by Kevin Faber, founder of Silver Summit Capital
Investing in employees can be a very beneficial and all-around positive experience for everyone involved. Ideally, employers get far more productivity and less expenses such as interpersonal conflicts, miscommunication and turnover. Employees feel valued and motivated to contribute, work to improve their employer’s business as well as have an incentive and sense of security that compels employees to stay instead of hopping jobs.
Here we will go over how to determine the likely ROI of investing in employees:
Investing in Employees: Details.
Instead of blindly throwing “teamwork” and “communication” seminars or coursework, analyze what you and your employees need and want. Understandably, employers want to spend on what will, in theory, make employees most productive or cost-effective to retain. The reality is that employees are not machines that can be upgraded. Their own feedback and desires factor into the equation.
If an employer points out clear and hard-to-argue benefits to the employees themselves, then he has a winning strategy for engaging employees. Employees should want the employer’s investment such that the benefits of that investment circle back to the employer, creating a win-win for all. Incentive packages, scaled bonuses or other additional compensation that reflects successful outcomes of investing in a given employee are some of the ways employees can make wise investments in their staff’s professional development.
Risks and Pitfalls.
As mentioned before, aligning employee and employer goals is important. Much of the pitfalls and duds that come with investing in employee training or development rest on a faulty goal alignment.
For instance, a programmer who spends most of his time and effort coding and debugging system errors would certainly know he would benefit from learning how to speak in public, negotiate, and master other social nuances that are critical to management and business leadership. However, if the employer doesn’t demonstrate a clear and viable path to success with this example’s “soft skills” training, the employee is far more likely to quit in favor of a rival employer who opens such avenues to management. In this case, the employer who invested in an employee’s professional development doesn’t benefit, while another employer gets a multi-faceted employee without spending on the investment it took to develop such skills in the employee.
Complexities of Calculating ROI.
ROI can be determined naively as the inverse of labor costs divided by total operating costs or sales. For instance, if labor is 1/2rd of total operating expenses for a given business, then the employee costs return twice as much as they take in, gaining an ROI of 100 percent. However, employee ROI can get murky depending on the industry, compensation, and type of work a given employee performs. Also, things like sales fluctuate and can give a misleading of costs and therefore ROI if interpreted or “averaged” in an illogical manner.
Though touted as a necessity, investing in employees is, in essence, no different than investing in assets, equipment, or financial derivatives. Of course impressive ROI can be had, but a straightforward comparison or generalized risk-reward profile of investment in employees will inevitably be misleading. Here, “fundamental analysis” is critical to answering two questions:
- How to maximize the odds that this investment will circle back to benefit my business?
- How does this investment benefit the employees; why would they have a desire or incentive to implement this training or investment for the benefit of your business?
An employer who can answer these questions coherently and honestly is well on his way to maximizing his ROI from investing in his employees.
Kevin Faber has been in the commercial finance and banking industry for most of his professional life. He graduated at UC Davis with a B.A. in Business/Managerial Economics. His experience in credit analysis, finance, and management led him to be the founder of Silver Summit Capital. He enjoys working in the financing industry and building connections with industry leaders.