At Last Proof That Training Works

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At Last!Proof That Training Works

• Laurie Bassi, Ph.D.
• May 24, 2005

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Training and financial markets

• People are accounted for as costs
• Investments in developing people are hidden
  costs
• Financial markets penalize organizations with
  high (and unexplained) costs
• Compensation packages increasingly align
  executives interests with those of financial
  markets

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Training and financial markets

• This scenario stacks the deck against investments
  in training and development, relative to all
  other forms of investment (including RD)
• Under-investment in developing people is harmful
  to everyonestockholders, employers, employees,
  and society
• Improvements in measurement and reporting would
  help immunize organizations against a pervasive
  tendency to under-invest in people

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The Agenda

• The theory and evidence that supports our
  perspective
• How we know what we know
• Implications for firms, investors, and public
  policy

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How we have done our research

• Since 1996, we (in our work at Bassi Investments)
  have been collecting data on firms spending on
  employee education and training
• This information is not publicly reported
• Over the years, we have collected data on
  thousands of organizations around the world
• Nearly 1,000 of these organizations are
  U.S.-based, publicly traded companies
• This database has enabled us to do extensive,
  econometric research on the relationship between
  firms spending on training and their subsequent
  financial performance

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The evidence that supports our perspective

• If firms invested optimally in people, then the
  marginal return on investments in training would
  be equal to the marginal return on all other
  forms of investment
• Our econometric analysis indicates that the
  return on investments in training far exceeds the
  return on physical capital or RD
• The evidence clearly indicates that there is
  supernormal rate of return on training
  investments
• Bassi Investments publications and white papers
  are available at www.Bassi-Investments.com.

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Trainings Effect on Shareholder Return
A series of portfolios of firms that made the
largest per capita investments in training
subsequently returned 16.3 per year, compared
with 10.7 for the SP 500 index
Bassi and McMurrer. Are Skills Costs or
Assets? Milken Institute Review, Third Quarter
2004.
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Actual Portfolio Performance
1/2/03 selected to provide common date for all
portfolios. (Portfolio B operated previous to
that date, w/inception 12/3/01.) Returns data are
updated as of 3/31/05. All data include dividend
reinvestment. Portfolio performance is reported
net of all fees and expenses. Past performance
is not a guarantee of future results. For more
information, contact Bassi Investments at
info_at_bassi-investments.com.
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Alternative explanations of the supernormal
return

• Explanation 1 Training is a Risky Investment
• The market views training as a risky investment
  and hence demands a supernormal return on
  investments in it
• Explanation 2There is a Market Imperfection
• The market incorrectly perceives (in the
  short-run) that firms that invest in training are
  high cost firms and hence penalizes them for
  these costs in the short-run

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Implications of a supernormal return on training

• Since our estimates show that the return on
  training vastly exceeds the return on RD, it is
  our view that explanation 2 is the correct one
• If we are right, then the inexorable conclusion
  is that there is a broad-scale under-investment
  in people
• In other words, firms must invest in training
  despite the pressures of financial markets rather
  than because of those pressures

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Implications for firms, investors and
public policy
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Implications for firms

• Firms that do not under-invest in human capital
  are richly rewarded, but may have to suffer a
  short-run decline in their stock price for doing
  so
• Firms can ameliorate this short-run impact by
  developing proactive communication strategies
  about their human capital investment strategy
• In many cases, executive compensation packages
  need to be realigned to create incentives for
  senior executives to resist short-run,
  destructive pressures from Wall Street

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Public policy implications

• Spending in employee education and training
  should be
• Separately reported
• Accounted for as an investment rather than a
  cost
• Provided with advantageous tax treatment

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Implications for investors

• Spending in employee education and training
  should be used as a positive screen
• Essentially, investors can use the myopia of the
  market to their advantage to earn above-market
  returns
• In so doing, this investment strategy can serve
  as a catalyst for change
• Shifting financial markets treatment of
  employees from costs to assets
• Helping to solve the under-investment in human
  capital development

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Evidence to share with executives

• Forbes (April 25, 2005)
• http//www.forbes.com/business/forbes/2005/0425/0
  48.html
• Blame the Accountants
• Milken Institute Review (Summer 2004)
• Are Skills a Cost or an Asset?
• Harvard Business Review (March 2004)
• Hows Your Return on People?