Training Investment Can Mean Financial Performance
By Laurie J. Bassi and Daniel P. McMurrer
Excerpted from Training and Development Magazine
Human capital investments rarely appear on corporate balance sheets, except as expenditure and not an investment. Consequently, it’s not surprising that there is little information on the effectiveness of such investments, even within companies. The absence of such information makes it difficult for corporate decision-makers to make well-informed choices about how much money to spend on training or what types of training to offer.
In short, companies that make investments in education and training must do so despite pressure from the investment community rather because of it.
In our study comparing two groups of companies – those in the top half of the distribution when ranked according to their average training expenditures per employee ($900) versus those in the bottom half ($275 per employee). The companies in the top half had higher net sales per employee in the first half of the year than those in the lower half of the distribution. In the first half of the year, companies in the top half also averaged an annualized gross profit of more than $168,000 per employee compared with companies in the bottom half with gross profits of $121,000 per employee.
Still, it’s clear that companies with high training expenditures did well in the stock market during the period we examined. The change over time in market-to-book ratios shows greater increases for companies that ranked in the top half on training expenditures. The growth in market-to-book ratios over a two year period was more than twice as large for companies in the top half in the year training expenditures per employee than for companies in the bottom half.
Such figures represent preliminary evidence of a relationship between training expenditures per employee and measures of financial performance. Publicly traded firms that spend more money on training tend to have higher net sales and gross profits per employee and are valued more highly on Wall Street. Though much additional work has to be done in this area, there is growing evidence that companies should treat training expenditures as an investment and measure them accordingly.