People power: a governance perspective on investing in employee training

Employee retention and turnover rates, employee engagement, manager evaluations and financial incentives for developing leaders comprise the marrow of what companies rely on their HR departments to handle, right? No longer. Nowadays, these issues are being looked at more carefully for their impact on business performance and financial results. More and more talent-management experts say talent development should be regarded as a board-level governance concern.

When most people think about human capital development, only succession planning for top executive posts comes to mind as a matter worthy of board attention. In reality, however, oversight of human capital development must extend several layers down from the C-suite if the board is taking its fiduciary duties seriously. Engagement has been defined as a heightened connection on emotional, behavioral and cognitive levels, which leads to higher discretionary effort by workers. Studies have shown that low levels of employee engagement have a big impact on productivity, business outcomes, customer trust and – ultimately – profitability.

Top firms are convinced talent is their greatest asset, act on this belief and have the financial results to show for it, often with significantly higher total shareholder returns than other companies. That’s certainly the assertion made by Aon Hewitt in its most recent Top Companies for Leaders report, released in 2012. And companies that recognize the link between the investments they make in employees and employee engagement, such as Verizon, have been able to demonstrate the lasting value to the business that those investments generate.

Boards aren’t exercising enough oversight of development opportunities for executive talent, let alone those for junior managers and rank-and-file employees. According to Talent Development: A Boardroom Imperative, a report released by the National Association of Corporate Directors (NACD) last October, executive talent management and leadership ranks fifth as a governance priority among directors, behind such issues as strategic planning/oversight and corporate performance/valuation. Fifth place is a big improvement from 12th place five years ago, but the rapid rise in priority calls for a plan of action for the workforce, which more than half the companies polled in a Mercer survey either lack entirely or limit to forecasting talent needs for just one year out.

Engagement and culture

When people with the right skills are coupled with an appropriate workplace culture, they enable the company to feel more confident about taking greater risks. ‘With the knowledge that the strategy is supported by the right talent, an organization can leverage this knowledge to more safely adopt a greater risk appetite,’ the NACD report states.

On the flip side, the loss of productivity that results when the majority of workers are either neutral or actively disengaged may not only hamper profits but also hurt the company’s ability to undertake a new strategy or enter into new business lines or partnerships, says Rebecca Ray, head of the Conference Board’s human capital practice.

The Association for Talent Development (formerly the American Society for Talent Development) estimates that $164 billion was spent in 2012 on employee training. Of that, firms spent $100 billion (61 percent) internally, with the remainder split between external services ($46 billion, or 28 percent) and tuition reimbursement ($18 billion, or 11 percent).

Investment in learning and development tends to follow economic trends, with companies all too quick to cut spending on employee learning during economic downturns, according to Aon Hewitt. Louann Tedrick, senior vice president of workforce development at Verizon Wireless, acknowledges that she’s had to reduce spending at different times, but says her team is able to show how tightly connected learning programs are to driving the business forward. ‘Tuition assistance is one of those things where we’ve been able to demonstrate that while we do expend money on it, what we get in return is really valuable to the business,’ she notes.

For several years her team has tracked retention of employees who participate in the tuition assistance program, compared with the firm’s general employee base, and found employees who use tuition assistance tend to stay longer than those who don’t.

‘We’ve found on the Verizon Wireless side year over year that the value just in retention pays for what we expend, so it’s a net neutral to a net positive investment for the business,’ Tedrick says. Studying performance ratings, she has found these employees also perform at higher levels and more of them make developmental career moves within Verizon. ‘So when some of our competitors in the past made decisions to reduce or eliminate tuition assistance, we were able to show the value and continue to offer it to our employees because we saw it as strategic for employee development, not just as an employee benefit,’ she explains.

Working with the board

Food retail company McCormick attributes its comparatively high retention rates to its multiple management boards, which are ‘the cornerstone of development for the organization,’ says Eric Barger, vice president of global talent management. ‘We’re plugging cohorts of employees at various levels into action-learning projects in time frames dictated by [those management] boards’, ranging from six to 18 months, he explains.

The relationships employees and lower and mid-level managers are able to build with senior executives while working on these projects ‘create more of an honest and open environment, which helps with the overall health of the organization all the way up to performance,’ says Barger. ‘We have some of the lowest turnover rates of any firm I’ve ever been with.’ While he won’t share what those rates are, he says the company is ‘in really good shape’ compared with average turnover of 5 percent to 7 percent annually and even above 10 percent at some firms.

Another governance benefit, Barger notes, stems from how these active learning projects translate employee engagement into the greater good. ‘The two-for-one spirit is something we talk about in the firm, meaning that if you think twice for the company, the company will think twice for you,’ he explains That’s the kind of ownership mentality many chief compliance officers can only dream about.

Dr Michael Echols, executive vice president of strategic initiatives and the Human Capital Lab at Bellevue University, which partners with organizations worldwide to measure the impact of training investments on business performance, believes low engagement arises from the fact that most companies tend to hire according to the strength of credentials and résumés rather than an assessment of job candidates’ capabilities. He cites the US military as the best talent management organization in the US today. The first task when someone joins the military is a calibration of his or her basic skills. Based on that, the military lays out a career plan, consisting of areas and positions it thinks will fit the new recruit’s assessment, as well as a complete training plan.

‘There’s a set of expectations on the part of the individual. Few companies do that,’ Echols says. ‘At most companies there’s very little assessment of who the individual is, and only in the minority of companies is there an associated career plan.’

Counting the cost of non-engagement

No wonder, then, that 70 percent of employees are not actively engaged in their work, according to Gallup’s most recent State of the American Workplace report, which also finds the ratio of engaged to actively disengaged employees is roughly two to one. But companies with 9.3 engaged workers on average for every actively disengaged employee had earnings per share 147 percent higher than their competitors in 2011-2012, Gallup finds. It estimates that active disengagement costs US companies $450 billion to $550 billion in lost productivity each year due to greater likelihood of theft, negative influence on co-workers, missed workdays and lost customers. To the extent that’s hurting profits and total shareholder returns, it’s a major governance issue.

In 2010 Harvard Business Review studied retention rates among high-potential employees and found that one in five believed their personal aspirations were quite different from what the company that hired them had planned for them.

It’s not just willingness to invest in employees’ learning and development but also readiness to share the increased value created with employees by raising their compensation that affects retention, says Echols. Once employees become aware of how much more valuable their newly acquired skills make them, they’re more inclined to leave if they don’t think they’re being paid commensurately with that added value. ‘So the pair-up on the retention piece is that companies need to have a more sophisticated strategy about sharing the increased value of the learning and development enhancement, not only for retention, but also for the whole productivity and engagement activity,’ Echols says.

On-the-job experience

What it means to invest in learning and development is changing with the influx of ‘millennials’ (those born between 1978 and 2002) into the workplace, says Ken Oehler, Aon Hewitt’s global engagement practice leader. ‘Seventy percent of real learning and development comes from on-the-job experiences,’ he explains. ‘Younger workers are demanding this and it’s actually what’s required of most employees. That’s a very new thing for companies to think about and really do well.’

People in their 20s and early 30s are demanding more of employers regarding career planning, agrees Tamara Snyder, senior vice president of Edelman’s employee engagement practice. ‘They want to know they’re valued and important to the company and that there’s a clear path for their development,’ she explains.

Snyder sees increased focus within companies on providing those opportunities and making them a selling point for why those firms are an employer of choice, including mentoring programs and rotational assignments that expose employees to various functions over a two-year period in order to provide a well-rounded business perspective and prepare them for leadership.

In providing tuition assistance, Verizon looked at its own staffing needs and began encouraging employees who wanted to pursue general business degrees to train specifically to become leaders of call centers and retail stores. ‘We created customized degree programs with Bellevue, one on professional retail sales management and the other on customer service operations management,’ says Tedrick. ‘The idea was to train them broadly on how to manage in a retail or call center environment, so it wasn’t so customized that it was going to teach you only how to work at Verizon in those areas. But we did have leaders from our business help shape what that curriculum looked like, thinking that we really did want the bulk of them to work with us in these roles.’

Along with those degree programs, Verizon asked Bellevue to do a full return on investment (ROI) analysis of its investment and found that both delivered ‘very positive ROI when we looked at the skills and knowledge attainment of these folks and how they believe that’s driven their performance compared with the investment we’ve made,’ Tedrick recalls. ‘Those degree programs are just huge motivators for the employees.’

Having attended some graduation ceremonies for these programs, Tedrick adds that ‘folks feel really great the business offers them this opportunity. I think it builds a sense of loyalty to the business that we’re investing in them.’

Falling behind

At most companies, however, that investment has declined or is altogether absent. Even as companies are demanding hyper-engagement from employees – ‘because that’s the prerequisite to innovation’ – they are simultaneously placing more cost and risk on them in terms of benefits, pay and learning opportunities, while also telling them ‘we may not be guaranteeing much job security for you,’ says Oehler. ‘What this means is that there’s a real disconnect between the traditional value proposition that companies have been offering and what’s really required for the future.’

Amid that disconnect, effective leaders who understand what it takes to motivate employees can make all the difference to engagement and business performance, Aon Hewitt’s research has found. ‘It’s sort of the multiplier effect that leaders have across all the significant employee engagement drivers, whether it’s career opportunities, giving people valuable coaching to help them improve and giving them learning opportunities to get them focused on performance standards, or driving innovation,’ says Oehler. ‘The leadership is not where it needs to be for your average organization to drive high levels of engagement.’

Motivating employees depends on creating a culture of engagement led by leaders rather than by any one learning program, career management system or other ‘silver bullet’, he adds.

In its 2013 State of the American Workplace report, Gallup says its research finds ‘that managers are primarily responsible for their employees’ engagement levels’. Gallup urges companies to ‘scientifically select managers for the unique talents it takes to effectively manage people’, which greatly boosts the odds of engaging their employees, ‘instead of using management jobs as promotional prizes for all career paths.’

Rethinking HR

Dr Jeffrey Kudisch, who leads the human resources program at the University of Maryland’s Robert H Smith School of Business and works with many companies trying to recruit Smith students, sees ‘top Fortune 500 companies that are in their infancy when it comes to HR.’ These firms don’t require the same level of technical expertise in HR as what’s expected of their finance or marketing departments.

One reason boards and C-suites have been slow to recognize the need for ongoing learning and development opportunities is that HR is still seen as a very soft science and HR managers aren’t seated at the decision-making table, Kudisch adds: ‘HR is a value proposition for companies that see culture as being the big differentiator in the war for talent and for company survival.’

It’s instructive that McCormick’s multiple management boards originated 82 years ago during the Great Depression ‘as a way to drive better business results’ and ‘almost to save the organization by empowering employees and tapping into the hidden strength of the company,’ explains Barger.

The thought that companies today may have to wait until a sense of desperation sets in regarding business results before they start to think about tapping the inherent strength of their talent base is sad, if not frightening. Yet that seems to be the prevailing mind-set where companies fail to recognize the value to be gained by investing in employees’ development and don’t help them map out meaningful career paths.