What’s the ROI on training? Here’s a hidden factor you may not have considered

One of the questions we get over and over is how to document a return on investment for training. For example, if you invest in a sales training program, will you be able to validate an increase in sales that will cover the cost of the program and can’t be attributed to any other factor? If you invest in a leadership program, can you prove that it resulted in better financial performance for the organization – and if so, how much better?

Many, many studies have documented the positive financial impact of training, but these studies  typically look at large populations across many organizations, because that’s the only way to get enough data to make any meaningful analysis.

When you get down to a single organization, by contrast, the sample size is small and the impact of confounding variables – noise in the data — is relatively large. If sales went up 10% last year, was it because of the training program, or because I hired a couple of talented new salespeople, or because we invested in some new functions on the CRM, or because we got better leads, or launched a new product, or something else? The mind reels.

A measurable benefit

Let’s set those concerns aside for a moment, because a new working paper from Harvard and the prestigious Rand Corporation have identified another return that is unambiguous and clearly attributable to training.

The study looked at how much value employees place on various job-related factors, including training.

That’s a complicated question. You can’t simply ask employees to put a dollar value on these factors, because that’s not how employees think, and because what people say and what they do are two different things. So, for example, if a job candidate told you that training was important, and then took a job that paid a little more money but didn’t offer training opportunities, what value did they really place on training?

To resolve these difficulties, the researchers used an ingenious approach. They presented each subject with two hypothetical job profiles. Then they asked which job they’d take.

To add to the realism of the decision, the “baseline” job profile for each subject—including duties, salaries and benefits–was based on his or her current job. Then the researchers tweaked a couple of factors to see how they affected the decision. For example, one job profile might say that the employee could telecommute, while another paid less, didn’t allow telecommutng, but included more paid time off (PTO).

By conducting such exercises with thousands of respondents, the researchers could parse out the dollar value of each perk.

So how much is training worth – to employees?

Not surprisingly, the perk that workers put the highest value on was PTO – probably because they put a high value on their time. But they did value training at 5.1% of their salary. The average salary in the study was about $60,000, so the perceived value of training works out to a little more than $3,000 per employee.

In other words, a job that paid $57,000 but included training was just as appealing as a $60,000 job without training.

Other research suggests the reason why: People feel that they’ll be more valuable in the long run – and ultimately command a higher salary – if they’ve been trained well. So they’ll take less now in order to earn more later.

A recruitment-and-retention return

The implications for employers are significant. It means you get a two-for-one return on training investments: (1) Presumably it leads to behavior change that will make the organization more valuable – for example, by increasing sales or creating leaders and managers who are more effective—and (2) you get an upfront recruitment-and-retention benefit that helps you attract and keep good employees.

Here’s how that works out in practical terms: A candidate who receives an offer from you and someone else will be more likely to choose you – all other factors being equal – if you include training in the mix. And a company that’s trying to poach your employees will find it more difficult if your employees feel that you’re adding to their long-term value by training them in key skills.

And here’s one more stat to consider: ATD estimates that most companies spend about $1,200 per employee per year on training. So if you’re spending that and getting a $3,000 return, that works out to an ROI of 150% – even before you consider the larger impact of training on your organization. For more highly paid employees, the returns are even higher. And that’s more than just a guess – it’s based on rigorous research from two of the world’s most prestigious organizations.

Sources:

Maestas K., et al. (2018). The value of working conditions in the United States and Implications for the structure of wages. National Bureau of Economic Research Working Paper.

Barron, J.M., et al. (1999). Do workers pay for on-the-job training? Journal of Human Resources, pp.235-252.