3
SD$=0.4

Assumed Benefits

Break-Even Analysis

This analysis addresses the question of how much (or little) of an increase
in job performance is needed to recoup HR costs.

1. Benefit = N * SD$ * Pc
2. Bottom-line Impact (BLI) =Benefit-Costs
3. BLI = N*SD$* Pc - Costs
4. 0 = N*SD$* Pc - Costs
5. Costs = N*SD$* Pc
6. Pc = Costs/(N*SD$)

By setting BLI to zero, and solving

the equation for Pc, you can estimate
the break-even point.

Copyright Edward R. Kemery, Ph.D., 1998

HRM at UB

Break-Even Analysis - How little must job

performance change in order for us to get
out of theAssumption
training what
we
put
into
it?
1: Benefit = N * SD$ * P
c

Assumption 2:(BLI) =Benefit-Costs

1. BLI = N*SD$*Pc -Costs
2. 0 = N*SD$* Pc - Costs

0=50*$20 mill.*Pc -$101,250

3. Costs = N*SD$* Pc

$101,250=50*$20 mill.* Pc

4. Pc = Costs/(N*SD$)

.0001 = Costs/(N*SD$)

This means that if job performance increases, on average, only 1

ten-thousandths of a standard deviation, the training costs will be
Copyright Edward R. Kemery, Ph.D., 1998
recouped.
HRM at UB

Exercise #1

45 employees trained
skill improved .3 sds
r between skill and job
performance = .5
training program costs $200,000
SD$ = $15,000

1. Estimate BLI for a one year period.

2. Assume you do not know PC. What is the breakeven point?
HRM at UB

Copyright Edward R. Kemery, Ph.D., 1998

Exercise #2
Training Program #1
95 employees trained
skill expected to
improve .25 sds
r between skill and job
performance = .5
training program costs
$200,000
SD$ = $15,000

Training Program #2
95 employees trained
skill expected to improve .
30 sds
r between skill and job
performance = .4
training program costs
$225,000.
SD$ = $15,000

Which program should you buy?

HRM at UB
Copyright Edward R. Kemery, Ph.D., 1998