Paper discussing economic rationale of IQ-based hiring practices

Question

TL;DR

I'm looking for a paper that explicitly quantifies the ROI an employer would likely derive if personnel selection involved intelligence testing and only those +2 SD in cognitive ability were hired.

There's a correlation between IQ and job performance, ranging from .20s for low complexity jobs and .50 for high complexity jobs. Hardly unity (r = 1.00) but regardless, it's still considered to be the best predictor of job performance.

A number of years ago as an undergrad I read a paper discussing the economic rationale of an employer administering an IQ test and only selecting candidates who scored +2 SD above the mean. From the pool of candidates remaining, the employer would then interview for the best candidate as per usual. The author's thinking was along the following lines:

• Suppose you had a group of employees who you were paying an annual salary of \$100,000 and their productivity was normally distributed between say, \$100,000 - \$300,000 (mean = $200,000).

• By selecting those who are +2 SD in cognitive ability, the employer would increase the chances that those who are hired will return them closer to $300,000 per year.

• Total economic gain = Number of employees x Increased return ($) x Duration of tenure

This topic is relevant to a publication I'm preparing and I've been racking my brain trying to find it. For the life of me I simply cannot find it.

Does this ring a bell for anyone? Ideally, I'd like the specific one that I'm mentioning, but failing that, something in a similar vein. Essentially: suppose you hired only those >130 IQ -- regardless of the rightfulness/wrongfulness of doing so, what I want to know is what the $ amount benefit to the employer would be.

Answer 1

I believe I know which paper you're referring to. My guess is the widely cited Schmidt & Hunter (1998) paper. The paper summarizes 85 years of practical and theoretical implications of research in personnel selection. To see that they address what you're asking for, here is a quote from the paper

If a superior worker is defined as one whose performance (output) is at the 84th percentile (that is, 1 SD above the mean), then a superior worker in a lower level job produces 19% more output than an average worker, a superior skilled worker produces 32% more output than the average skilled worker, and a superior manager or professional produces output 48% above the average for those jobs. These differences are large and they indicate that the payoff from using valid hiring methods to predict later job performance is quite large.

Then later they state

At one extreme, if an organization must hire all who apply for the job, no hiring procedure has any practical value. At the other extreme, if the organization has the luxury of hiring only the top scoring 1%, the practical value of gains from selection per person hired will be extremely large. But few organizations can afford to reject 99% of all job applicants.

However, a more recent paper on the subject has been published. That's the Schmidt, Oh & Shaffer (2016), which summarizes 100 years of practical and theoretical implications of research in personnel selection. This paper is an update on the former, so you may as well just look only at this latest one.