Who should fund training?

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Engineer Instructing Trainee On Use Of Compterized Cutting ToolEvery manager knows that if they train their staff, quality and productivity will rise. And every senior executive knows that if they train themselves and their managers, better people-management results and quality and productivity will rise some more.

But there are huge debates about who should fund training and whether or not the firm should pay for all employee training. Some say that staff should come with the skills and the knowledge ready to go. Others say that since the firm benefits most, management should be prepared to invest most.

So is there some reasoning that will allow clarity about the question of who should fund training? Management or employee?

The Investment Argument

The employee is making a payment now (for training) in the hope that they can reap the rewards of that by way of greater job security and higher salary later. Graphs plotting total cash flow of a university graduate are commonplace. They start with a huge negative investment blip followed by steeply rising earnings. Break-even when compared with a non-graduate is around the age of say 40 with the graduate earning maybe £200k more over their working lives.

On the other hand, the firm can train an accountant from AAT to ACA qualification. The difference in the firm’s earning power is around £50 an hour. This amounts to around £40k per annum, though the added cost of salary needs to be subtracted (since a fully qualified accountant is typically paid more than a part-qualified accountant). The net figure, let’s say, is £20k per annum. Over 10 years, that’s £200k of added profits.

We can argue with the figures but it’s clear there’s no clear winning argument about whether management or employee should pay.

Motivational View

Employees continually make decisions about whether they will gain more if they stay with a firm than if they move on to another.

On the one hand it may be that the employee views that it’s best to stay and invest in their present firm, believing that they will gain more through pay rises and bonuses than jumping into the unknown of a new firm. In that case the employee may be motivated to invest in their own training, considering that the investment will be repaid adequately in their present firm.

And most importantly, this training is likely to be specific to the needs of the firm.

On the other hand, the employee is continually appraising the labour market. If they consider that self-funded training investment will better pay back in another company, they will fund the training and develop a plan to leave.

In this case, the training is likely to be industry-specific, employee-specific or general, rather than specific to their present company.

Whether the employee feels their best return on investment is to be had locally or by leaving depends a lot on the nature of the labour market. An employee will likely plan to leave in a tight market if they acquire scarce and highly paid skills. In a slack market, it may be better to hang on in there with their present firm.

Even viewed from the employee’s side, there’s no clear guide as to who should pay. It all depends on the employee’s view of their future.

Analysing Gains

The firm gains most by the employee acquiring firm-specific skills and knowledge. If the firm is good at managing its strategy, firm-specific skills and knowledge will yield the best competitive advantage. Industry-specific and general training is easily acquired and hence the associated skills and knowledge is easily copied.

Firm-specific training is however least valuable outside the firm and hence if the employee considers their future lies elsewhere, it will be of least value to them and they’ll not be hugely motivated to engage with that training. Industry specific, employee-specific or general training will yield the greatest gains for the employee since this training has the greatest value in the labour market.

To develop competitive advantage, this argument suggests that the firm should only sponsor firm-specific training and not industry-specific, employee-specific or general development.

Conclusions

From these arguments, it seems that both management and employee should contribute. That is until we look beyond discussions about return on investment.

Employees value industry-specific, employee-specific and general training highly. Research shows that granting something that an employee values highly increases their commitment.

If an employee is committed, management can then employ leadership tactics to manage employee performance. The converse perhaps illustrates the point more – it’s hugely difficult to get greater performance out of an employee who’s not committed.

So the conclusion’s simple. When considering return on investment alone, both should contribute. But if the firm wants to develop competitive advantage, the firm should always contribute more.

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