Making the Case for Training

By Ed Frauenheim

Aug. 11, 2009

The payoffs of training have long been considered tough-to-measure intangibles—such as improved morale or increased employee productivity.

But over the past decade or so, researchers have forged links between training investments and business outcomes. And they’ve been joined by others working to assign value to additional hard-to-quantify factors such as a company’s good will or innovation, says Pat Galagan, executive editor at the American Society for Training & Development professional group.

“In the last 10 years, there’s been a lot of progress,” she says.

Among the seminal studies in the field was a 1998 paper by Laurie Bassi and Dan McMurrer finding preliminary evidence that companies that invest more heavily in training and development are more successful and profitable. A follow-up study they did in 2004 on about 390 publicly traded companies confirmed a strong link between training expenditures and subsequent stock market performance.

Research firm Bersin & Associates has found that organizations that consistently spend within 10 percent of the industry average on training per employee are, on average, 12 percent more profitable over a four-year period than those that spend below these levels.

Despite such glowing results, there’s a fundamental challenge associated with tying training and other HR investments to business benefits, says John Haggerty, managing director of the executive education program at Cornell University’s Center for Advanced Human Resources Studies. It’s tricky to distinguish chicken from egg, he says.

“It is possible that companies that perform better invest more in [human capital],” Haggerty says. “There are lots of people working on better proof, but it has been a frustrating exercise.”

Bassi and McMurrer, though, say they dealt with “reverse causality” in their 2004 paper, where they found that training expenditures are not driven by past stock returns.

They also say related research they did this year controls for reverse causality, because it looks at changes in stock price rather than the level of the stock price. That paper finds that nearly half the change in banks’ stock performance relative to peers could be attributed to changes in annual training budgets during the prior year. Although the authors had 2007 training data on a very small number of banks, they say it appears training expenditures were a very strong predictor of stock prices even during last year’s market turbulence.

The paper concludes that training may have its intended effect of better corporate performance. Budgets for employee development also may indicate whether a firm is focused on the long term, Bassi and McMurrer argue. And training expenditures may act as a “window” into a firm’s future financial health, they say.

Citing Training Magazine figures, they say Wachovia slashed its training per employee by more than half from 2006 to 2007. In 2008, Wachovia shares fell as much as 95 percent before the bank agreed to merge with Wells Fargo.

Bassi and McMurrer have spent more than a decade researching the link between training and business results. Bassi says the bank study is particularly good evidence of a connection between training spending and stock performance: “That’s the cleanest, purest example we’ve had.”

Ed Frauenheim is a former Associate Editorial Director at Human Capital Media and currently works as Senior Director of Content at Great Place to Work. He is a co-author of A Great Place to Work For All.

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