Training and Development: Who Pays?

Why not read our latest blog post, Industrial Strategy Boosting Technical Skills?

TrainingTraining is something that we do in order to develop our concepts, skills, attitudes, abilities and behaviours in some positive way in the hope of gaining some benefit. It’s a form of investment and by its definition, investment means spending money now in the hope of greater returns sometime in the future.

Training beyond tertiary education for a typical employee over the course of their working lives could be as much as £40,000.  If it’s even half that, it’s still a lot and we need to think about who pays.  Who pays for the upkeep of employees’ competence?

There are three players in the game of employment – the person, the firm and the Government.  This blog discusses the arguments for and against each picking up the bill and concludes that in the current political climate, we can expect little from the UK Government.  That leaves the person and firm to fight over the liability and we suggest an appropriate split.

Introduction

Training is relatively expensive. So in promoting the idea of training we need to discuss who pays; who makes this initial investment and who reaps the subsequent benefit. Is it the individual who is being trained, who might expect an increased salary for increased competence or simply to be kept in a job because they have kept their skills current? Is it the firm, because the firm might expect to increase competitive advantage and hence make greater profits? Or is it the government on behalf of the nation-state who might expect an increase in Gross Domestic Product and hence, through taxation, expect an increase in government spending to the benefit of all citizens?  Training sounds a good idea, but who pays?

Why Do We Need Training?

Competitive advantage in a firm leads to increased profits. This happens through better differentiated product and reduced costs. There is a generally accepted belief that competitive advantage comes through the people employed in the firm and their associated competencies. It’s a general understanding that if the firm is to compete, it must do so to some greater or lesser extent through the quality of its people. This translates to the national level where if a nation-state is to compete in global markets it must have the necessary human capital: it must have better developed workers than other countries.

At the personal level if an individual wishes to be reasonably certain of always being in employment, earning a salary that meets their expectations, they must retain their own personal competitive advantage. They must do things efficiently and effectively and learn new skills that keep their competence current.

So it’s easily argued that all three parties, the individual, the firm and the nation-state, have much to benefit from training themselves, employees and citizens. All things being equal, it seems that all three should contribute to the development of competence in everyone.

So is that where we leave it: with an obligation but no action?

The State of Training in Britain

In other blogs we note that there are three forms of competition: price leadership, quality leadership and innovation leadership and we illustrate the importance of people in each case. We also note that because UK companies are often owned by venture capitalists and private investors, Britain suffers short-termism. Such investors expect quick returns and this reduces shareholder interest in longer term investment such as investment in people and their competences.

By comparison, Germany enjoys partnerships between staff, management and owners  and because firms are owned by banks, a longer term view of investments is taken. To put some figures on this investment, we see that in the UK we spend on average just €1068 per person per year on training compared to Germany’s €1637 and France’s €1898.  France has a government-led and government funded system of training.   Also companies with more than nine employees must allocate 1.6% of the total annual wage bill to staff training. Firms are also compensated by the government for time that employees spend away from work training.

As alternative national strategy, Britain has preferred to enable 50% of its young people to gain a university degree even if in courses without any real ability to add value to firms. In Germany the apprentice scheme structure is legendary and can lead successful apprentices to technical universities. Apprenticeships are part-government funded.  There are only 11 apprenticeships for every 1000 employees in the UK compared to 40 in Germany.  Britain has adopted a market led approach to training – it’s up to the market; in other words it’s up to employers to train staff beyond the basic foundations. UK firms, however, spend too much time worrying that if they train staff they will be poached by competitors.  The danger with this approach and this attitude is that none of the three beneficiaries will make the necessary investment.

So what can we deduce? We can conclude that, when compared with others in Europe, the UK Government is under-spending on people development and that hence the returns at some later date will be less than our European partners. Our GDP will be less and hence the funds available to the government for social welfare will also be less in years to come.  So if the government isn’t going to pay, and we accept that staff training is absolutely essential, that leaves firms and individuals with the bill.

A Tale of Two Firms

Let’s digress for a moment to consider two companies. The story is true though the identities anonymous. Both companies are in the telecommunications consulting industry. Both have existed for over 15 years and both have seen the galloping success of the 1990s. Both shrank back around 2001 to less than 50% of their original size. Both are small firms with under 50 employees.

Company A has no active policy of spending on staff development, does not hold Investors in People and for the last three years has spent no money at all on training. Company B has on the other hand sponsored several of its staff on Masters level degree courses and a further group on Bachelors level courses to augment existing vocational skills. This is in addition to significant vocational learning opportunities for all.  Typically it has invested £2500 per year per person. It has held Investors in People since 2005.

Training SeminarIn the last three years, Company A has made substantial losses and its balance sheet is now weakened. In the same period, Company B has made around 10% net profit per year on sales and all staff have earned annual bonuses of between 5% and 10% of salary.

Whilst it might be a sweeping statement, Company A has made no investment and hence has realised no returns. In Company B both individuals and the firm have invested significantly, the first giving time outside of work hours and the second sponsoring courses. In Company B both individuals and the firm have and still are reaping the benefits.

So Who Does Pay?

Essential Christmas reading this year included Alan Sugar’s The Way I See It.  Lord Sugar is quite clear: it is not for the government to fund investments in individual businesses. He discusses the fact that, in the 1990s, success in business was almost inevitable and that there was substantial money available for mergers and acquisitions and for growth through expansion of staff levels (as distinct from staff skills). He discusses that in the ‘noughties’ things changed and money became more difficult. As he says “Disneyland is over, folks”.

Today a hard-nosed approach is essential. Every employee needs to understand that they must invest in their competencies. And each firm needs to understand that it too must invest for the sake of sustaining competitive advantage. Training is however expensive. A residential course for one week is typically between £2000 and £3000. If we consider that the average salary in the UK is around £25,000, such training is out of most employees’ reach. The employee can however invest in time. Many courses today use computers and the Internet and personal attendance is in many cases reduced to perhaps between 10 and 40% of the total training hours. This allows the individual to work a normal week, making the investment in the evenings and weekends.  For firms it’s a Catch-22 situation. If they invest, profits are reduced but if they don’t invest, losses in subsequent years are more likely. Firms must take a long-term view and forego short-term gain to break the downward spiral of losses.

Training and Development: Who Pays?

So who pays? Both employers and employees have much to gain. For the most part employees would find that in the current economic climate they would be unable to fund training. Funding therefore falls to the employer, investing somewhere between 5% and 10% of the total salary bill. Time investment falls to the employee, investing between 5 and 10 hours per week throughout the year to the maintenance and development of their own competencies. Both employers and employees must invest equally.

 

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