Investing in Workforce Training Improves Financial Success - studies find that companies investing in employee training experience higher stockholder returns - Brief Article - Statistical Data Included

Training & Development, Nov, 2000 by Deborah A.F. Koehle

There is definitive evidence that investments in workforce training can predict a company's future financial performance, including its total stockholder return (TSR), according to research recently released by ASTD. ASTD also notes that investors can improve their portfolio performance if they have access to information about training expenditures when making investment decisions.

After a major study of training practices and outcomes of 575 U.S.-based, publicly traded firms during 1996, 1997, and 1998, ASTD found that companies that invested $580 more in training per employee than the average company in the study improved their TSR the next year by 6 percentage points (even after adjusting for other factors).

With the help of Saba consultants, ASTD examined the average annual training expenditures of the 575 firms. Those in the top half of the study group (that spent more on training) had an average TSR the following year of 36.9 percent, while firms in the bottom half had an average TSR of only 19.8 percent. (For comparison purposes, the S&P 500 had an annual return of 25.5 percent during that same period.) Thus, firms in the top half had a TSR that was 86 percent higher than firms in the bottom half and 45 percent higher than the market average.

Taking other factors into account, ASTO found that knowing a firm's education and training investment improves the power to predict its future TSR by 50 percent. "It's clear that a firm's commitment to workplace learning is directly linked to its bottom line--and investors, Wall Street, and financial analysts should pay attention," says Mark Van Buren, ASTD's director of research.

ASTD researchers also found a similar pattern when looking at gross-profit margin, income per employee, and price-to-book ratios. Firms in the top quarter of the study group that invested on average $1,595 per employee in training experienced 24 percent higher gross-profit margins, 218 percent higher income per employee, and 26 percent higher price-to-book ratios than firms in the bottom quarter that invested on average $128 per employee.

"It's clear that firms' training expenditures positively affect other indicators that investors use to evaluate stocks," says Van Buren. "This information is powerful. Investors and companies will both benefit by tracking and reporting on training expenditures."

With the U.S. labor shortage, much of the discussion has centered on how to recruit and retain talented employees. A separate study by ASTD and the Society for Human Resource Management, "Recruiting and Retaining Employees: Using Training and Education in the War for Talent," shows that training and development has risen to the top as one of the most important benefits organizations must offer to attract and retain talented employees.

Of the seven exemplary practice partners surveyed in this second study, all of them trained more employees and gave eligible employees more hours of training than other firms. In addition, each of these seven companies experienced lower turnover rates and higher employee satisfaction than the average company in its industry.

Van Buren continues, "More companies are discovering that training is critical to their success. For example, at Sears, Roebuck & Co. (an exemplary practice partner company), career advancement and training opportunities for associates consistently rank as key predictors of employee satisfaction."

To help companies manage and benchmark their investments in training and education, ASTD provides its Measurement Kit free of charge at its Website. Go to www.astd.org/virtual_community/research/ and click on link to the Benchmarking Service.