Utility refers to the overall usefulness of a personnel selection or placement procedure. The concept encompasses both the accuracy and the importance of personnel decisions. Moreover, utility implies a concern with costs?costs related to setting up and implementing personnel selection procedures and costs associated with errors in the decisions made.
The utility of a predictor or selection method depends upon four factors:
1. The accuracy or validity of the predictor.
2. The selection ratio.
3. The base rate of success.
4. The costs and benefits of selection decisions.
Generally, utility of a selection method is higher when it results in a higher base rate of success for a job. Base rates of success increase when a higher-validity predictor is used and when lower selection ratios are used. If a base rate is already quite high, it is difficult to find a predictor that can "beat the base rate." In this case, utility of a predictor will be low since there is little room for improvement. The factors of validity, selection ratio, and base rate, however, do not consider the costs of making selection decisions and, particularly, the costs and benefits of these decisions.
Costs and benefits of selection decisions can be divided into actual and potential costs and benefits. Actual costs include those for all applicants, including recruiting and selection process costs and costs for newly hired employees, such as orientation and training costs, wages, and benefits. Potential costs are those associated with selection errors. Potential benefits come primarily from hiring applicants who exhibit the ability to succeed in the job.