Meeting Employers' Training Needs

In this Section you will find training resources to assist in training workers in your business. You may need the names of trainers and their contact information. You may be interested in financial assistance for the training you are planning. Or you may be exploring the value of training.

Whatever your training need, look inside!

Shares of companies that spend the most on employee training and development outperform those that spend the least, a study has found.

Nothing is new, of course, about the idea that in a so-called knowledge economy, a company’s success depends greatly on the collective skills of its employees -- its human capital. Companies that invest more in developing that capital should fare better.

For many years, however, investors had a big question about that investment theory: How can it be put into practice? Until recently, it was next to impossible to rank companies according to how they spent on employee training and education. After all, companies typically do not report such expenditures on a separate line on their income statements, and annual reports and public pronouncements aren’t much help, either, because they may pay only lip service to the notion that employees are the most important asset of a business.

Those practical barriers were lowered in the mid-1990’s when the American Society for Training and Development, a nonprofit group, created a database with standardized information on employee training expenditures at hundreds of publicly traded companies. That database allowed companies to be ranked according to their training expenditures, and for portfolios to be constructed based on those rankings.

Over the last five years, these portfolios performed as the theory predicts, according to a working paper by four researchers: Paul Harrison, an economist in the research and statistics division at the Federal Reserve Bank; Jens O. Ludwig, an associate professor of public policy at Georgetown University; Laurie J. Bassi, chairwoman of Knowledge Asset Management; and Daniel P. McMurrer, chief research officer of that money management firm, which aims to use this research in managing clients’ investments.

Companies that ranked in the top 20 percent or so in spending on training and development would have earned an average of 16.2 percent, annualized, in the five years through 2001, or 6.5 percentage points a year more than the Wilshire 5000 index. Better yet, that market-beating performance was produced with about 10 percent less risk, as measured by the volatility of returns. Currently, that list of companies includes Accenture, Agilent Technologies, Allstate, Capital One Financial, Corning, FedEx, First Consulting Group, I.B.M., Intel, NCR and Storage Technology.

Over those same five years, companies at the bottom of the training-expense rankings had significantly lower returns. And the researchers obviously couldn’t include companies that did not report training expenses and presumably performed even worse.

Skeptics might worry about the objectivity of the results, given that the American Society for Training and Development is dedicated to encouraging companies to spend more on employee education. But the researchers focused only the performance of these companies after they had been identified by the society, so hindsight bias is not likely to be an issue.

Two standard caveats apply to the research. Because the data go back only five years, it is too early to predict confidently that the pattern, though crystal clear so far, will persist in coming years.

Second, knowledge of a strategy’s profit potential can kill it, as more and more investors try to exploit it. But I am not particularly worried about that effect in this case, because Wall Street puts intense pressure on companies to increase current earnings by cutting expenses like those for employee training. Such expenses also carry indirect short-term costs, like reduced productivity while employees are being trained.

As a result, companies that resist short-term pressure and spend heavily on training are likely to remain few. The new research, however, suggests that investors will be rewarded for betting on them.