Sexual Harassment Policy

Creating a Sexual Harassment Policy One of the best ways to prevent sexual harassment is to have an anti-harassment policy. Below are some of the key

One of the best ways to prevent sexual harassment is to have an anti-harassment policy. Below are some of the key questions associated with such a policy.

What is sexual harassment? There are two types of sexual harassment. The first is "quid pro quo." In its most basic form, this type of sexual harassment involves an employer asking an employee or a job applicant for a sexual favor in return for employment or some job benefit.

The second category is "hostile work environment." In contrast to "quid pro quo," this type of claim is more difficult to define, yet occurs more frequently. Many people may not even realize that they have been a victim of this type of harassment, or even that they may have been a harasser. Typically, a hostile work environment claim involves a supervisor, co-worker or customer making unwelcome sexual comments or remarks, or suggestively touching or acting in a sexually inappropriate way toward an employee.

What should be included in an anti-harassment policy? The Equal Employment Opportunity Commission's (EEOC) Guidelines suggest the following key elements be included:

• Clear explanation of prohibited conduct.
• Assurance that employees who make complaints or participate in an investigation of a complaint will be protected against retaliation.
• Clear description of complaint process.
• Assurance that the employer will protect the confidentiality of complaints to the extent possible.
• Complaint process that provides prompt, thorough and impartial investigation.
• Assurance that the employer will take immediate and appropriate corrective action when an investigation determines that harassment has occurred.

How does an anti-harassment policy help? One of the best ways an employer can prevent claims of sexual harassment is to educate everyone on the job, and one of the easiest ways to educate everyone is to have an anti-harassment policy. You must keep in mind, though, that you should not simply announce a policy. The best and often easiest way to properly educate yourself and all employees is through a training program regarding the policy.

As the employer, you need to be informed of the law and your obligations, both of which may change as a result of new legislation and court decisions. As for supervisors, they typically have the majority of contact with the employees, and their behavior could result in liability for the employer. Thus, they need to be informed as to what could be considered inappropriate behavior and need to be trained to handle potential complaints. With respect to employees, they, too, should be informed as to what could be considered inappropriate behavior and what the potential corrective measures against such behavior include. They should also be informed of their right to raise the issue of sexual harassment, and how to raise it.

After you have properly trained everyone, follow through with the policy. This means developing appropriate sanctions, promptly investigating all allegations of harassment and taking the appropriate corrective measures in response to any investigations.

As a business owner, you should also set a good example for your employees. Some ground rules to help keep you out of trouble.

• Don't touch employees inappropriately.
• Never date someone who works for you.
• Don't demean others or make suggestive comments. Watch your mouth; what seems humorous to some may offend others.

In sum, if you want to protect yourself as an employer, make it clear to your employees that you strongly disapprove of any form of harassment, including sexual harassment. The best way to do this is by implementing a policy against harassment, educating the work force regarding the policy and enforcing it.

If It Happens...

Even if an incident does arise, the good news for business owners: Most complaints can be solved at the company level, before the issue comes close to a courtroom. To make this work, however, time is of the essence. Don't put off dealing with complaints, or the victim is likely to stew.

Give both parties a chance to tell their side of the story. Often, the cause is a simple misunderstanding. To cover your bases, your may want to have a neutral consultant or human resources professional from outside the company investigate the matter.

Sexual Harassment

Discrimination and Sexual Harassment Policies

Although sexual harassment is one of the biggest issues facing employers these days it's not the only type of discrimination you need to be concerned about. Under the Civil Rights Act of 1991, employees who believe they were victims of job discrimination due to race, religion, sex or disability are entitled to a trial by jury.

While companies with fewer than 15 employees are generally exempt from federal discrimination laws, most states have their own laws prohibiting discrimination, which, in addition to protecting a wider range of categories of employees, include smaller businesses within their scope and procedural and evidentiary standards more favorable to claimants. Apart from the tendency of some juries to award plaintiffs disproportionately high monetary damages, litigation in this area of the law can be extremely costly, even if you prevail. One attorney estimates the average legal fees for defense in a sexual harassment suit, regardless of the verdict, are upwards of $75,000.

Concerns over the discrimination are more important than ever in today's increasingly diverse business world. If you run a small business, chances are you will be dealing with employees from many cultures, races and age groups. How can you keep things running harmoniously and protect your business from legal risk? The best policy is to make sure that everyone in your workplace understands what constitutes harassment and discrimination--and also understands the benefits of a diverse workplace

Big companies may spend thousands on diversity training, but there are plenty of low-cost options available:

• Learn as much as you can from books on the subject and from exposure to people who are different from you.
• Investigate video series on managing diversity. Many are available for rental or purchase.
• Consider public programs. A growing number of Urban League, chamber of commerce, Small Business Administration and community college seminars and courses are bringing business owners

Alternative to Investment

Outsourcing as an Alternative to Investment in Human Resources

As indicated earlier, investments in human resources should support the organization’s strategies. Unless there is the potential to build capabilities that provide an advantage over
competition, cost considerations often lead to the rational decision to outsource through specialized service providers rather than invest in human resources.

In general, strategic outsourcing is advocated where
(1) world-class capabilities and a strategic advantage cannot be developed,
(2) the resources devoted to services performed internally will be greater than those needed to outsource the service,
(3) excessive dependency on suppliers can be avoided.

When an activity is performed internally at a higher cost, the misallocated resources will put the company at a disadvantage to its competitors. Firms have been outsourcing human resource activities at a phenomenal rate.

Furthermore, they have been outsourcing a wide range of activities. For example, firms routinely outsource the administration of 401(k) plans, executive search activities, payroll functions, employee assistance programs, human resource information systems, benefits administration, and outplacement.

As a result of the demand for outsourcing, a whole new service industry of personnel service providers has been created, often by human resource executives who were downsized during the 1980s and early 1990s. Although many firms have been willing to outsource a wide range of their human resource activities, virtually all of them have retained the critical and sensitive functions of performance management, employee relations, and labor relations

Utility Theory

Utility Theory

In considering investments in human resources in terms of hiring or development of current employees in order to pursue given strategies, there must be a method for evaluating the financial attractiveness of such investments. There must also be a method to be used in “selling” the investment to senior management. These tasks may be accomplished bydetermining the r eturns for such investments through cost– benefit analytical approaches such as utility analysis. Utility theory attempts to determine the economic value of human resource programs, activities, and procedures.

As such, utility theory might be used to determine the dollar value of a selection test that enables an employer to identify and hire managers for a specific job whose productivity is higher than those hired without the test. The calculations of utility might involve several variables. For example, validity of the selectiontest would be a critical variable, in that it provides an indication of the predictive ability of the test. Additionally, the increased production, its contribution to profitability, and the standard deviation of the contribution, would be variables in the calculations.

Finally, other variables might be included in the analysis, such as the cost of testing enough applicants to obtain a sufficient number having scores above the cut-off point. Brian Becker and Mark Huselid’s study in a national retailing company provides another example of an application of utility theory. Becker and Huselid’s analysis explained return on sales for each store on the basis of the performance appraisals of the store supervisors.

Their statistical analysis also controlled for differences in the supervisors’ educational levels and their commitment to the company. Their study demonstrated that better estimates of the standard deviation ofthe performance appraisal variable could be obtained through a model based on the use of accounting data (return on sales) rather than the more commonly used subjective approaches. This study helps to enhance the legitimacy of utility theory for applications in real business environments

Temp Company

How to Choose a Temp Company

Very often, choosing a temporary help service amounts to nothing more than a last-minute phone call to fill an absence or to get help in a crisis. However, taking a more strategic approach to choosing a temp service can actually be very valuable. Not only can you minimize costs, but you may be able to find temps who are far more productive for the tasks at hand.

This guide is designed to give you the facts you need to choose and evaluate a temporary help agency for your business. The various sections are listed in the box above. You can choose to read this guide from beginning to end, or jump directly to a section of interest

How Temps Are Used

Most commonly, temporary employees are used to address normal fluctuations in a company's work flow. In order to save money, companies keep staff levels low and use temps to handle the excess work. Examples of this include hiring temps for large mailings, unexpected orders, or time-sensitive projects.

A second major use of temps is as contingency workers to fill positions that are temporarily vacant. This helps a firm to avoid overworking permanent employees and can reduce the need to shuffle job responsibilities.

A third use of temps is as a source for permanent employees. Businesses will often hire temps to fill a new opening in the company. If the person is good at the job, the company arranges with the temp service to hire the person on a permanent basis.

Types of Positions

Temporary work has broadened since its inception to include a wide range of fields and industries. Clerical and office positions continue to be the largest segment of all temp jobs, comprising almost 40% of all temporary positions. These positions commonly include administrative assistants, general office clerks, filing clerks, receptionists, typists, word processing operators, data entry clerks, and cashiers.

The second largest category, with one-third of all placements, are those involving industrial work, such as shipping/receiving and assembly line work.

A third category, with just over 15% of all placements, consists of technical workers such as computer programmers, analysts, or engineers, and professional workers in the accounting, legal, sales and marketing, and management areas. This ranks among the fastest growing categories, with specially trained temps becoming an important resource for many firms.

Differences Between Firms

Most temp agencies use newspaper advertisements, job fairs, and word of mouth to recruit candidates. National firms may attract greater numbers of candidates due to the brand name, but large, local firms are often equally well known within their region.

There are much greater differences, however, in how firms screen candidates before hiring. Some firms use computer testing to evaluate candidates, while others supplement this with psychological evaluations or personal interviews to select temps for the right jobs. If you need a temp with specific skills, computer matches are usually adequate, but personal interviews can help ensure that workers are better suited for your needs.

Pricing

Temp firms generally charge a fixed percentage greater than the hourly cost of a worker. For basic jobs, this can translate to total charges of $9 to $18 per hour. Skilled temps tend to be much more expensive. Technical or professional temps may cost up to $30 per hour.

Most firms offer discounts off their published rates. Even if you plan to use temporary services infrequently, it is usually worth negotiating rates upfront to reduce the overall cost.

Special Tips

Even if the temp agency will not give you an across-the-board discount for temporary help, you should negotiate rates for specific types of workers and jobs, such as those that require little skill.

Also, if temporary workers will be hired for a specific long-term project, see if you can provide training without being charged for their time.

Ask about guarantees from services for the workers they place. Reputable services generally guarantee satisfaction, waiving fees for workers who do not work out.

If security is of concern, see that the service is bonded to cover the theft or destruction of property by temporary workers.

Make sure to inquire about the cost of hiring a temporary for a permanent position before working with a service. Doing this ahead of time can put you in a much stronger position if you subsequently decide to permanently hire a temporary employee.

Economic Rationale

Economic Rationale for Investment in Training

Because human resource investments frequently involve training, it is instructive to consider the difference between specific and general training. Nobel Laureate economist Gary Becker has written extensively on this subject. His distinction between specific and general training in human capital theory provides guidance for understanding when employers will provide training.

The decision whether to invest in training and development depends, in part, on whether the education imparts skills that are specific to the employing organization (specific training) or are general and transferable to other employers (general training). Employers generally invest in or pay part of the cost of specific training because employees cannot readily transfer such skills to other employers.

Employers recoup their investments after employees complete training by paying employees only part of the revenue derived from their increased productivity (marginal product). Conversely, conventional human capital theory predicts that
employers will pay for none of the cost of general training because employees can transfer skills developed at employers expense to other employers. Accordingly, employers would rather hire an employee who has the requisite general skills.
When employees having the requisite general skills cannot be hired, the employer must invest in general training without assurance that the unskilled employee will remain employed long enough after training for the employer to recoup the
investment.10

In reality, employers probably invest in general training more than the specific and general training rationale would suggest. A recent study has found the following:
under certain conditions [use of employment contracts and retention of employees based on productivity] the firm may share the costs of and returns on investment in general human capital and pursue no lay-off policy. General human capital will have the same implications as firmspecific

capital.11
General training can be obtained in on-the-job training as well as in formal programs such as tuition reimbursement. It also can occur unintentionally simply as a byproduct of the work situation as employees learn work skills that are applicable to other employers. Employers may make general training investments in employees by paying a wage during training, which has been reduced by the training costs.


Employers also can recoup some of their investments in general training because employees incur costs of mobility, such as the costs of finding new jobs and relocating. If the costs of mobility are high enough (moving expenses, realtors’ fees, psychological costs of moving children, etc.) the employer can pay a wage lower than the employee’s new general skills would warrant at other places of employment.

Labor economists also argue that employers are more reluctant to lay off employees in whom they have invested in specific training. (When employers pay part of the costs of general training, the firm also will be reluctant to lay off workers who have received this training.) Like general training, specific training can be obtained through formal programs. It also can be obtained through on-the-job experience, as much of what employees learn on the job tends to be of a specific nature.

Employees who receive specific training from an employer receive a lower wage after training than their productivity would warrant because no other employers have
use for these specific skills.13 Thus, it is likely that the employer will have invested more heavily in these employees and would not want to lose the investment.

Conclusions

Conclusions and Recommendations

Training, inappropriately selected, may or may not yield valued organizational and personal performance results. It is a "crap shoot" with low probabilities of success. Key to acquiring effective results from training is front-end analysis that allows organizations to determine whether training is necessary or sufficient to achieve desired results.

Training, appropriately selected, can lead to astounding performance results. Training, well selected, designed and supported, increases the ability of people to perform. It raises the value of the human capital an organization possesses and this benefits both organization and individual performer. As stated earlier, human capital in the knowledge economy is true wealth. It has greater potential to generate productivity and profits than physical capital.

The training ROI model presented in this paper is a tool. It guides decision makers and instructional designers to do the right things with respect to training. It also generates meaningful figures that clearly demonstrate the value of the training effort. What it uncovers also guides decision makers in future training ventures.

The case application at the Bank illustrates a number of valuable lessons for training:

• Where a need for training is identified and the training is well designed and implemented, the results are demonstrably beneficial to the organization.
• Training ROI´s are often dramatic with ratios often exceeding 10:1.
• Even applied to a partially completed training initiative, the model can help monitor early results.
• Despite careful planning of training projects, the dynamic context of organizational environments can drastically affect results. The Bank did not foresee major shifts in structure and personnel that would impact training outcomes.
• The model offers a valuable tool to training managers. It answers the questions: "How do I calculate training ROI?" and "What do I measure?"

Based on the content of this paper and in particular the training ROI model, the authors recommend that:

• Other organizations critically examine their training activities and in the light of the suggestions made here, conduct front-end analyses and training ROI studies.
• Organizations try out the part of the model dealing with intangible improvement. This presents the greatest challenge and would be extremely worthwhile to test and document.
• Organizations, in general, document their front-end analyses and applications of the training ROI model. The research and professional literatures contain too few systematically documented examples.
• Through experimenting with the model, improve upon it and make it easier to apply in varied organizational contexts.

a Banking Case

Application of the Training ROI Model: a Banking Case

A major objective of the Bank is to assist businesses, mostly small and medium sized, with creative financing. In 1996, the Bank announced in its annual report that it was determined to help enterprises in sectors of rapid growth and those heavily engaged in the development or use of new technologies. The Bank promised specific lending programs targeted toward knowledge-based industries, high growth sectors and export markets.

This was a significant initiative for a bank traditionally focused on providing loans based on material guarantees such as tangible assets, homes, equipment, buildings, etc. However, as the economy has veered increasingly toward service and high technology enterprises, there is simply less physical collateral available in the emerging markets sector. The facts speak for themselves. For example, one major region of the Bank´s activities is largely dominated by tertiary sector activities: 81% of all investments and 74.5% of employment.

To meet the challenge and make good on its word, the Bank created a range of new variable interest loans (new economy loans). Establishing a radically different set of loans is one thing; selling them is quite another. It soon became apparent that account managers required training and other assistance to help them introduce and promote the sale of these loans. In October, 1995, the Bank developed a strategy to respond to the performance problems the new variable interest loans were creating.

The primary audience for selling the loans were its 320 account managers. These loan professionals possess basic skills and knowledge in sales and bank lending procedures. The problems the account managers experienced were in identifying appropriate potential clients and presenting the loans in a credible manner. Account manager performance also affected branch manager performance. Each branch manager supervises two to twelve account managers. They also manage the branch and its administrative personnel as well as sell loans. Since they are generally seasoned lenders (10+ years), their own loan quotas are high.

To add to the situation, approximately 50% of account managers were new to the Bank (less than two years experience). Their quotas are stiff which requires that they work hard to meet them. The Bank has also experienced a high turnover of account managers. Each account manager handles approximately 60 accounts.

The strategy the Bank selected to improve sales of new economy loans was to:

• Increase awareness of the new loan types and demonstrate, through examples, that account and branch managers can and do achieve impressive sales.
• Create a series of training activities spread out over time to bring about a culture change for account managers with respect to lending. The training was to help account managers find ways to meet and talk with prospective clients, become co-investors in their enterprises and discover how fertile the emerging markets sector can be for harvesting successful loans.

The desired performance was clear: competence and confidence in making new economy loans. The actual performance was very distant from this ideal state. Specifically, account managers:

• Had difficulty identifying potential emerging market clients.
• Were uncertain about how to communicate and sell these types of loans.
• Perceived the loans as high risk with potential to negatively affect their careers.
• In some instances believed that these loans might just be a "flavor of the month" and might soon fade away.
• Lacked knowledge about new economy businesses.
• Were resistant because these loans require three times as much time as traditional ones.
• Were uneasy explaining to clients that the Bank would become a form of co-manager of their businesses.
• Had difficulty selling interest rates of 16% - 25% (compared with traditional loans rates of 7%).

Nevertheless, the Bank was determined to move ahead. As the initiative unfolded, the training ROI model came into play. What follows is its application to the project.

Step 1. Calculate potential for improved performance in dollars.
The Bank had decided that between October 1995 and October 1998, the volume of new economy loans should increase (218% increase) which would generate an additional $5,000,000 in profits. A front-end analysis identified lack of skills and knowledge to be a central cause of current underachievement, although other factors such as marketing and presentation materials, policies, incentives, procedures and support systems were also lacking. On the basis of the front-end analysis information, (essentially a new system for existing and somewhat new personnel), training was selected as an appropriate intervention.

Step 2. Calculate the estimated training costs.
The adopted strategy called for a three-stage roll out.

• Training I: Distribution to account managers of actual new economy loan cases with communication links established to provide background information and interaction with successful lenders. Forecasted dates: January to March 1996. Cost in time, materials, distributions and follow-up estimated at $93,859.
• Training II: Distribution of a comprehensive self-instructional package (6 hours) complete with information, exercises, models, job aids, a marketing kit and self-tests. Forecasted distribution date: June 1996. Cost of development, consultants, subject-matter expertise, management, distribution and control estimates at $270, 266.
• Training III: a two-day session, rolled out by region, involving testing of self-study materials, presentation of success stories and strategies and group problem solving. Forecasted delivery dates: October to December 1996. Cost of development, delivery, travel, lodging, materials and trainee time estimated at $625,000.

The total estimated training costs came to $989,285.

Step 3. Calculate the worth analysis.
Based on the prior steps:
Estimated value = $5,000,000
Estimated costs = $ 989,285
Worth = $5,000,000 = 5.0
$989,285
Estimated ROI over 3 years = 5.0 : 1.

Step 4. Train.
Due to changes within the Bank, training ran longer than anticipated with slippage of intermediate milestone dates. Training took place between January 1996 and March 1997.

Overall, training occurred as planned. However, unforeseen events affected the process of the training and certainly decreased effectiveness. These included:

• For both Training I and II, many account managers did not clearly perceive the importance of these and viewed the materials as two among many "communications" they received to be examined when time allowed. The timelines and expectations were not clearly defined resulting in underutilization of the training materials. No incentives were issued to participate in the training.
• A number of account managers were promoted or transferred to new locations. These changes decreased the ability of lenders to sell new economy loans. It takes approximately six months for an account manager to establish himself/herself in a new territory and create contacts.
• The Bank experienced a 38% turnover in loan personnel in a short period of time.
• Pressure to meet quota deadlines conflicted with time needed for training.
• Training was "homogeneous" and did not account for varied experience and skill levels.

Despite these drawbacks which point out that even with careful planning and forethought problems occur, training proceeded successfully. Evaluations by participants were positive both in terms of quality of training content and activities. However, the question of impact on bottom line results remained. For answers, we proceed to the post training steps of the model.

Step 5. Calculate the true cost of training.
The project team carefully tracked all costs. The greatest expenses were those related to human resources. Below we present the total costs.

Training I: $93,859
Training II: $284,491
Training III: $595, 390
Total $973,740

These figures are very close to the $989,285 forecasted in Step 2.

Step 6. Calculate organizational return on investment.
Throughout the project, the Bank maintained careful records of new economy loan volumes and profits. For purposes of this paper, only 89 account managers were studied. Generally, training ROI requires a long time frame to verify impact of training activities. The training began in January 1996 and concluded in March 1997. The data available only accounts for the account managers who went through Training I and II and remained in their positions so that they had the potential to apply what had been taught. Between January 1996 and January 1997, the 89 account managers increased their volume of new economy loans from 8.64% increase over 12 months.

Examining the dollar value of the loans, the increase was 14.69% representing a profit growth of $215,760. The amortized cost of training for this period (total training cost for Training I and II -- as Training III only began in January 1997 and thus could not be included in the analysis -- divided by 3 years, the expected life of the training) is $126,117. For the 89 account managers, the training cost is $35,075.

By subtracting the training cost ($35,075) from the profits ($215,760) we identify a net gain of $180, 684 for the 89 account managers in 1996 and a training ROI of 615%.

As partial as these results are, the early indicators are of a significantly large organizational ROI for the training investment. Figures at the end of October 1997, with Training III completed, indicate a 53% increase in loan volume for the 89 account managers being tracked.

Step 7. Calculate individual value of human capital.
The average increase in profits for each of the 89 account managers is $215,760 · 89 or $2,424. The new individual human capital account for each of these account managers has increased by this amount.

In summary, the training ROI model was applied to a real-world case. Each of the steps was performed as prescribed. At each step, the necessary calculations were made. The test of the model in the banking context demonstrates its viability

Calculate Training ROI

A Model for Calculating Training ROI and the Value of Human Capital

The model is the product of a careful sifting of many ROI models and processes. Each model has its particular strengths and weaknesses. Kearsley (1986) presents a number of approaches for calculating ROI, all with their own form of outcomes. What we present here is an operational model that draws primarily from the work of Schneider and Wright (1990), Schneider, Monetta and Wright (1992), Robinson and Robinson (1990, 1992), Spencer (1984) and Stolovitch and Keeps (1995). The figure on the next page graphically portrays the model and its steps.

The model consists of seven major steps. Below, we describe each step and provide additional explanations and examples as necessary.

Step 1. Calculate potential for improved performance.

To perform this step requires conducting a front-end analysis (Harless, 1970; Rossett, 1987, 1992; Stolovitch and Keeps, 1997). In brief, front-end analysis consists of the following steps:

1. Determine purpose of training request (mandated; new system; performance improvement).

2. Identify desired performance and, if relevant, actual performance.

3. Identify feelings related to the desired performance.

4. Identify causes for not achieving desired performance if this is a performance improvement issue.

5. Identify appropriate solutions that are economically relevant, feasible and acceptable to both organization and targeted performers.

Through careful investigation, the front-end analysis identifies the magnitude, urgency and value of the performance gap as well as the factors affecting it (environmental; skills/knowledge; emotional/political). It also proposes a basket of intervention solutions that are most appropriate, economic, feasible and acceptable to achieve desired performance. If training is one of the suitable interventions, the step proceeds to verify the potential for improvement in monetary units (e.g. dollars).

1.1 Certain types of training result in tangible, easily verifiable outcomes. Examples are productivity gains, increased sales, decreased errors. These improvements can often be measured in the short term. Pre and post measures of performance with assigned value per unit of gain can establish the potential for improved performance. Example: Reduction of 10% in invoicing errors can result in $800,000 annual savings in investigations, late payments, dispute resolution, customer retention, etc.

Another method for calculating potential for improved performance is by comparing exemplary with typical or average performance. Gilbert (1996) suggests that the potential for improved performance (PIP) is the ratio of the worth of what the exemplary performer produces (Wex) to that of the typical performer (Wt). Hence,

Wex PIP = __ Wt If an exemplary performer makes $1,000,000 in sales and a typical performer $500,000, PIP = 2.0. If total sales is $80,000,000, the potential for improved performance is $160,000,000 or twice current performance.

1.2 Intangible, less readily counted and measured outcomes of training provide a special challenge for calculating potential for improved performance. Examples include listening skills, counseling techniques, systemic thinking. Although less directly measurable, results of improved performance in these areas can produce significant organizational gains. Changes, however, generally take place and can only be measured over the long term.

Schneider et al. (1990, 1992) have proposed a form of survey methodology for estimating the value of improved performance in the so called "softer" areas. It works as follows:

• Define the major job competency requirements of the persons targeted for training.

Example:

Effective use of human resources; budget administration; management and evaluation of work; planning; work coordination; problem-solving. The competencies listed should include those which are the subject of the proposed training content.

• Assign a value to each competency expressed as a percentage of time each competency is required in the job.

Example:

Effective use of human resources 25%

Budget administration 10%

Management and evaluation of work 10%

Planning 15%

Work coordination 25%

Problem-solving 15%

Total 100%

This can be achieved through survey and estimation

• Within the targeted competency area for training, break this down further into performance requirements. This can be done with supervisors of the target trainee group, the trainee group itself and, if relevant, subordinates and customers.

Example: Under the "planning" set of competencies, one might list 5-8 critical performance requirements such as "Develop and monitor long- term work objectives."

• Create a 0-9 scale for each performance requirement. Based on supervisor and trainee estimates, assign a desired performance value, 0 being the lowest, 9 the highest. Assign a current performance estimate as well.

Example: Planning

Develop and monitor long term work objectives...Desired, 8...Current, 2.

• Calculate the difference between desired and current for each required performance. This represents the estimated gap in performance.

Example: Develop and monitor long-term work objectives 8 - 2 = 6

• Total all the desired and current performance requirement estimates as well as the gaps.

Example: Planning
Desired total score for all 6 performance requirements 48
Current total score for all 6 performance requirements 24
Performance gap 24
This represents a potential for improved performance of 200%.

• Convert the potential for improved performance to a dollar value.

Example: Planning represents 15% of job-time.
Average salary per trainee is $60,000/year.
Planning represents 15% of $60,000 or $9,000/year.
300 trainees = $2,700,000/year salary for planning.
Current performance is at 50% of required.
Potential for improved performance = $1,350,000/year.

The seven-step calculation of potential for intangible improvement is based on estimates and on base salaries. As estimates are not perfectly accurate, using a base salary produces a conservative potential for improved performance figure. The survey procedure can be rigorously conducted to increase estimate validity. Trainee fully loaded costs may be used in place of base salary (leading to much higher potential for improved performance figures and closer to actual impact on productivity).

Step 2. Calculate estimated training costs.

Training costs include:

• Training development costs: human resources* ; direct travel and non-travel; media production; consultant fees, licenses.
• Training implementation costs: training facilities and equipment, instructors; trainees; replacement of trainees; lost opportunity; travel; materials; communications; administration.
• Training course maintenance costs. If a course is to be delivered over several years, updating and revisions are usually required at an annual percentage of initial development costs. This can vary from as little as 5% for stable content to 50%+ for highly volatile material.

The total of all development, implementation (which may include on-the-job support and evaluation activities) and maintenance costs represents an estimate of the total training costs.

Step 3. Calculate the worth analysis.

This step essentially verifies the worth of doing training by comparing costs against potential outcomes. Worth analysis is performed as follows:

• Estimate the highest number of annual deficiencies or improvements.
• Estimate the lowest number as well.

Example:
Current annual number of deficiencies 20,000

40,000

low high

• Estimate the low and high cost of each deficiency or improvement.

Example:

Current annual cost per deficiency $15.00

$25.00

low high

• Calculate current annual cost of deficiencies or improvements both low and high.

Example:

20,000 x $15 = $300,000 low cost; 40,000 x $25 = $1,000,000 high cost

• Estimate the range of expected deficiencies corrected or improvements obtained from training.

Example:
Low = 20%; High = 40%

• Estimate low and high annual value of training. $300,000 x 20% = $60,000 low annual value $1,000,000 x 40% = $400,000 high annual value
• Multiply the low and high annual values of training by the expected life of the training and divide by the estimated training costs to obtain potential worth of the training effort.

Low worth: $60,000 x 3 years = $180,000 = 2.8
$65,000 $65,000

High worth: $400,000 x 3 years = $1,200,000 = 18.5

$65,000 $65,000 The potential ROI for this training = 2.8 - 18.5:1

This represents a far greater potential return than on most physical capital. It is in line with published results from training when appropriately selected, applied and supported on the job.

Step 4. Train.

This step includes design, development, implementation, support and monitoring/evaluation of training.

Step 5. Calculate the true cost of training.

This step mirrors Step 2, calculate the estimated training costs. However, new actual figures replace previous estimates. As mentioned earlier, the highest costs of training are in the human resources. In Canada, fringe benefits represent an additional 12% - 15% of salary. Fully loaded costs for employees are generally calculated on the basis of salary + benefits + overhead (usually 100% - 150% of salary + benefits) divided by productive annual work hours.

Example:

Salary = $60,000

Benefits = $60,000 x 12% or $7,200

Overhead = $67,200 x 125% or $84,000

Fully loaded cost= $67,000 + $84,000 or $151,000

Cost/day = $151,000 · 230 work days or $656.52/day

Cost/hour = $656.52 · 7.5 or $87.53/hour

The fully loaded cost is approximately 2.5 times the base salary. In the U.S., where benefits run as high as 35% of the base salary, the fully loaded factor for calculating personnel costs is 3.0.

Other expenditures sometimes forgotten in estimates that increase the true cost of training include: equipment maintenance, shipping, handling and storage of materials, correction of errors caught after implementation, trainer training, course publicity, enrollment and tracking. Often, the organization delivers more training sessions than planned due to work schedules that reduce class sizes or unexpected turnover.

Step 6. Calculate organizational return on investment.

This is difficult to carry out in a fully valid manner. The front-end analysis should have led to the selection of a "basket of interventions" of which training is one. If all the interventions have been implemented in an integrated manner, isolating the impact of training alone becomes almost impossible. Ideally, the organization should capture the costs of all interventions and calculate return globally. However, two realistic options are: estimate the percentage of impact likely due from training (establish a range low to high); calculate the value of results against training costs only on projects where training has been the major performance intervention.

6.1 Calculate organizational return on investment for tangible improvement. This usually occurs six months or more after all training has been completed. Robinson and Robinson (1989) suggest, as examples, the following types of performance indicators:

Sales: Size of average sale, sales volume, add-on sales. Non-monetary indicators may include ratio of new accounts to old ones, call-to-close ratio; percentage of objections overcome, items per order.

Supervisory and management: Decreased rejection rates, increased output, reduced absenteeism, reduced tardiness, decreased waste, decreased production costs, reduced cost of new hires, reduced overtime. Non-monetary indicators may include reduced number of grievances, reduced turnover, increased number of employee suggestions adopted, improved climate survey data.

Customer relations: Accuracy of orders and information, size of orders and transactions, adherence to credit procedures, amount of repeat business, number of transactions per day. Non-monetary indicators may include number of complaints, customer satisfaction, number of referrals.

In both front-end analysis and this step, it is always wisest to use indicators with which the organization is already familiar and values. Once improvement data have been gathered, they are compared with the training costs. It is essential to amortize costs properly. Hence, when calculating ROI three months into training, include training development costs proportional to the projected life of the training (estimated in step 3). Similarly, only include implementation costs for those already trained.

6.2. Calculate organizational return on investment for intangible improvement. The procedure for this is almost identical to that of Step 1.2 for calculating improvement in required performance. The difference between pre and post training performance is converted to dollars. This is then compared to appropriately proportional training costs.

Example: Planning (after 6 months of training activities):

• Post training total score for all 6 performance requirements 40
• Pre training total score for all 6 performance requirements 24
• Performance improvement 16

This represents an improvement of 67%.
Planning represents 15% of job time.
Average salary per trainee is $60,000.
Planning (15%) represents $9,000.
Pre training performance at 50% of requirement = $4,500.
Post training performance at 83.3% of requirement = $7,500.
Improvement = $3000 per trainee.
ROI = Value
Amortized Cost of Training
= $240, 000 = 2.28
$105,000

The sum of all returns from tangible and intangible training improvements represents the total organizational return on the training investment.

Step 7. Calculate individual increased value of human capital.

Each employee possesses a human capital account, usually established with an initial value equal to his/her salary (although benefits can be included). As the employee´s competencies increase, the value of the account rises. This serves to track the value of the individual human capital asset and is not necessarily given out in salary and bonuses to the employee. However, too great a discrepancy between what is in the account and compensation can result in the employee leaving the organization to obtain more money. On the other hand, not all can be paid to the employee as the company assumes the risk cost associated with the training. The employee´s individual account is increased by the value training has added to his/her current human capital account.

Example: Employee X Human Capital Account

Current value $60,000

Increased post training performance $ 3,000

New value $63,000

In some cases, especially for new hires, the initial account value may be less than the base salary, but is paid out in anticipation of future increased performance capability.

In summary, this section has presented a model for calculating training ROI. As noted at the outset of the section, front-end analysis is required to determine whether or not a need for training exists. Tangible or intangible improvement, this model permits calculation of training ROI. While we may apply the model to intuitively selected training, the first three steps will not be relevant. The results will also remain questionable.

Human Capital

Human Capital, The Value of Training and Obstacles for Calculating Training ROI

All of the preceding appears to present a rather gloomy and pessimistic portrait of the value of training. This is definitely not the intent of this paper. An avowed purpose is to present a critical analysis of poor training selection and lack of systemic support of the training effort within organizations. We now alter our discourse and offer a more positive view of training, what it offers and how its benefits may be calculated.

A central concept to the calculation of ROI for training is that of human capital. At this point, it is useful to define two key terms and from these derive the important contribution training can make to organizational performance.

Capital: The common dictionary definition of this word is "any form of wealth employed for the production of more wealth". During the agricultural era, land represented the major unit of capital. By the time of the industrial revolution, money and physical plant or machinery emerged as the preeminent units of capital wealth. Now that we have entered the information era, knowledge has replaced physical assets as the most valuable capital asset (Crawford, 1991).

Human Capital: This leads to the theory of human capital which is based on the notion that education, by its very nature, transmits useful knowledge which increases the productivity of individuals and which in turn justifies increases in wages and salaries tied to greater worker productivity (Gravot, 1993, p. 2). This suggests that education and training, specifically targeted to meet an organization´s needs, can increase the value of its human capital. Both the organization and the individual employee benefit from the increased value.

More than "just a theory", economists such as Thomas W. Schultz (1981) and Gary S. Becker (1993) have won Nobel prizes for their demonstration of the impact and value of human capital at macro-economic levels. In 1995, the American Management Association conducted a national survey of major businesses and identified a very strong interaction between increased training budgets and decreases in personnel. They found that 68% of businesses which had increased their training budgets after a significant downsizing improved their profits. Only 42% of companies maintaining the same training budgets as before showed profit gains. The companies with larger training budgets saw their profits jump an average of 44% compared with the other companies whose profits went up 29% (Gordon, Lee, Picard, Stamps and Zemke, 1996).

Many economists and researchers have provided powerful evidence that the intellectual assets of a corporation are usually worth 3 to 5 times its physical assets (e.g. Lickert and Pyle, 1971; Stewart, 1994). All of this suggests that human beings represent immense wealth for organizations and that training, appropriately delivered, can lead to increased wealth.

The problem, however, is that virtually no companies, other than those owning sports teams, calculate the value of their human assets. Examination of any annual report not receive the careful attention it should. If managers perceived training as an investment illustrates that physical assets are clearly identified (e.g. buildings, machinery, inventory) while gifted engineers, marketers and managers appear nowhere on the balance sheet. Furthermore, training expenditures merely show up as costs that decrease company profits.

All of this creates a climate that explains why training does with strong potential to increase the value of a company´s capital assets, perhaps they would consider its selection, delivery, support and maintenance more carefully.

A second problem is the difficulty training managers experience in calculating the value of the training effort -- training ROI. Crane (1989, p. 47), in a doctoral study on quantitative measures and cost/benefit analysis in human resource departments, concluded that "training is measured subjectively rather than quantitatively. Few programs are measured in terms of results. The most common evaluation method used is participant feedback sheets. Training is seen as an expense...training results are usually presented in demographic rather than economic terms."

Lombardo (1989, p. 61) found that training managers strongly desire methods and models for calculating training ROI. They want to know "whether the training curriculum is based on genuine organizational need or simply a carry-over of past practices." However, they complain that they do not know how to find out.

Grove and Ostroff (1990) identified four major barriers that discourage verifying training ROI:

• Senior management does not ask for it.
• Training managers do not know how to do it.
• Training managers do not know what to measure and evaluate.
• The effort may be both costly and risky.

This is confirmed by Meignant (1991, p. 23) who also found training managers anxious about their inability to calculate "the famous return on investment of training". He goes on to deplore the situation asking "what, then is the contribution of training to the quality of performance. He concludes by stating that the existence of training courses has no worth; only the added value they provide counts. (p. 24)."

To summarize, people generally represent greater value for an organization than its physical assets. Education and training can increase this value. However, these must focus on organizational needs. Handy, Gordon, Gow and Randlesome (1990, pp. 60 - 67) make the following observation: "Many courses are nothing more than entertainment as opposed to carefully planned, strategically useful events...with very little follow-up." They add that " training in business and industry is more concerned with appearances than effectiveness...".

Training managers desire change and state that they want to demonstrate the added value of their efforts. How to do this in a reasonable manner remains a key question for them. What follows provides an answer in the form of a clearly defined procedural model for calculating not only training ROI, but also the increased value of human capital for both the organization and the individual.

Risk and Return

Risk and Return on Investment

Although there are a number of important benefits to investments in human resources, such investments contain an element of risk. Investing in human resources is inherently more risky than investing in physical capital because the employer does not own the resource. Employees are free to leave, although contractual arrangements may limit their mobility. In order for investments in human resources to be attractive, the returns must be great enough to overcome the risks. Further, for some investments, such as cash outlays to maintain no-layoff policies, the benefits are not easily quantified and there are meaningful costs. Decision makers have to be prepared to trade off current costs for long-term strategic benefits, such as a more flexible, committed workforce and related positive aspects of the organizational culture to which such policies contribute

"I need a training program on..." is a frequent reflexive mantra that issues forth when organizations experience significant change or seek improved performance.

"We have to adapt to new systems."

"Our sales must improve."

"Customer service is inadequate."

"We need greater productivity from our workers."

These statements and other similar ones often result in hasty decisions to train. Before long, curriculum committees form; training managers, instructional designers and subject-matter experts embroil themselves in discussions about media; instructors gear up for the delivery of a new training blitz.

It is all very exciting... and expensive. It is also vastly time and resource consuming. What makes it bearable, however, is the comforting thought that "we are doing the right thing for our people." We are investing in our most important asset. The activity and expense is contributing to the career development of our human resources. We are increasing our human capital assets. Best of all, we are building our organization´s competencies. We have certainly heard expressions such as: "The ability to learn more rapidly than our competition may be our only competitive advantage (de Geus of Shell Oil Company in Meignant, 1995, p.36).

Companies like Digital Equipment Corporation and Air Inter have invested as much as 19.5% of total salaries in training (Meignant, 1991, p.25). In the U. S., corporate training expenditures have risen from $50.6B in 1994 to $58.6B in 1996, an increase of over 21.5% in four years (Training, October, 1994 - October, 1997). With this type of enthusiasm, spending on training to produce improved human performance must be the right thing to do...or is it?

The purpose of this paper is twofold. First, it critically examines the role of training for improving the performance of people in ways that both they and their organizations value. It focuses on what the true worth of training is and can be for organizations. Secondly, it proposes a model for calculating return on investment (ROI) in training -- one which has been designed based on careful research and practical experience. In describing the (ROI) model, the paper presents a case study of its application within an operational context at a Bank (name withheld).

This text is divided into six major content sections: front-end analysis; wasted dollars on training; organizational factors that affect training ROI; human capital, the value of training and obstacles to calculating training ROI; a model for calculating ROI; a case study of the model´s application. A final section draws conclusions and offers recommendations for applying the model in other organizational contexts.

Management Values

Fundamental values must be addressed in many human resource issues, particularly those involved in major strategic initiatives. When senior managers formulate and implement
strategies, their values and philosophies are communicated to members of the organization through human resource policies and practices.7 For example, senior managers who are committed to the preservation of the organization’s human resources can manage the stress associated with major strategic events, through such measures as dealing with rumors and providing accurate information, so that misinformation does not have such a debilitating impact on employees.

How employees are treated following significant strategic events, such as a merger or acquisition, is a reflection of these values and communicates whether the organization views employees from an investment perspective. Those adopting an investment perspective seek to enhance the value of their human capital or, at the very least, prevent its depreciation.

Several factors will be considered in the discussion of strategic human resource investment decisions. As noted earlier, these will include management’s values, views of risk, the economic
rationale for investment in training, utility theory, and alternatives to human resou1rce investments. Investments in training are covered in this section because they are fundamental to the formation of human capital. Firms also invest in many other human resource practices with the expectation that there will be impacts on performance and financial returns