How Much Should Companies Spend on Talent Development?
An ounce of prevention is worth a pound of cure.
Pay now or pay more later.
A stitch in time saves nine.
Pick your proverb; they all convey the same idea: It is better to take steps to prevent a problem from happening in the first place, rather than trying to fix it after it has already occurred. Would you rather brush your teeth twice a day and floss once a day, or have a root canal?
This principle applies to investing in talent development as well. It’s easier and less expensive to invest in comprehensive and ongoing development, rather than trying to unwind a mess when it becomes a crisis.
So how much should you then spend on talent development? Let’s explore the factors.
What percentage of revenue should be invested in training?
The amount that companies spend on talent development varies, but as a general rule of thumb, businesses should aim to spend at least 1% of their revenue on talent development, according to Inc Magazine. The lower they are relative to that number, the more they increase their risk of falling behind their competition.
Of course, you must also take into account the relative growth rate of your company and industry. Are you doing more hiring? Is there more turnover? Is your company growing quickly? If so, you may need to increase that percentage, just as you would invest more in physical space or equipment needs in a growing company.
“If your company had just invested in a $10 million piece of equipment, you wouldn't think twice about spending $100,000 a year –– 1 percent of $10 million –– to maintain it,” writes business coach Jim Schleckser. “But for most companies, the most valuable asset you have is your people. Why wouldn't you make a similar investment in maintaining and growing them?”
What is the ROI of leadership development?
There are multiple ways to measure the ROI of training, including retention, productivity and innovation that pays back in dividends.
According to one recent study, running first-time managers through a leadership development program offered a 29% ROI in the first 3 months, and a 415% annualized ROI.
At a time when unemployment is very low or hiring is difficult, investing more in training development may produce even more return. When employees feel that their employer is investing in their development, they are more likely to stay with the company, as well as improve performance and productivity. It saves a lot more to invest in current employees than to begin more hiring and training cycles.
In terms of the bottom line, talent development can also help companies to innovate. When employees are given the opportunity to think creatively and solve problems, they are more likely to come up with new ideas that can help the company grow.
Where should companies invest in training development?
Finally, it’s important to ask where in the organization training is being deployed. Is it for everyone, or only reserved for a small group of top leadership or future leaders?
While 83% of organizations believe it's important to develop leaders at every level of the company, only 5% of businesses have implemented leadership development at all levels, according to research from Zippia.
But we are seeing trends of spreading the budget out more throughout the organization. In a 2021 survey, approximately 25 percent of total training investment went to leadership development, below the peak investment of 30 percent in 2017. The pandemic clearly affected these trends, as new methods of working necessitated shifts and adjustments for nearly everyone. This practice of identifying training needs throughout an organization – not just clustered in traditional leadership circles – can help lift the entire company’s performance.
There are many different types of talent development programs available, including formal training programs, informal mentoring programs, and on-the-job training. Choose the types of talent development programs that will be most effective for your employees.
Overall, wise investments in training will ultimately pay for itself. There is a cost for poor leadership and execution, with Gallup estimating that a lack of leadership capability costs U.S. corporations up to $550 billion annually.
Finally, to get an accurate view of your return on investment, it’s important to measure the results of your talent development program to see if it is effective. This will help you to make changes to your program as needed.
Investing in talent development is a wise investment for companies that want to be successful. By investing in talent development, companies can attract and retain top talent, improve employee performance and innovate –– and save a pound of cure.
At Living As A Leader, we support organizations who are looking for comprehensive leadership development: equip all leaders at all levels with common language, skill and approach to leadership of the workforce. Leaders—as well as their employees—express gratitude for the investment their employer is willing to make. Leaders who are developed feel more confident, and employees have a better experience. This leads to heightened productivity and fulfillment.
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At Living As A Leader, we offer a Leadership Development Series designed to produce leaders that can positively shape the cultural environment, reduce turnover and effectively support crucial business initiatives. We do this by providing training, coaching and consulting with a focus on pragmatic communication tools for leaders at all levels of your organization.
For more information, contact Aleta Norris at anorris@livingasaleader.com or find a 15-minute slot on her calendar HERE.