Thinking On: Workers are Assets not Expenses

After a decade of U.S. companies lamenting they cannot find qualified people[pdf], current findings show companies are spending less each year on training workers to fill openings. The decline of investment in skills is troubling for the long-term health of both companies and workers. Studies at the organizational level have found that the extent to which companies invest in their employees can be a good indicator of overall company success, with evidence suggesting that training may increase worker productivity by as much as 23 percent. Across the market, it appears that investment in workers is good for growth; with an investment portfolio of companies that “actively invest in the people side of their business” annually outperforming the S&P 500 by 3.5 percent.

Training benefits workers for many of the same reasons it benefits companies: it leads to increased specialization, productivity, engagement and advancement. In addition, gaining skills on the job leads to increased employee satisfaction and lower turnover rates. Perhaps most importantly for workers, it is estimated that training leads to a 12 percent increase in wages, as well as giving workers greater career mobility.
 
Given the benefits to firms and workers, why has there been a decline in employer-sponsored training? A new report by the Center for American Progress suggests two causes. First is the growth of the “secondary market” in which employers subcontract work in an effort to cut costs. These subcontracted employees typically work for smaller companies, which are less likely to provide training than their larger counterparts. The second reason for the decline in worker investment is that in the current business climate, publicly-traded companies face pressures from their shareholders to prioritize short-term profits instead of investments in long-term growth. As the CAP points out, companies are compounding the problem by the way they treat human capital investments in their own reporting:

A $10 million investment in worker training shows up in a firm’s financial statement—not on its own but lumped into selling, general, and administrative expenses, or SG&A, a measure that includes items such as company lunches and paper clips. Companies’ expenditures on worker training and skills show up not as a valuable investment similar to R&D but as an increase in general overhead, a measure that managers have shown a proclivity for cutting and whose reduction is often cheered by investors.

CAP argues that highlighting workforce investments in companies’ financial disclosures to the SEC (Form 10-K) could change the way investors and managers choose to prioritize it. Instead of simply reporting on worker training as part of sales and SG&A expenses, companies could include separate lines for such investment in their disclosures, similar to how they now report on R&D. Highlighting workforce training in this way could change how it is viewed by stakeholders, encouraging them to focus on investing in their workers for long-term growth.

Many voices in the discussion about worker training point to a greater focus on the concept of human capital, a term popularized by economist Gary Becker in 1964 to denote the skills and knowledge held by a workforce. However, the term has been criticized, however, for the focus that it puts on workers as corporate assets. As one New York Times Op-Ed expounded:

The very term that many companies use to describe their people, “human capital,” is inherently dehumanizing and helps explain why employee disengagement is so rampant. I recently spoke to a Fortune 500 executive who explained why an organization’s human capital is really no different than any other type of capital equipment, like aircraft. You’ve got to develop and maintain people, just like planes, he argued, to make sure you get a good long-term return on your investment.

A more genuine relationship between companies and their workers may be what is needed to address these issues. If managers see their employees as vital members of the organization, rather than simply assets on a balance sheet, they may be much more likely to invest in their future.

Click here to read more reflections from Heron on aspects of our work and the many reasons we do it. This post was prepared by Megan Mannifield and Mark Rafferty.