So, your intuition tells you that a pre-employment testing program can help you hire more good employees and avoid more bad ones. In most cases, that's absolutely true. But if you want to be a little more certain, you need to answer these questions:
What is the cost of a bad hire?
How many applicants do you evaluate for each hire you make?
How often does a new hire turn out to be a bad hire?
Let's consider each of these questions.
Question 1: What is the cost of a bad hire?
To answer this question, consider the lost productivity compared to a good employee, costs you've invested in training the employee, and the impact a poor performer can have on your organization. These costs can really add up, sometimes approaching a whole year's salary for the employee.
Once you have a number in mind, ask yourself if this number is significant to your organization. In almost all cases, the cost of a hiring mistake is high enough to justify improvements to the hiring process, such as pre-hire testing. However, there are two more questions that must be answered before we'll know for sure.
Question 2: How many applicants do you evaluate for each hire you make?
You probably have a good feel for this number, often referred to as your Selection Ratio (SR), which is defined as 1 divided by the number of applicants for each hire. So, if you hire everyone who applies, you have an SR of 1. If you hire one of five, you have a selection ratio of 1/5 = 0.20.
Lower selection ratios mean you evaluate more applicants before you decide who to hire. Higher selection ratios mean you evaluate fewer applicants.
If your selection ratio is low, such as 0.2 - 0.4, testing can usually help you. If it is fairly high, such as 0.6 - 0.8, then testing will have only a small impact, unless you reduce it first. In other words, it doesn't really help to be more selective unless you have enough applicants to be more selective with.
However, even if you have a significant cost of bad hire, and a low selection ratio, we need to check one more thing.
Question 3: How often does a new hire turn out to be a bad hire?
Put another way, this question asks: What's your hiring batting average? This number is often referred to as the base rate (BR), which is defined as the percentage of the time that a person you hire works out. So, if you make one bad hire for every two hires you make your base rate would be 1/2 = 0.5 or 50%. This means that 50 percent of the people you hire turn out to be good hires.
Testing helps most when your base rate is around 50 percent. If it's already very high, your process is working well and pre-hire testing can only improve it a little bit. If it's too low, you may need more than a commercial off-the-shelf test. In general, most companies experience a base rate without testing of about 50 percent, so most can benefit from testing.
Summary
We all intuitively think testing can make a difference. However, to be absolutely sure, you need to evaluate the cost of making a bad hire - is it high enough to care? Next, you should look at your selection ratio - are you evaluating enough applicants per new position? Finally, how good a job are you doing right now? If you're happy with your current hiring batting average, then you don't need pre-hire testing. If you want to do better, and there is room for improvement, then it appears testing can help.
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