From the January 2004 issue of Entrepreneur

When Kim Lopez was looking to hire a director of strategic partnerships last year, she gave the most promising candidate one last hurdle to jump: Develop and lead a partnership strategy session involving Lopez and her executive team-a task the successful applicant would do on the job. The candidate prepared a stellar presentation and handled the brainstorming session confidently and diplomatically. He got the job.

"We wanted to know we had somebody who could think, and that's hard to discover in the interview," says Lopez, 37, CEO of Remedy Interactive Inc., a 4-year-old ergonomics software company in Sausalito, California, with 12 employees. Today, the company, which helps clients such as GE, Intel and Visa streamline their ergonomic programs, is incorporating the ideas from that presentation into its business strategies.

Lopez is a fan of the situational interview, a hiring method gaining popularity. Situational interviews help companies get beyond the resume to see how an applicant reacts in a real-world scenario. The situational interview takes many forms, such as asking an applicant to deal with an angry "customer" played by one of the interviewers or, as at Lopez's company, having an applicant pose a step-by-step strategy to handle a business problem.

The situational interview is just another way for companies to make a good fit, in terms of both skills and character, with new hires. According to the Handbook of Industrial and Organizational Psychology (Davies-Black Publishing), the situational interview is reportedly 54 percent accurate in predicting future job performance, while the traditional interview is just 7 percent accurate. Situational interviews are used in a wide variety of jobs today, says Mark Clark, assistant professor of management and organizational behavior at American University in Washington, DC. "It's a good thing, because we're realizing what a fallacious process the [traditional] interview can be."

Lopez says she incorporated situational interviewing techniques last year after making a few bad hires-in one case, a sales employee who set the company back seven months in its sales initiatives. She believes the company is making better hiring decisions with situational interviewing, and she now regularly uses it with a traditional interview and reference checks. "Most people exaggerate in [traditional] interviews," she says. "[Situational interviews] have been very informative."

But situational interviews can create sticky situations. You might lose good applicants who decide that going further in the interview process isn't worth the time and trouble. Lopez says she's had a few irritated applicants tell her the company is "weird" for asking them to make presentations. And she's had to convince people on her executive team who were worried the interviews would turn off great candidates.

Those aren't the only potential problems: Companies also risk selecting for specific personality traits and creating a workplace that lacks diversity and teamwork, says Linda Finkle, who helps companies do situational interviews as the owner of Innovative Solutions Group LLC, a consulting firm in Potomac, Maryland.

As with any hiring situation, you have to be aware of legal issues, says Larry Lorber, a labor and employment partner with law firm Proskauer Rose LLP in Washington, DC. If a rejected applicant files a discrimination complaint, you'll have to show that the test, and what it measures, is related closely to the position. "As long as you keep it as close as possible to what would be experienced on the job, it's not going to be a legal tripwire," Lorber says.

Another challenge is finding a real-world scenario that will give you enough information to make a good hiring decision. Make a list of the skills needed to do the job well, and develop an assignment based on it. If you're hiring a salesperson, draw real-life examples by having your salespeople tell you about difficult sales calls and using these as role-playing situations in interviews. Give applicants an opportunity to ask questions about the assignment in advance and a chance to refuse before the interview, Finkle says. This will keep you from annoying applicants who feel they've been set up unfairly.

You'll also have to decide how to score these interviews. At Remedy Interactive, each person on the executive team evaluates an area they feel comfortable scoring-preparedness, confidence and negotiation skills, for example-on a scale of 1 to 10. A total score is added up before they debate an applicant's pros and cons. "This takes some of the subjectivity out of it," Lopez says. It's also putting the company in a good situation: Annual sales are now in the seven figures.