Business Analytics:

From Data to Insights

Module
Summary

Week 6 – Predictive Analytics:

Using Data to Predict
Employee Performance
 Staffing Cycle

A fundamental part of managing people is staffing.

Attrition Hiring

Internal Mobility and

Career Development
 Staffing Cycle: Hiring

From an analytics standpoint, hiring is about predicting performance.

To screen applicants,
companies use:

Job knowledge tests

Cognitive ability tests

Attrition Hiring
Personality tests

Reference checks
Internal Mobility and
Career Development Structured interviews

Unstructured interviews

Work samples

Integrity tests
 Hiring: Predicting Performance

Correlation is a measure of how closely two variables move together. As you can see in the
chart below, work samples have the highest correlation with future performance, while
reference checks have the lowest correlation.

Job knowledge tests

Correlation with subsequent performance (0-1)
Cognitive ability tests

Personality tests

Reference checks

Structured interviews

Unstructured interviews

Work samples

Integrity tests
 Benefits of People Analytics

People analytics allows us to estimate what makes people effective.

 Predictors for Hiring People

Background/Experience: Test Scores Interview Performance

• Resume • Intelligence tests • Unstructured interviews
• Academic records • Personality tests • Specific questions aimed
(e.g. GPA) • Job knowledge to test attributes the job
• Characteristics tests requires

JetBlue’s Story
• JetBlue wanted to hire flight attendants.
• They went to customers to find out if customers rated them higher when
the flight attendant was friendly? Or when they were helpful?
• Results suggested that helpfulness of attendants was more important,
which helped them fine-tune their hiring.

Focus on attributes that drive performance, e.g., by looking at patterns in data sets.
 Hints on Predicting Performance

The idea is to take predictors and look at them for well-performing employees in the
organization, i.e., which of these predictors say something about people's performance.

Focus on attributes that drive performance, e.g., by looking at patterns in data sets.
Approaches to Predicting Hiring Performance
 Multivariate Regression

Multivariate regression finds the best-fit line

through the data, summarizing the
relationship between two variables (e.g. GPA
and performance in the chart on the left).

Characteristics of Multivariate Regression:

• Quantifies the effect of a variable (with an equation)
• Gives a level of statistical significance to the data
• Allows comparison of multiple variables, enabling us to identify those that
strongly affect performance
 Internal Mobility: Beyond the Peter Principle

Analytics can help us optimize the process (to get the right people into the right jobs), where
people move from one job to another within the organization. We have to go beyond the
Peter Principle to analyze promotability.

The Peter Principle:

In time, every post is occupied by an employee who

is incompetent to carry out its duties.

People who do well on their jobs, eventually get

promoted. People will keep getting promoted until
they hit a job that they can't do.
 Internal Mobility: Whom to Promote?

Your goal is to identify dimensions of their current performance to predict whether they're
going to be a high performer in a higher-level job.
 Optimizing Movement Within the Organization

An organization fills empty jobs in three ways: hiring from outside, promoting from
within, and moving laterally (sideways).
 Staffing: Hiring Vs. Promoting

Hired Promoted
Performed worse but were Performed better but were
paid more than people who paid less than people who
were promoted were hired
Comparing Staffing Within Firms
 Internal Postings vs. Promotions

Internal postings are more successful because they are more structured than
promotions.
 People Analytics and Causality

People analytics is performed when we want to bring about a change using data.
However, correlation is not causation. For instance, the inferences in the
examples below may not always be correct.
 Types of Causality Problems:
Omitted Variable Bias

There are two types of causality problems: omitted variable bias, and reverse
causality.

Omitted variable bias:

If X is correlated to Y, that doesn’t mean X causes Y. There may be a third
variable, O, that causes both X and Y.

Example: Ashenfelter dip phenomena

The posted job may

be difficult to fill
 Types of Causality Problems: Reverse Causality

Reverse causality:
Reverse causality is when, rather than X causing Y, Y causes X.

Example: Peter Principle

 Approaches to Address Causality

To address causality, analyze what leads to differences in the main predictor variable.
 Approaches to Address Causality:
Measure and Control for Omitted Variables
 Approaches to Address Causality:
Look for Evidence to Rule out Alternatives
Addressing Causality: Performance Evaluations
 Approaches to Address Causality:
Exploit Natural Sources of Randomization

For example, going to the university in the

US during the Vietnam war
Approaches to Address Causality:
Conduct an Experiment
Understanding and Managing Attrition
Understanding Attrition
Why People Move: Basic Predictors
Process Perspectives on Turnover:
Reasons for Quitting
The Process of Leaving: Search
Predicting Attrition
Approaches to Predicting Attrition
Survival Analysis
 Ordinary Least Squares (OLS) Regression
Equation

Y = a + b1X1 + b2X2 + b3X3 + b4X4 + … + e

• Y is the outcome variable

• Xi are the predictor variables
• a is the intercept or constant
• bi is the coefficient or slope
• e is the random error

OLS estimates values of a and b that minimize the sum of

(Ypredicted - Yactual)2
 OLS Regression: Correlations Among Variables

• OLS works well when the predictor variables have low correlations with one
another
• As the correlations become higher, co-linearity problems may occur, leading to:
• Less precise estimates because it’s not clear which of the two similar
variables create the outcomes
• Estimates becoming more influenced by a few observations
• There is no clear threshold for co-linearity problems, but correlations of 0.5-0.7
are used as a general rule depending on the size of the data set and variables
• If there are highly correlated variables, consider dropping some of them
OLS Regression: X and Y Variables for Predicting
Turnover
X variables Y variable

• Only numerical data can be used for

regression analysis
• For textual data, identify the indicator
variable that is closely related to attrition
and use that to convert textual data into
numerical data.
For example, customer representatives
serving the financial industry may be more
likely to quit
OLS Regression: Running the Regression

• Click on the Data Analysis button under the

Data tab in Excel
• Choose Regression from the list of Analysis
Tools
• Select column “Quit this Year” as an input
for Y Range
• Select columns from “Bachelor's Degree” to
“Applied Internal Job Last Year” as an input
for X Range
• Fill out the details as shown on the left, and
click OK
• Regression analysis results are added in a
new sheet
 OLS Regression: Diagnostics

• Multiple R is the correlation between the predicted and true values of Y.

• R Square (square of multiple R) is a percentage of the variance in the outcome
variable that can be explained by a predictor variable. It takes a value between 0 to 1.
If R square is 1, the predictor variables perfectly explain Y.
• Adjusted R Square accounts for the number of predictors used in the analysis.
• Standard Error explains the noise in the estimates.
 OLS Regression: Interpretation
B C D E

A Constant a

B Variable X

C Variables b1 to b9

D Possibility of difference between true coefficient and derived coefficient (standard error)

E Probability of the coefficient value being different from zero (p value)

 OLS Regression: Interpretation

• An employee with a Bachelor’s Degree (coefficient of 0.05) has 5% higher probability of

quitting.
• An employee with more experience (coefficient of -0.005), i.e. for every additional year
probability of quitting falls by 0.5%.
• p-value for Bachelor’s Degree is ~0.478, which explains that there is a 48% chance that
the Bachelor’s Degree is different from zero, hence we have less confidence of
considering Bachelor’s Degree as predictor of turnover.
• According to the thumb rule, variables having p-value less than 0.05 are usually
considered as statistically significant. In this case it would be Organizational Tenure, Time
in Job, Pay, Applied to Internal Job Last Year?
 OLS Regression: Interpretation

Reasons for turnover based on perception Reasons for turnover based on regression
• Experience • Tenure
• Tenure • Time in job
• Performance • Pay scale
• Pay scale • Internal movements
• Internal movements

Regression enables us to:

• Quantify the relationship between variables
• Understand the association between data
• Test ideas