Playing the Training Game
"Training for future work' and 'hiring for potential ' can drain your company's shareholder value
On nearly every survey, training appears somewhere in the top three benefits that employees want from their employers. In particular, they want the opportunity to grow and learn, and they search for organizations that will give them the tools to advance in their profession. Top-performing professional/technical employees and those under age 30 tend to put developmental opportunities first on their list of desires.
By the same token, HR professionals have long been advocates of training. They espouse the importance of investing the time and resources in developing their people and how much that can pay off, not only for the individual, but for the company as well—in retention and increased productivity.
So, creating training programs is a no-brainer, right? Employees say they want it, and companies stand to benefit from it.
Not so fast, according to new research from Watson Wyatt, a worldwide human resource consulting firm based in Washington, D.C. In fact, training is actually linked to lower shareholder value, with companies providing it being worth 5.6 percent less than companies that do not provide training. Furthermore, companies that train during an economic slowdown have a market value that is 3.4 percent less than companies who don’t train during this time.
These conclusions are drawn from data analyzed from the 2001 Watson Wyatt Human Capital Index (HCI), an ongoing study of the linkages between specific HR practices and shareholder value at 750 large, publicly traded companies. The HCI study provides insight on what works—and what doesn’t—when it comes to maximizing HR’s contributions to the bottom line. (For information on 360-degree feedback programs’ effect on shareholder value, see “Does 360-Degree Feedback Negatively Affect Company Performance?” in the June issue of HR Magazine.)
Wrong Type of Training
How can companies lose money on training when it is clearly valued by employees? One reason training may act as a drain on shareholder value is the simple fact that, too often, the quality of training is poor. Training programs are pulled together quickly, outside vendors are hired and workers are informed they must attend—all because everyone agrees that training is a good thing. Little measurement takes place (notwithstanding the quick questionnaire at the door on the way out) so there isn’t enough information available on the effect the training had on performance. The result? Training programs remain poorly designed and employees remain frustrated.
Watson Wyatt research shows that a large part of the problem stems from too much investment in “developmental” training—developing people for future jobs.
Developmental training is popular with employees who are interested in becoming more marketable. But, after the training, one of two things happens, neither of which contributes positively to shareholder value:
- Employees who have undergone developmental training typically expect a salary increase commensurate with the contributions they are making with their new skills. The raise cancels out any increased productivity the company might otherwise have captured.
Research Watson Wyatt conducted on training, productivity and shareholder returns bore this out. A 10 percent increase in productivity led to a 10 percent increase in pay, for example, negating any potential benefits.
- Offering developmental training without proper career opportunities increases turnover. In many cases, organizations providing top-notch developmental training do not have higher-level positions available for their newly skilled employees. Unfortunately, their competitors do.
Getting Training Right
The Watson Wyatt findings should not lead HR to abandon developmental training programs altogether. But, in the face of numbers that show training can be harmful to the bottom line, it is useful for HR to become healthy skeptics. All training is not equal. Companies must take a rigorous approach to the design of training programs to reap the benefits of increased productivity, employee commitment and shareholder value. There must be a strategy for return on investment (ROI). And, the organization must capitalize on the new skills.
The most critical step HR professionals can take is to look closely at employees’ competencies and to train specific individuals in specific job-related skills based on organizational needs.
But HR should not stop there. It should examine training methods as well. All too often, organizations rely on lectures, inspirational speeches or videos, discussion groups and simulation exercises. These methods may receive high marks from participants, but whether they change behavior on the job is debatable. Often, HR sets up the training, conducts it and then checks it off the list of things to do for the year without any follow-up to determine if the training transferred to the employees’ daily work.
A few ways an organization can improve the odds that workers will incorporate new skills into everyday job behavior include:
- Use training technologies that build how-to skills that are highly relevant and immediately applicable.
- Stay away from theoretical or inspirational training approaches where “the rubber meets the sky.”
- Follow up on training sessions with on-the-job coaching and support from managers.
- Build training around organizational objectives and strategies.
- Use credible trainers.
- Involve senior management.
Finally, to build a training effort that adds value to the bottom line, instead of decreasing it, HR must measure efficacy. You need to ask participants if the programs helped them perform their jobs better and how. And, you need to find out from supervisors if your training program has helped achieve their units’ business goals. (For more information on how to create more accurate training evaluations, see the Training & Development Agenda in the June issue of HR Magazine. And for more information on transferring training, see the Management tools column in the April issue of HR Magazine.)
Hiring for Potential
The demand for developmental training often stems from the practice of HR to hire people based on traits and characteristics rather than skills and competencies. It’s the reasoning that “you can’t train someone to be committed and a hard worker, but you can train them to process widgets.”
This strategy can be detrimental to the bottom line. Results from the HCI study show a strong linkage between hiring people who can hit the ground running and the creation of value. Hiring employees who can immediately perform their duties is associated with an increase in shareholder value of approximately 1 percent—whether that employee is a top executive or an hourly/clerical employee.
For a $1 billion company, a 1 percent increase in shareholder value means an additional $10 million—real money that companies can’t afford to ignore, especially in the current economic environment.
This value isn’t realized when an organization has to prop up the “employee with potential” and, therefore, suffers a productivity loss—from the boss who has to invest more time in this person to the colleague whose job relies on the timely completion of the new hire’s work. Training that person for the skills needed for that job on day one further exacerbates the performance and financial issues.
Ideally, a company will hire someone doing the exact same job in this exact industry, in this particular business climate, from a company with a similar culture. The further a company gets from that ideal, the less likely that employee will perform well. While it can be a time-consuming and frustrating endeavor to find the person who can hit the ground running, the cost of hiring the wrong person for the job is unacceptably high.
How can HR predict job behavior? First, you need to identify the must-have skills and knowledge of a successful employee. Then, you must determine the extent to which your candidate’s past experience demonstrates that he meets both of these requirements. If there’s nothing in his background to suggest he’s succeeded in similar circumstances, you should not hire him, no matter how great his potential.
A financial services company learned this lesson the hard way. A large firm that specializes in selling to high-net-worth individuals, the company struggled during the recent boom period to find enough recruits from traditional Wall Street sources.
To broaden their pool of candidates, the company decided to consider people with the right style and selling experience from other fields and to train them on what they needed to know about financial services. The results were disastrous. Even though the new hires had the right style and sales experience for the job, their lack of knowledge about the financial services industry proved a severe impediment. Training costs skyrocketed, turnover increased and the group failed to produce the financial successes the company needed.
The pace of business is such that there is a significant financial advantage to hiring people who are already as close as possible to being able to do the job—whether at the highest ranks of the company or at entry level. It also pays to enhance the skills of those employees once they are on board—as long as the enhancements mean they can perform their current jobs better now.
If all of this seems unreasonable in an economy that still exhibits tight labor markets even in a downturn, calculate what it means to lose 5.6 percent of your market share value or to add 1 percent of it and see if it’s worth the expenditure of time and money.
Bruce Pfau is the national practice leader for organization effectiveness at human capital consulting firm Watson Wyatt Worldwide. Ira Kay is Watson Wyatt’s national practice leader for compensation. Pfau and Kay are co-authors of The Human Capital Edge: 21 People Management Practices Your Company Must Implement (or Avoid) to Maximize Shareholder value (McGraw-Hill, February 2002).