Human Capital Investment
By Michael E. Echols, Ph.D.
Vice President of Strategic Initiatives
Bellevue University
Virtually every major U.S. corporation has tuition reimbursement as a part of its benefit package. The question for your HR operation is, why do you provide the benefit, and what is it doing for your company?
One of the best ways to think about the issues is to pretend that you do not know what your company's tuition reimbursement policy is and approach the questions as though you are forming the policy for your company for the first time. This makes the question to address: "What should the level of the tuition reimbursement benefit be?"
One avenue often preferred by HR professionals in policy considerations is to seek out best practices. Along those lines, the data in the March 2005 issue of Training magazine has as its lead article, "The 2005 Training Top 100," and the cover even headlines "Best Practices." The feature article contains numbers on the tuition reimbursement policies of the Top 100 training companies with 83 percent of those 100 companies providing detailed data on their annual tuition reimbursement benefit.
Out of the Training magazine Top 100, 15 percent of the total has "no maximum" on annual tuition reimbursement. One company even awards $10,000 worth of stock for completion of an accredited degree. At the other extreme, one company grants no tuition reimbursement. Of the 61 companies reporting specific annual amounts, the average annual cap is $4,976.89.
So, some of the considerations for setting a new policy based upon best practices might be:
1. Grant no tuition reimbursement and thus minimize costs.
Implications: While your finance manager would love you, it is unlikely your CEO would be pleased at the message that his/her company has, by implication, no interest in reinvesting in its people.
2. Grant no maximum to the benefit.
Implications: The Chief Financial Officer (CFO) will hate you because of the potential for widely varying charges to this quarter's reported earnings is very real. The CEO would likely not appreciate it either, though 15 percent of the Top 100 HR departments have successfully convinced their CEO, no doubt over the objections of the CFO, that there should be no cap.
3. Award the average of the Top 100 or about $5,000 a year.
Implications: Your company would be able to represent your benefit as equal to the average of the Top 100 organizations, thus positioning it favorably when recruiting new employees. Competitive positioning in recruiting is an often-cited rationale for particular benefit offerings, and tuition reimbursement is no exception.
Indeed, the benefit range which is most highly represented in the data is between $5,000 and $5,250 per year, with a total of almost 35 percent of the Training magazine Top 100 companies reporting falling in that narrow range. One might ask, "Why this range?" The answer is that above $5,250 per year, an educational benefit to an employee becomes a taxable event for that employee under the existing U.S. Internal Revenue Service (IRS) tax code. The conclusion is that IRS policy is one of the primary considerations in the setting of corporate tuition reimbursement policy--hardly a heartening prospect in the face of the mantra that people are the company's most important asset.
The point of this data examination exercise is that what other companies are doing is of little real help when setting tuition reimbursement policy for your company. What would be valuable is to set that policy based a human capital investment approach linked to the ROI on such an investment. If you are able to do this, the CFO will convert their relationship with HR from adversary to ally.
The parameters that have the potential to accomplish this role reversal with regard to tuition reimbursement within your organization are:
- The total cost of the investment portion of the ROI calculation required to secure a given human asset outcome. In the case where an employee is securing a bachelor's degree, the investment (I) measurement is the total cost to earn the degree from a given accredited educational provider.
- The value of the outcome or return in the ROI calculation must be objectively measurable. For most organizations this is very difficult. Again using the bachelor degree as the investment outcome, the U.S. Census Bureau measures the average salary of a bachelor's degree holder in the U.S. economy.
- The company's retention rate or one minus the company's turnover rate is a key parameter defining multi-period return to the company. There is extensive evidence that education benefits actually improve company retention. Measuring the level and change in the retention rate is important in the ROI calculation.
- Lastly, you need to measure the incremental salary increase your company gives when an employee is awarded a bachelor's degree. This measurement is the additional annual salary increase given above that awarded to employees who do not receive their bachelor in the analysis period. This data is available through the analysis of your company payroll records.
Integration of these key parameters in a quantitative ROI model is presented in the author's forthcoming book: ROI on Human Capital Investment.
In summary, setting the company policy on tuition reimbursement in the absence of any reference to past company policy is a significant HR challenge. Unfortunately, examination of industry best practices provides only limited insights for the evaluation of policy alternatives. The balance of the policy conclusions requires the capture and evaluation of data unique to your individual company and then the integration and analysis of that data into a rigorous ROI financial model.
Dr. Echols is speaking at the upcoming 2005 Linkage HR Leaders Summit on September 18-21, 2005. His presentation, "Assessing the Financial Impact of Learning & Development Programs," will cover: how the vital statistics of the current labor market indicate trends how market value of firms is integrally linked to a company's investment in training and education; how to prepare your organization to address the shifting labor market through the implementation of targeted training & development programs; and how to demonstrate the link between performance and training to senior management within your organization to gain their buy-in for training & development initiatives.
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