Wednesday, February 14, 2007

Signaling Theory Gives a Green Light to Training Investments

We call them red flags, signs, indicators, omens, or the writing on the wall. Whatever you call them, signals are used in every part of life. From the rain forests of the Amazon Basin to the marble floors of Wall Street, signals are relied upon as cheap, easy, or safe indicators of things too difficult, costly, or risky to assess directly. As is turns out, investments in employee training can send a signal of its own to an important customer group: investors.

Investment in training is a powerful signal that wise investors look for when evaluating opportunities. That’s the conclusion reached by the American Society of Training and Development (ASTD) in a study of 575 U.S.-based, publicly traded.

The ASTD study of training practices and outcomes found that:

-Companies that invested $580 more in training per employee than the average company in the study improved their total shareholder return (TSR) the next year by 6 percentage points.

-Top training spenders had an average TSR the following year of 36.9 percent, while more frugal firms had an average TSR of only 19.8 percent. The TSR for top spenders was 45% higher than the market average.

-Firms that invested on average $1,595 per employee in training experienced 24 percent higher gross-profit margins and 26 percent higher price-to-book ratios than firms in the bottom quarter that invested on average $128 per employee.

-Knowing a firm's education and training investment improves the power to predict its future TSR by 50 percent.

ASTD’s Director of Research Mark Van Buren called the information “powerful” and that “both investors and companies will benefit by tracking and reporting on training expenditures.” Bottom line: investing in your employees is a capital idea.

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