On The Job Training – Cost Analysis

Written by: Kyle Kaan

Overview:

“It is very important to evaluate the benefits of the training and be able to put that in terms of numbers. Training comes at a cost and therefore any organization would be interested in knowing the return on investment (ROI).” (Cost Benefit Analysis for Training)

Relevance:

Cost analysis of on the job training is crucial for upper management in order to make the best decisions for the organization. If the training program does not provide sufficient financial benefit to the organization it will be management’s responsibility to decide whether or not to continue with the training. However, in almost all cases, HR training programs provide a positive return on investment and are a critical investment to improve the operations of the organization.

Key Points:

Training employees is not cheap, so organizations should be interested in knowing the return on investment. The return on investment formula is as follows: Return on Investment (in percent) = Program benefits/Costs x 100. This formula demonstrates how successful the training program is in terms of how much capital was spent on the training and how the performance of the employees increased after the training was complete.

The costs associated with the return on investment formula are relatively easy to calculate in comparison with the program benefits. The basic training costs can usually be broken down into two broad categories: course development and training execution (this is easy to calculate when using an external company because they will give a set amount for any given program). The in house training costs can be broken down into smaller categories: designing structure based on learning objectives, designing training materials, preparing pre course material, preparing course hand outs, preparing evaluation tools, travelling expenses, and refreshments for the trainee’s.

There are other costs associated with human capital in regards to the trainers. The organization must consider the hours that the mentor will not be able to carry out their normal duties. The trainer will not have time to carry out their regular tasks within the organization, so someone else within the organization will have to complete the trainer’s assigned tasks during their absence. Or the mentor will have to work overtime, which costs the company more, and the overtime costs should be recorded in association with the training costs. There will also be costs in regards to the trainee’s time and the administration and management costs.

The program benefits are more difficult to calculate. “The HRD staff should collect both hard data (representing output, quality, cost, and time) and soft data (including work habits, work climate, and attitudes)” (Shaw). The benefits can be measured using various metrics: follow-up questionnaires, program assignments, action plans, performance contracts, and performance monitoring. All of these metrics require a collection of data before and after the training is complete. “The important challenge in this step is to select the data collection method or methods that are appropriate for both the setting and the specific program” (Shaw).

Theory:

As per the textbook “A widely used financial measure that can be applied to measure the contribution and cost of HR activities is return on investment, which is a calculation showing the value of investments in human resources. Return on investment is stressed because it is used in most other functions in an organization and is the language used by financial staff and top management.” (Mathis - HRM textbook p.65)

Take Away Points:

All activities performed within the organization have costs associated with them. The role of management is to determine whether or not these activities are worthwhile. Return on investment and other various cost analysis metrics are necessary for every aspect of business, including HR training programs. It is essential to determine whether the job training is going to be a financial benefit to the organization and will help the company grow financially. The return on investment analysis will also determine if it is more beneficial to outsource the HR training programs or keep them in house.

Works Cited:

"Cost Benefit Analysis for Training." Managementstudyguide.com. N.p., n.d. Web. 31 Mar. 2013. <http://www.managementstudyguide.com/cost-benefit-analysis-for-training.htm>.

Cotterill, Rob. "Best Practice Guidance on Training for Small and Medium Sized Enterprises." Epsc.org. N.p., May 2004. Web. 31 Mar. 2013. <http://www.epsc.org/data/files/PRISM/Training%20Guidance%20Rev%201.pdf>.

Shaw, Jack. "Evaluating Training and Results (ROI of Training)." Evaluating Training and Results (ROI of Training). Carter McNamara, MBA, PhD, Authenticity Consulting, LLC., n.d. Web. 31 Mar. 2013. <http://managementhelp.org/training/systematic/ROI-evaluating-training.htm>.

Mathis, Robert L., and John Harold. Jackson. Human Resource Management. 13th ed. Mason, OH: Thomson/South-western, 2011. Print.

Education, OJT, and Internships

By: Katie Bales

TWO PARTS: EDUCATION, THEN OJT

Let’s say an individual just got a job at a huge company. It’s a dream job. This individual worked hard to receive the position and is ready to start the following day. Yet, necessary schooling and past experience will not always prepare a person for their future job. Can you remember what you learned from High School in relation to your current position? How about college? How much of it can you remember in clear detail? That’s the problem. A person can spend years of their life going to college, getting their degree, and still not be prepared for a particular position. Technically, training for most high-leveled jobs has two parts. The first part is an education; it is a “prerequisite, a basis on which to build further, more specialized training.” (Mincer, 1962). The fact of the matter is, it’s going to be necessary that you experience most jobs first hand.  Even if it’s a minimum wage job at a restaurant, degree or not, you’ll need some practice before you start waiting on tables (if you want to make good tips…). It takes time to get used to the tasks you’re given. 

Education is a major factor in many careers. High paying jobs usually require a related degree to the position. In some cases, new employees may be ready to start their new job without training. However, on-the-job training can have a positive impact on productivity, even for over-educated employees. In a Current Population survey, “respondents were asked whether they needed specific skills or training to complete their current jobs and whether or not they took training to improve their skills in their current jobs” (Job-related, 1994). After analyzing the survey, it was found that “two-thirds of respondents indicated that specific…training [was] needed to obtain their current job…” (Job-related, 1994). As noted before, almost every job is going to require some sort of training and for different lengths of time. Moreover, the survey also suggested that the “group also had higher earnings than those at the same education level who said they did not need specific…training to get their jobs” (Job-related, 1994). Regardless of how much education an individual has on their resume, it is vital for a company to implement some sort of on the job training experience. The survey proves that individuals with the same education level showed that with on the job training, they were receiving higher wages (Job-related, 1994). These wages could be the result of promotions, raises due to high productivity, and bonuses. These findings show the importance of a prior education and new employees receiving on the job training.  

COMBINING EDUCATION AND OJT

In the last two paragraphs, I’ve mentioned the two parts that correspond with a new position. The first part is the previous education and the second part is the on the job training for the new position. Instead of separating the two parts, it may be in a company’s best interest to connect them; an education that includes on the job training. This connection usually brings forth a requirement of an internship with a degree. Many Universities require internships in relation to a student’s major for that student to receive a degree. Although, regardless of the requirement, students may find that pursuing an internship of some sort will be beneficial to them as they get to experience the job first-hand. By doing so, a student can further recognize if a job is the right fit for their future. 

The Association of American Colleges and Universities created a survey report in 2010 that found “73 percent of employers stated the desire for higher education to put more emphasis on ‘the ability to apply knowledge and skills to real-world settings through internships and other hands-on experiences”’ (Westerberg & Wickersham, 2011). Internships are not always paid, but the on the job training experience an individual receives can outweigh the cost of their internship. Moreover, companies offering internships to undergraduates may be saving money in the long run. Companies may offer internships “as cheap labor, or as a way to recruit new talent, [but] they are aware of the considerable costs involved in training and supervising interns” (Westerberg & Wickersham, 2011). Internships for the reason of cheap labor may create a loss for the company, but recruiting new talent in the process can save the company money. The time and money spent on the individual’s internship could be compared to the time and money spent on hiring a new employee and having to train them for the same job. When managed properly, internships can be cheaper for the company (especially if unpaid), than hiring a new employee with no past experience. 

ABSTRACT

Overall, on the job training is always a beneficial choice, whether the training occurs after an education or during. Companies may find it more efficient to create internships and recruit their employees from the process. Furthermore, almost every job requires some kind of OJT, and if it doesn’t, employees may find it in their best interest to involve themselves in OJT in some way. Like I mentioned before, if you’re a waitress, you might want to get an experienced waitress to tend the floor with you in the beginning, otherwise, you might not receive good tips.

WORK CITED

Job-related education and training. (1994). Family Economics Review, 7, 3. Retrieved from http://search.proquest.com/docview/219313184?accountid=12924

Mincer, J. (1962). On-the-job training: costs, returns, and some implications. Journal of Political Economy, 70, 5. Retrieved from http://www.jstor.org/stable/1829104

Westerberg C., Wickersham C. (2011). Internships have value, whether or not students are paid. The Chronicle of Higher Education. Retrieved from http://chronicle.com/article/Internships-Have-Value/127231/

 

Wages and On-the-Job Training

By Mary Van Pamel

Overview

Every organization has different goals, ideas, and methods they wish to implement in order to have their business run smoothly. On-the-job training (OJT) is one method organizations depend on to correctly train their employee’s and make sure their employees are fit for the position. Instead of speaking to a new employee about what their job requirements are, managers or supervisors train the employee as they are working the actual job. This is what OJT is meant to do. Although many organizations view OJT differently, two common predictions remain. One prediction is that “on-the-job training should increase wage growth, and second, on-the-job training should lower the starting wage” (Barron, Berger, & Black, 1999).

Relevance

On-the-job training is important for employers, as well as new employees, because an employee will be more productive if he or she is trained properly. In regards to general training and wages, Barron et al. (1999) believes “the worker pays the full training costs by accepting a lower starting wage and receives higher future wages in return.” However, if the OJT is specific to one firm, Barron et al. (1999) believes that “the worker and the firm share the costs and the returns to training.” There have been ideas accusations that OJT and wage growth are positively correlated, however, it is unclear to make such accusations since it truly depends on the commitment of the trainee to OJT and succeeding in the organization. Many situations exist whereby OJT and wages differ because of age, education, and gender.

Equation Analysis

To test the theory that individuals who complete OJT become more productive, which in turn allows their wages to become higher than the individuals who do not complete OJT, Maranto and Rodgers (1984) created a standard human capital model. The two modifications to this model are: (1) “The dependent variable for the anal-ysis of primary interest is a measure of productivity rather than wages,” although the wages are analyzed “in order to compare the effect of tenure on productivity with its effect on earnings” (Maranto & Rodgers, 1984). (2) “The estimating equations pool cross-sectional and time-series data” (Maranto & Rodgers, 1984). The equation from Maranto and Rodgers (1984) is as follows:

Recovery = B0 + B1*EDUC + B2*PREV EXP + B3*PREV EXP² + B4*TENURE + B5* TENURE² + B6*X + e

Where “RECOVERY = wages recovered/wages owed X 100; EDUC = years of schooling completed; PREV EXP = potential years of work experience prior to employment with the Wage-Hour Division, computed as (AGE – EDUC – TENURE – 6); PREV EXP² = potential previous years of work experience squared; TENURE = years of experience with the Wage-Hour Division, calculated as the difference between the date the wage claim was closed and the date of hire by the division; TENURE² years of experience with the Division squared; and X is a vector of control variables” (Maranto & Rodgers, 1984). A very important aspect to OJT is the effect of company tenure on wages and overall productivity (Becker & Hills, 1980). Studies can review at the tenure of an individual employee and realize that the higher the tenure of an employee is, the higher their wages and productivity levels will most likely be. Lifetime wage differences are often overlooked due to the fact that many individuals fail to consider the high wages associated with the years after OJT (Becker & Hills, 1980).

Class Comparison

The entire idea that OJT is a direct correlation to higher wages relates back to the many theories discussed in class. The recruiting process of a potential employer requires the Human Resources (HR) Department to generate a large applicant pool for openings in an organization. After the recruiting process is finished, the selection process begins. Selecting employees requires the HR department to choose qualified individuals to fill the job openings in the organization. Once these individuals are carefully selected, some organizations require OJT to correctly train their employees. OJT only works best if it is well-planned, well-executed, and if the supervisor or manager running the training is able to teach and show the employees exactly what to do (Jackson & Mathis, 2011). Once employees begin OJT, they can reassure themselves they are in the correct person-job fit by assessing that their knowledge, skills, and abilities match the characteristics of the job they were specifically hired for (Jackson & Mathis, 2011). Once employees realize they are in the right position through OJT, they can work to their fullest potential which will overall increase their wage.

Take-Away Points

After reviewing the research, individuals should be able to judge how different factors affect the overall wage of employees who utilize OJT at their organizations. The education, experience, and tenure of an individual all affect the overall wages an employee ultimately receives. If an individual receives OJT, it is more likely that their wages will be higher than a coworker in the same position who did not have the advantage of OJT. Individuals can use this information in the workforce now, as well as in their future careers, by realizing that what you put in to OJT will determine their overall outcome at their organization. Although many factors influence their wages, it is the time, effort, and motivation that an employee is willing to put in to receive a positive outcome. Hard work truly pays off!

References

Barron, J.M., Berger, M.C., & Black, D. A. (1999). Do workers pay for on-the-job training? The Journal of Human Resources, 34(2), 235-252. Retrieved from http://www.jstor.org/stable/146344

Becker, B.E., Hills, S.M. (1980). Teenage unemployment: some evidence of the long-run effects on wages. The Journal of Human Resources, 15(3), 354-372. Retrieved from http://www.jstor.org/stable/145288

Jackson, J.H., Mathis, R.L., (2011). Human resource management (13^th ed.). Mason, OH: South-Western Cengage Learning.

Maranto, C.L., Rodgers, R.C. (1984). Does work experience increase productivity? a test of the on-the-job training hypothesis. The Journal of Human Resources, 19(3), 341-357. Retrieved from http://www.jstor.org/stable/145877