Many companies offer perks like gym memberships, education benefits, and free lunch based on the general belief that it makes people happier, healthier, and more productive. But do they actually have the data to support these claims?
Most companies don’t, and the reality is that the pandemic shift to hybrid work has exposed many once-fashionable start-up culture “perks” as the paper-thin benefits we always knew they were. Thanks, but I’ll take picking up my kids from school over a ping pong table any day.
Professional development, on the other hand, is not just another feel-good perk with limited long-term value.
Professional development offers real return on investment (ROI) – to both employees and companies. And an increasing number of organizations and analysts are generating the data to prove it. While this area of research is still very new – professional development (PD) stipends are only about a decade old – the initial results are very encouraging.
What goes into an ROI calculation?
First, let’s consider the variables that should go into a professional development ROI calculation. Remember, any ROI calculation involves taking a business result and then comparing that to the cost of the total investment required to produce it. In this case, the cost of the investment is going to be all of your spending on professional development, including software licenses, employee PD stipends, and any costs associated with learning and development (L&D) professionals and programming.
Therefore, in order to generate positive ROI, the net impact of the business result must be greater than what you paid to produce it. If it’s equal or less, then your investment is really an expense that may have value, but not in terms of generating positive ROI.
Here’s a very simplified equation that we can use to demonstrate this concept:
Net business result / cost of investment -1 x 100 = ROI %*
* ROI is generally expressed as a percentage, which is why we subtract the 1 and then multiply by 100
And here’s an example using real-world data from Guild Education, a career development provider. Guild found that their partners generated an average of $2.84 in savings for every $1 invested in career education and upskilling, or putting that into our equation:
($2.84 / 1) – 1 x 100 = 1.84 x 100 = 184% ROI
So what “business results” can we reasonably expect to be related to professional development? One business result that is often positively impacted by investments in PD is worker productivity. And productivity is not just about cranking out more widgets or lines of code. It’s about doing more things better, including delivering higher quality customer service, launching new products faster to market, and other key metrics of business success.
Another area that can tangibly benefit from investments in professional development is employee retention. The pandemic and the ensuing Great Resignation have made retention one of the top issues facing business leaders as they struggle with the huge costs of hiring and the productivity losses resulting from departing employees. On average, it costs $100K to replace a technology worker, or anywhere from 50-200% of a worker’s annual salary.
If either retention or productivity increases significantly, you can expect to generate positive ROI on your PD investment. And, of course, if both measures show positive gains, that means your ROI value will be even higher.
Going back to our simplified equation and incorporating these business results, let’s assume your company spends $100K on professional development costs each year. On average, that saves you $50K in hiring and attrition costs and generates an additional $75K in net income resulting from increased productivity. Then your ROI calculation would look something like this (notice that we’re using the timeframe of just one year to avoid complications related to the time-value of money and more tricky finance math).
($50K (retention savings) + $75K (productivity gains) / $100K (PD spending)) – 1) x 100
= $125K / $100K – 1 x 100
= 1.25-1 x 100
= .25 x 100
= 25% ROI
Of course, there are other factors that may be positively impacted by investments in professional development, including talent attraction, media coverage, etc. But for the sake of this article, we’re going to focus on the metrics that are simplest to track and which have existing data to support them in the literature.
So now let’s take a closer look at retention and productivity to understand what they are, how professional development can have an impact, and what the initial data suggests about the scale or ROI of that impact.
Employee retention: Why it’s such a problem
According to Deloitte, employee retention and engagement is the number two challenge facing business leaders today (after building global leadership). During the Great Resignation, attrition rates (the percentage of people leaving a company in a given year) rose from an already high 13% in 2020 to a record high 20% in 2021 at the height of the pandemic. And the wave of attrition is far from over. As recently as July 2022, McKinsey reported that as many as 40% of people in the workforce were unhappy and looking for new jobs.
The impacts of turnover are significant, costing anywhere from $1500 for an hourly employee, to more than $250K for a senior executive. By Gallup’s estimates, voluntary attrition costs US businesses an astonishing $1 trillion per year.
Why is the cost of turnover so high? Consider all the factors that go into replacing a worker:
(hiring + onboarding + development + unfilled time) X number of employees X annual turnover % = total cost of turnover (Source: Lattice)
It’s easy to see that these costs can add up very quickly. And this doesn’t even factor in any negative synergies resulting from multiple simultaneous departures.
Why employees leave
We now have a little better sense of the scope of the retention problem and why it keeps so many executives up at night. However, in order to figure out how to address it, we need to understand why employees leave their jobs in the first place.
Of course, some degree of attrition is normal as employees choose to change careers or pursue new opportunities, and there’s little companies can do about it. What we’re talking about here is attrition above a company’s desired rate, and upon which they can have a meaningful impact to change.
Lack of career advancement and PD opportunities are leading drivers of attrition
The evidence is clear that career development is one of the main reasons people leave companies to seek other opportunities. According to an ICONIQ Future of Work Report, the most common reasons employees cited for leaving jobs in the last two years were low job satisfaction (83%) and a lack of career advancement and professional development opportunities (78%). These factors ranked even higher than a desire for greater compensation.
In another study by LinkedIn, 24% of employees who were actively searching for a new job reported being overlooked for a promotion by their current employer as their primary reason for leaving. McKinsey also reported that 41% of employees cited a lack of opportunity for upward mobility as the main reason for leaving their job.
This emphasis on upskilling and professional development is especially strong among younger workers, with employees under 25 citing it as their number one driver of engagement, and workers up to 35 ranking it as their number two priority.
Speaking of engagement, it’s a massive problem.
According to Gallup, only 13% of all employees are highly engaged and 26% are actively disengaged. And according to Udemy, bored employees are more than twice as likely to leave a company. The leading drivers of boredom? A lack of opportunity to learn new skills (46%) and unchallenging work.
Finally, there’s one more important factor we need to consider in our analysis of why people leave companies: other people leaving. It’s no secret that high levels of attrition can create a negative feedback loop that makes the problem worse as morale drops, workloads increase in the short term, and departing employees tempt their friends to come join them at exciting new companies. For this reason, it’s critically important for executives to stem the tide of runaway attrition.
How professional development can improve retention
Professional development can improve retention by directly addressing many of the key factors that cause people to leave a company, including 1) a lack of learning opportunities (PD can provide nearly limitless learning possibilities 2) boredom / unchallenging work (PD can keep people engaged and help them learn new, advanced skills 3) and being overlooked for a promotion (PD can provide training and upskilling that will enable employees to demonstrate their readiness to advance to the next level and take on new responsibilities).
But do companies that invest in professional development and upskilling actually see these results? The answer is a resounding yes.
According to Deloitte, companies with a strong learning culture experience engagement and retention rates that are 30-50% higher than average. Deloitte also found that companies that overinvest in learning and development (L&D) relative to their peers rated among the highest in employee retention, innovation, and customer service, and even outperformed their peers threefold in long-term profitability.
And let’s take a minute to consider the outsized impact on cost savings and productivity that comes from increasing opportunities for internal promotion. Numerous reports have shown that the costs of hiring externally vs. internally are enormous. For example, Harvard Business Review found that it takes external candidates three years to perform as well as internal hires at the same job. Similarly, the University of Pennsylvania’s Wharton School reported that, while external hires were paid 18% higher on average than internal hires, they received lower scores on performance reviews and were 61% more likely to be fired than internal hires.
Luckily, engagement in professional development activities is positively correlated with rates of internal advancement. For example, a Guild Education study found that workers who participated in upskilling programs were 2X more likely to have a role change or promotion than the average employee. The data is strong that there are huge benefits to investing in and promoting your own people.
Beyond retention to increased productivity
If all companies did was boost retention and increase the rate of internal promotions, their investments in professional development would likely pay for themselves. But what about the people who aren’t planning to leave in a given year, and who may not be on track for an immediate promotion? Can professional development provide benefits to them (and their employers)?
Let’s consider the issue of skills gaps. With the current pace of technology and innovation, many workers’ skills will quickly become outdated. Without additional training, they will find themselves in a position where their skillset no longer aligns with the requirements of their job. This is disheartening, demotivating, and can be disastrous for their careers. In fact, a recent Gartner HR Research report found that fully 58% of workers will need new skill sets to do their jobs successfully. Professional development and upskilling can be utilized to address these gaps and help employees stay relevant, productive, motivated, and fulfilled, while giving them the confidence that comes with mastering new skills and learning to adapt to an ever-changing world.
And what about management? The sad reality is there are lots of bad managers out there. And it’s not entirely their fault! Most managers are top performers who get promoted into management with little to no training on how to lead a team. In fact, 59% of managers who oversee one to two employees and 41% of managers who oversee three to five people report having no management training at all. And this matters, because the impact of a great manager on team productivity is significant. Compared to disengaged teams, engaged teams with strong managers have 24-59% less turnover, 10% higher customer ratings, 21% greater profitability, and 17% higher productivity.
So how do you get better managers? By investing in proven, high-impact professional development activities like coaching. The companies with the most effective leaders spend 1.5-3X times more on management development activities than their peers. Additionally, a coaching culture is the practice that is most highly correlated with business performance, employee engagement, and overall retention.
So let’s put it all together: Increased performance and productivity are shown to result from a number of professional-development related factors, including (but not limited to): improved technical skills, improved management skills, higher confidence and engagement leading to greater adaptability and a faster pace of innovation. To demonstrate this even more compellingly with data, Deloitte found that organizations with a strong learning culture were 52% more productive, 92% more likely to develop novel products, and 17% more profitable than their peers.
What can professional development do for your business?
The evidence is clear that, far beyond being just another perk or feel-good benefit, investing in professional development and upskilling can generate real returns for your business. Of course, the scale of the impact for your business will depend upon a number of factors, including your industry, mix of job functions, and, most importantly, the rate of participation in your PD programs. To state it more bluntly: you can’t achieve the benefits of investing in professional development if your employees don’t take advantage of the opportunity.
In order to maximize the return on your PD investment, we recommend using an annual professional development investment (PDI) or stipend model. In this model, you offer workers an annual education stipend, usually ranging from $1,000 to $5,000.
This model provides employees with complete flexibility to use their funding on the professional development and upskilling program(s) that align with their needs and interests, whether that’s technical skills training, management development, one-on-one professional coaching, or another program (after receiving manager approval). It also incentivizes your team members to participate every year so that they can use-rather-than-lose their PD benefits, enabling them to build their skills and embrace the practice of lifelong learning.
As an employer, the PDI model also offers distinct advantages because you only pay when employees participate in meaningful learning, versus the traditional cost-per-user models that charge for access to a (generally) limited course platform, regardless of whether employees actually use it and get the benefits.
You’ll also want to set targets for participation and put a plan in place to drive engagement. And you’ll want to collect data about the types of PD and upskilling programs your workers choose and the results of those programs. This type of data can be captured through employee self-reports, manager assessments of progress, performance reviews, exit interviews, and through tools within the OneRange platform.
Ultimately, you are the expert on the factors that drive top performance in your business and the knowledge and skills required to succeed. We’d love to work with you to develop a plan to track ROI on your professional development investment. As we collaborate with a growing number of companies on their PD journeys, we’re excited to share our findings with the Learning & Development community and contribute to this growing area of important research.