What are you going to do with all that money?

by on November 19, 2014 · 0 Comment POSTED IN: Top Sales Dog
money-guy

If it seems like it’s getting harder and harder to get funding for your training programs, you’re not crazy. And the culprit may be Wall Street.

According to Training Magazine’s most recent report on the training industry, spending on training has declined by 7.2% since 2011. Over the same period, stock prices have increased approximately 60%. Corporate profits increased by nearly 30% and are now at an all time high.

So with all this money rolling in, why aren’t companies spending more on training?

Professor William Lazonick of the University of Massachusetts Lowell argues that the strangling of training budgets is part of a much larger trend — one that’s putting a long-term hurt on American business. In his view — which was featured in a provocative Harvard Business Review cover story recently — the culprit is stock buybacks.

What do stocks have to do with training budgets?
Here’s the gist of Lazonick’s analysis:

When companies make money, they have to decide what to do with it. They could hand it out to employees in the form of raises, bonuses and profit sharing. They could give it to the owners in the form of dividends. Or they could plow it back into the business.

Traditionally, that last option has been the key to growth — for companies, workers, investors and the economy as a whole. A company that’s investing in itself will create more jobs, more opportunities for advancement and, over time, greater shareholder value.

But, says Lazonick, the way companies reinvest their earnings has changed profoundly over the years, and not in a good way. Instead of investing in things that make the company stronger — such as training — they’re investing in their own stock.

Accounting trick
The reason that senior managers favor stock buybacks over more organic forms of reinvestment is simple: It’s a quick and easy way to juice the share price. But it’s an accounting trick that does nothing to create value. Here’s a simplified example: A company is worth $100 million and has 1 million shares outstanding. That comes out to $100 per share. If it buys back a quarter of its own shares, the remaining shares are now worth $133 each ($100 million divided by 750,000 shares). But the company’s value hasn’t changed.

Buybacks don’t do much for long-term shareholders (in fact, Lazonick says, they’re a lousy investment, because companies tend to buy when stock prices are high). But they’re very good for short-term speculators, stockbrokers and executives with stock options.

Here’s the real issue, says Lazonick: The money spent on buybacks could have been spent on making the company stronger. Lazonick offers evidence that companies that do a lot of buybacks end up underperforming in the long run. As he said in an e-mail to me, “It is not just the tens of billions of dollars frittered away on buybacks that are the problem…. It is the failure to invest in collective and cumulative learning processes, which are the essence of innovation.” As one example among many, he cites Apple Inc., which made huge stock buybacks during the Sculley era and nearly went bankrupt.

Stock buybacks only apply to publicly traded companies, of course, but private companies suffer much the same effects when owners/partners/investors choose bigger dividends over reinvestment: they get more cash in the short term, but could be harming the long-term viability of their companies.

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Making the case for training
So what’s all this mean for you and your sales training budget?

Well, Lazonick’s article is generating a lot of soul-searching among investors and executives, who may now be thinking more about long-term value and less about last week’s stock price. And there’s evidence that Wall Street itself is having a change of heart about buybacks. Laurence Fink, the chairman and CEO of BlackRock, the world’s largest asset manager, wrote this in an open letter to corporate leaders: “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies …Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”

Which means that some of that money that was going to buybacks could start flowing back into companies to make them stronger. And if executives and investors are looking for where to invest, I can’t think of a better place than with the people who bring in the money. A well-trained, world-class sales force is an asset that will pay dividends for years to come.

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