Playing the training game and losing: 'training for future work' and 'hiring for potential' can drain your company's shareholder value - Training & Development - Includes related article on the research

Bruce Pfau

They say you can teach a squirrel to fly. But it's easier to hire the eagle." DAVID McCLELLAND, noted organizational psychologist behavioralist.

On nearly every survey, training appears somewhere in the top three benefits that employees want from their employers. In particular, they want the opportunity to grow and learn, and they search for organizations that will give them the tools to advance in their profession. Top-performing professional/technical employees and those under age 30 tend to put developmental opportunities first on their list of desires.

By the same token, HR professionals have long been advocates of training. They espouse the importance of investing the time and resources in developing their people and how much that can pay off, not only for the individual, but for the company as well-in retention and increased productivity.

So, creating training programs is a no-brainer, right? Employees say they want it, and companies stand to benefit from it.

Not so fast, according to new research from Watson Wyatt, a worldwide human resource consulting firm based in Washington, D.C. In fact, training is actually linked to lower shareholder value, with companies providing it being worth 5.6 percent less than companies that do not provide training. Furthermore, companies that train during an economic slowdown have a market value that is 3.4 percent less than companies who don't train during this time.

These conclusions are drawn from data analyzed from the 2001 Watson Wyatt Human Capital Index (HCI), an ongoing study of the linkages between specific HR practices and shareholder value at 750 large, publicly traded companies. The HCI study provides insight on what works--and what doesn't--when it comes to maximizing HR's contributions to the bottom line. (For information on 360-degree feedback programs' effect on shareholder value, see "Does 360-Degree Feedback Negatively Affect Company Performance?" in the June issue of HR Magazine.)

Wrong Type of Training

How can companies lose money on training when it is clearly valued by employees? One reason training may act as a drain on shareholder value is the simple fact that, too often, the quality of training is poor. Training programs are pulled together quickly, outside vendors are hired and workers are informed they must attend--all because everyone agrees that training is a good thing. Little measurement takes place (notwithstanding the quick questionnaire at the door on the way out) so there isn't enough information available on the effect the training had on performance. The result? Training programs remain poorly designed and employees remain frustrated.

Watson Wyatt research shows that a large part of the problem stems from too much investment in "developmental" training--developing people for future jobs.

Developmental training is popular with employees who are interested in becoming more marketable. But, after the training, one of two things happens, neither of which contributes positively to shareholder value:

* Employees who have undergone developmental training typically expect a salary increase commensurate with the contributions they are making with their new skills. The raise cancels out any increased productivity the company might otherwise have captured.

Research Watson Wyatt conducted on training, productivity and shareholder returns bore this out. A 10 percent increase in productivity led to a 10 percent increase in pay, for example, negating any potential benefits.

* Offering developmental training without proper career opportunities increase turnover. In many cases organizations providing top notch developmental training do not have higher-level positions available for their newly skilled employees. Unfortunately, their competitors do.

Getting Training Right

The Watson Wyatt findings should not lead HR to abandon developmental training programs altogether. But, in the face of numbers that show training can be harmful to the bottom line, it is useful for HR to become healthy skeptics. All training is not equal. Companies must take a rigorous approach to the design of training programs to reap the benefits of increased productivity, employee commitment and shareholder value. There must be a strategy for return on investment (ROI). And, the organization must capitalize on the new skills.

The most critical step HR professionals can take is to look closely at employees' competencies and to train specific individuals in specific job-related skills based on organizational needs.

But HR should not stop there. It should examine training methods as well. All too often, organizations rely on lectures, inspirational speeches or videos, discussion groups and simulation exercises. These methods may receive high marks from participants, but whether they change behavior on the job is debatable. Often, HR sets up the training, conducts it and then checks it off the list of things to do for the year without any follow-up to determine if the training transferred to the employees' daily work.

A few ways an organization can improve the odds that workers will incorporate new skills into everyday job behavior include:

* Use training technologies that build how-to skills that are highly relevant and immediately applicable.

* Stay away from theoretical or inspirational training approaches where "the rubber meets the sky."

* Follow up on training sessions with on-the-job coaching and support from managers.

* Build training around organizational objectives and strategies.

* Use credible trainers.

* Involve senior management.

Finally, to build a training effort that adds value to the bottom line, instead of decreasing it, HR must measure efficacy. You need to ask participants if the programs helped them perform their jobs better and how. And, you need to find out from supervisors if your training program has helped achieve their units' business goals. (For more information on how to create more accurate training evaluations, see the Training & Development Agenda in the June issue of HR Magazine. And for more information on transferring training, see the Management Tools column in the April issue of HR Magazine.)

Hiring for Potential

The demand for developmental training often stems from the practice of HR to hire people based on traits and characteristics rather than skills and competencies. It's the reasoning that "you can't train someone to be committed and a hard worker, but you can train them to process widgets."

This strategy can be detrimental to the bottom line. Results from the HCI study show a strong linkage between hiring people who can hit the ground running and the creation of value. Hiring employees who can immediately perform their duties is associated with an increase in shareholder value of approximately 1 percent--whether that employee is a top executive or an hourly/clerical employee.

For a $1 billion company, a 1 percent increase in shareholder value means an additional $100 million--real money that companies can't afford to ignore, especially in the current economic environment.

This value isn't realized when an organization has to prop up the "employee with potential" and, therefore, suffers a productivity loss--from the boss who has to invest more time in this person to the colleague whose job relies on the timely completion of the new hire's work. Training that person for the skills needed for that job on day one further exacerbates the performance and financial issues.

Ideally, a company will hire someone doing the exact same job in this exact industry, in this particular business climate, from a company with a similar culture. The further a company gets from that ideal, the less likely that employee will perform well. While it can be a time-consuming and frustrating endeavor to find the person who can hit the ground running, the cost of hiring the wrong person for the job is unacceptably high.

How can HR predict job behavior? First, you need to identify the must-have skills and knowledge of a successful employee. Then, you must determine the extent to which your candidate's past experience demonstrates that he meets both of these requirements. If there's nothing in his background to suggest he's succeeded in similar circumstances, you should not hire him, no matter how great his potential.

A financial services company learned this lesson the hard way. A large firm that specializes in selling to high-net-worth individuals, the company struggled during the recent boom period to find enough recruits from traditional Wall Street sources.

To broaden their pool of candidates, the company decided to consider people with the right style and selling experience from other fields and to train them on what they needed to know about financial services. The results were disastrous. Even though the new hires had the right style and sales experience for the job, their lack of knowledge about the financial services industry proved a severe impediment. Training costs skyrocketed, turnover increased and the group failed to produce the financial successes the company needed.

Conclusion

The pace of business is such that there is a significant financial advantage to hiring people who are already as close as possible to being able to do the job--whether at the highest ranks of the company or at entry level. It also pays to enhance the skills of those employees once they are on board--as long as the enhancements mean they can perform their current jobs better now.

If all of this seems unreasonable in an economy that still exhibits tight labor markets even in a downturn, calculate what it means to lose 5.6 percent of your market share value or to add 1 percent of it and see if it's worth the expenditure of time and money.

Extra Online Resources

For links to the stories cited in this article and to the HCI study, see the online version of this article at www.shrm.org/hrmagazine.

RELATED ARTICLE: About the HCI Study

The Watson Wyatt Human Capital Index (HCI) is an ongoing study that quantifies the link between specific human capital practices and shareholder value.

In the 2001 study, human resource executives at 750 large publicly traded companies in the United States, Canada and Europe were asked a wide range of questions about how their organizations carried out HR practices, including pay, people development, communication and staffing. Their responses were matched to objective financial measures, including market value, three and five-year total return to shareholders and Tobin's Q, an economist's ratio that measures an organization's ability to create value beyond its physical assets.

The 2001 survey linked 49 specific human resources practices to a cumulative 47 percent increase in market value. Three HR practices-360-degree feedback, developmental training and implementing HR technologies with softer goals in mind-were associated with negative effect on market value.

To view an executive summary of the HCI study, go to www.watsonwyatt.com/hci.

Link Training to Results

by John Murphy

The authors proposition that business training is to the most part awful and damages company performance is not to be denied. Beyond that I search in vain for conclusions that square with my 30 years of experience in management training.

If market value is an indicator of effective management. If should be logical that such management creates both better financial results and better human capital strategies-a far dry from stating that investment in human capital is causal facto and that any management team that invests in if, more anti better, will reap results of improved market value.

The use of competencies as a framework for development holds enormous appeal for HR people and so its failure to meet their expectations is a bitter pill. The problem is that competencies are by definition, an abstraction. They are meant to represent the potential in perform. Estimating and defining human potential is one of the things we do worst and now we have made if the foundation of long lists of alleged competencies and the evaluation and development of individuals to add onto this sand castle, the expectation that HR should be willing and able to as the authors say look closely a employees competencies and to train specific individuals in specific job related skills (which are not the same as competencies) is a fantasy.

The authors make a more compelling case that training is so badly designed that its enormous potential is seldom realized. Unfortunately, their proposed solutions are no improvement. Here's the problem trainers consistently reverse the link between business results and improved capability. We have believed that managers and organizations must first be reformer and developed before they can then be expected to achieve improved results.

The sequence that works, however has turned out to be "results-first, change second," time after time our experience tells us that development comes from the achievement of urgent critical business needs-not the other way around.

Management training's reputation for failing to affect business results stems from the simple fact that it isn't aimed at results. It's aimed at the alleged antecedents of results--organizational change and manage a competencies and knowledge.

To will the authors write: "You need to ask participants it the programs helped them perform their jobs better and how. And you need in find out from supervisors if your training program has helped achieve their units business goals.

When, I was a young and idealistic management trainer. I tried mightily to do both these things. If doesn't work, principally because neither the participant not the boss is capable of answering these questions. And it's not a high enough priority for them to learn how or even to give you a horseback guess. Don't forget we are working with a fundamental skepticism here about the real business impact of training. To ask our various customers to play our evaluation game blows quickly through then veneer of good will and support for education."

If we want senior management to make a larger and more intelligent commitment to development, we had better demonstrate its inexorable link with business results not with global research hypotheses.

John Murphy is president of Executive Edge, a consulting firm in Fairfield, Conn. He has held a number of positions as both a consultant and a corporate training manager including director of executive education at GTE Corp. He has been a keep observer of the training industry since the 1960s.

Look to the Future

By Cydney Kilduff

As I read through the research findings of this study. I was most concerned about the fact that the study seems to take an "all or nothing" approach. My experience is that issues involving people are rarely that black and white.

Staffing organizations today is a complex challenge that requires a complex solution. Most importantly companies cannot staff only for today; there must be a clear vision and strategy for the future. While I agreed with much of what read in the article and in the research. I found the conclusions over simplistic and without much consideration to long-term thinking and strategy. I believe a more balanced approach to hiring, i.e., a balance between experienced hires and capable "trainees", is more prudent for the health of an organization.

I understand that Wall Street only values the present quarter however successful companies intent on building long-term shareholder value plan accordingly. In my view the one dimensional hiring strategy (only hiring people with very narrow specific experience in your industry, exact job culture, etc.) described in the article does not take into account three important considerations changing demographics long-term workforce planning and diversity.

Changing U.S. demographics will likely cause the study's strategy to backfire over the next 10 years. As baby boomers retire the number of available skilled workers will significantly decrease. Companies that haven't adequately assessed the workforce and addressed the upcoming shortage by hiring some number of "developmental" workers will find themselves competing for a much smaller pool of experienced workers. A much smaller pool translates into a much more expensive hire, much longer recruiting time and lost productivity. So much for shareholder value!

Best practice companies excel at workforce planning both short term and long term. They are purposeful in evaluating their strategy (present and future) knowing what skills are needed to execute that strategy assessing workers for those skills and developing actionable plans to ensure that workers with those skills are available to the business. This most probably involves hiring people from outside the company, but it also involves growing and developing people they already have.

Finally, I see a critical flaw to the research's hiring approach in that there is no consideration of diversity. At Kellogg we inherently believe that a diverse workforce is a business imperative that drives shareholder value. It is difficult, not to mention tremendously expensive to execute an aggressive diversity hiring strategy if you are only interested in candidates with a narrow stone of experience. It's realty the same demographics issue, only the issue is real today. It's about supply and demand. Experience minority and female talent is in high demand, therefore you pay a premium for it. The best companies, and the most profitable over the long term are committed to diversifying their workforces and are using a variety of strategies to get there.

Again, I don't disagree that companies must already, understand the competencies needed for their business today but they must also think beyond today. At Kellogg Co. due to recent industry challenges and our business model, we have tended to hire people with specific skills and experience. While this has been effective for our business we have not lost sight of the future. We focus on demonstrated skills and experience but we also are aware of human potential. We are interested in employees who have both the capacity and desire to grow. Much of our training comes on the job, but nonetheless, we are committed to the growth and development of our people, because we are committed to the growth and development of our company.

HR can play critical role by ensuring that the proper workforce planning takes place and that any subsequent training and development programs are aligned to both the present and future business strategy. This isn't full. This is good business.

Cydney Kilduff is direction of staffing and diversity at the Kellogg Co. in Battle Creek, Mich. She serves on the Society for Human Resource Management Employment Committee.

Ready to Work

There are several recruiting strategies that can help you make sure the people you hire can do their job on day one:

* Commit to hiring as close to the job as possible. The further you move away from the "ideal," the less likely it is you will make a good hire. Past behavior is the best predictor of future behavior.

* Watch the performance in the environment. Verbal skills have a lot to do with some jobs and absolutely nothing with others, and yet people still place so much stock in the interview process that they are amazed when it fails them. The truth is, It can be a misleading selection methodology, if not properly applied.

The solution is to Identify the skills and behaviors critical to job success and to use preview techniques to match these requirements against the candidata's abilities. This strategy is popular among many of the companies on Forture magazine's list of the World's Most Admired Companies. Through internships, three-month-trial periods, assessment centers and simulations, many of these companies ascertain exactly how the candidate will perform in the job environment.

* Focus on competencies and skills. Current best practice thinking these days is that organizations have made a mistake in emphasizing skills over personal characteristics. A company can always train an employee to make a sales pitch, they say, but not to be outgoing and personable.

Clearly, this wasn't the case for a Wall Street financial services firm that hired salespeople from other fields. No matter how outgoing and personable their new hires were, without the requisite knowledge of the financial services industry, they were acting as drains on, not contributors to, shareholder value.

* Create an attractive brand. Your ideal employees probably aren't sitting at home waiting for your call. They are already a work for someone else and they may not even be looking for a new job. Active job seekers make up a remarkably small percentage of the market. To entice a performer away from his current job, you need to have an attractive corporate brand.

* Look close to home. Most organizations fail to tap into their own talent reserves enough. No one could be as up to speed on a company as its own employees, and watching a worker perform within the company is more revealing than any "work simulation" effort could be.

-- Bruce Pfau and Ira Kay

Bruce Pfau is the national practice leader for organization effectiveness at human capital consulting firm Watson Wyatt Worldwide. Ira Kay is Watson Wyatt's national practice leader for compensation. Pfau and Kay are co-authors of The Human Capital Edge: 21 People Management Practices Your Company Must Implement (or Avoid) to Maximize Shareholder Value (McGraw-Hill, February 2002).

COPYRIGHT 2002 Society for Human Resource Management
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