What is your great Manager worth to you?
Measuring the return on investment on management training and development is a bit of a black hole. By definition, managers work through other people – not only their direct reports but also through collaborating with their management peers and senior management. Intermediate managers sit in a complex web of relationships, interactions and activities that impact multiple facets of the business across multiple time horizons.
So, how do you measure their effectiveness? Then, how do you measure their change in effectiveness that may come from an investment in L&D? Let’s explore a parallel abstract universe and see what dots we can join.
In the realms of strategy, we are often faced with unquantifiable ROI calculations. The world of strategy involves making decisions and investments today with a view that these will pay off positively in the future. However, the future is opaque and neither I, nor any of the executives I have worked with, have a crystal ball. Let’s look at a specific example.
We don’t have endless time and resources. We are busy growing our core business aggressively in Asia. This requires more investments in resources and infrastructure. At the same time, we have uncovered a new product opportunity in mainland Europe. This would require resources and infrastructure to develop out and take to market.
Option 1: continue to push growth in Asia – we have a track record and we have a good sense of what the return on investment would be
Option 2: This new product opportunity is fraught with unknowns. It could be really massive. Could. We know how roughly how long it will take to develop but have no idea how long market uptake will take. This ROI is very obscure and risky.
So, out of our $100 investment pool, how much do we invest in option 1 or option 2?
One way to look at Option 2 is to say: If we invest the whole $100 into this new product – what do we need to believe for this to be a better strategy than putting the $100 into Asia growth? This changes the question and associated analytical analysis quite considerably. Let say an answer could look like this:
Our new product would be a game changer in Europe and our German clients have been crying out for it. If we invest our $100 in this, and we sign up only five new clients in the first year, we would make $500. We don’t know how exactly how many new clients we could sign up in year 1 – it could be much more than that.
If we put the $100 into Asia, we would make $400 over 2 years.
So, do we believe we could convert 5 new German clients in one year? If the answer is yes, then that is the better strategy – without actually having to calculate an exact ROI!
So, back to Management L&D: how much should we be spending on management development exactly? And how do we measure ROI?
There are a couple of angles to consider:
Benchmarks
This is the first place I would look for input. Other people have applied their minds to this problem and have come up with their views. So what is the range of typical annual investments in management L&D?
Total investment in learning and development is commonly quoted as 1 – 5% of annual salary bill. If we pull this down to a per manager level, and assume a manager earns $150,000. That would give an annual investment of $1,500 - $7,500.
Now, depending on L&D strategy and leanness of the L&D team, 10% - 50% of could be spent on outside products and services. This yields a range of $150 - $3,700 per Manager per year. This aligns roughly with per learner figures of ~$1,000 – 1,600 in 2022 according to Training Magazines 2022 survey.
To contextualise this – let’s say you have a high performing manager and you are sending them on a leadership development program – you can expect to pay between $2,000 to $10,000 or more for a day, multi-day or multi-month program.
Subscribing to a learning platform like LinkedIn learning will tick a box and cost you roughly $350 per user per year.
So, while our benchmark range is wide, it isn’t crazy.
While we want to be fair and equitable, capitalism is also a meritocracy. And it is often in our business’ best interests to look after and nurture our top talent. High-performer programs and investing more heavily on a per-capita basis on manager levels and above is very typical. This gives us the ability to play in the range and meet our overall business objectives.
Global benchmark figures are helpful to consider for budgetary purposes and framing.
I recently had a discussion with a L&D Leader. They had just invest $60,000 on a new learning platform for their management team. This was a big number and they said it with gravity and pride. I enquired on the number of managers and they responded 400. So, that’s ~$150 per manager per year.
That seems pretty low, in my opinion. While the global number seems large – its proportion of annual salary budget would be tiny. (~0.1% to be exact). At this level, I would be tempted to walk into the CEOs office and say we have a material risk – we are grossly under-investing in management training relative to industry!
If my manager calculated that I was investing only $150 a year in their development, I’d be pretty embarrassed. If they found out I was investing a tenth of what other companies are investing, they would probably start talking to other companies.
Market related benchmarks are an important input.
What do you need to believe?
Back to our million dollar question. And it begs a couple more:
Why are we investing in Management Development? What do we wish to achieve? What do we wish to avoid?
Obviously we want effective managers, increases in revenue, lower costs, more profit, happier staff, etc etc. All of these are not direct measures of manager or management development impact.
Okay. So, what don’t we want?
We don’t want our top managers to leave prematurely. They will leave eventually but we want them to stay as long as possible. So, if we get a good manager to stay for an extra year, we save a year of time value of money in the replacement costs.
The estimates of the cost of losing and replacing a manager are in the region of a half to two times the annual salary of the employee (recruiting, onboarding, ramp up, loss of productivity, etc). For our annual manager salary of $150,000, that yields a cost of $75,000 to $300,000 depending on level, responsibilities, etc.
Now, if we can delay having to pay these costs for a year, we would save 5 – 10% of these costs (depending on country and ruling interest rates). Note: Cost of capital is much higher than this – this is a conservative estimate. This yields a range of $3,750 and $30,000!
You would save $3,000 to $30,000 by hanging onto a good manager for just one more year.
So, if I believe that a good management development program will help me hang onto a good manager for just one extra year, I should be happy to spend $3,750 – 30,000 to make that happen – just to avoid the time value cost of replacing them. Just to break even.
This excludes all other benefits like happier and more stable team, revenue and cost impacts, strategy impact, lack of disruption and distraction in other managers, etc etc.
When we consider benchmarks and look at the bigger, medium-term picture:
On average, benchmarks for direct investments in development are $150 - $3,750 per employee. Per general employee.
Our managers should be on the higher end of this spectrum as they have more responsibility and impact on the business, earn more (higher multiple outcome) and management training is more specialised and expensive than general training
Being aware of benchmarks in a talent competitive market is important to protect your recruiting brand and talent
The cost of losing and replacing a manager is significant. While we cant eliminate it indefinitely – we can delay this through investing in the growth and development of the manager. We can also use “lock in” mechanisms (where legal) to tie the manager in for up to 2 years post training, typically.
What do we need to believe? If we can delay the loss of a manager for a year, we save between $3,750 and $30,000 in replacement cost time value of money. I should be happy to spend up to this in order to hang onto a good manager for another year and break even.
Lastly – promoting from within is priceless where appropriate. It sends a tremendous signal of growth and opportunity to all staff members. You avoid the costs of recruiting a senior resource. And, you eliminate the unknown risks of onboarding and having to deal with a potential liability.
Now, I hear what you’re thinking – if I spend $30,000 on 400 managers – that’s $12m!
We obviously aren’t spending $30k on everyone. This how I do it:
The average time-to-itch for a good manager is 3 - 4 years. They are on top of their role and are starting to think about what’s next a bot more tactically. So, if I have 400 managers, I can assume I have around 100 managers in this window.
Of these 100 managers, there are some that simply wont progress. This will discourage them. They will get destructive. They should move on. Assume bottom 20%.
Of the 80 remaining managers, there is a bell curve. Some I will spend a bit more money on developing to keep. And a handful – the top 10 – 20%, I will spend significant money on to keep. So, I look at performance reviews as a commonly accepted measure of performance. I identify my top 20 Managers and I offer them a change to APPLY for a leadership accelerator program.
Now, this program isn’t cheap. We are making a significant investment here. If you want in, and you apply, and you get accepted – we are talking $5,000. In order for us to make this investment in these top performers, we need to know that they are going to take this training and apply it to growing our business.
So, if accepted, we agree to sign a lock in agreement for 2 years. If the employee leaves their role within two years of finishing the training, they have to pay back the cost of the training in proportion to the time remaining in their lock in period.
This is practical, aligns with business strategy and at $5,000 per participant equals a $50 – 100k investment. This is half the cost to company of just one good manager, and is in line with benchmarks.
So, thinking about your managers and business, what do you need to believe to tactically invest in keeping your top talent…?