The Way to a CEO’s Heart is Through Her Stock Options

L&D has been fighting for years decades to get the attention of the CEO. We have played the “it’s the right thing to do,” card. We have fought through convoluted ROI calculations. We are all adults here so let’s get honest. We know what will get the attention of our CEO. Money.

“Don’t hate the player. Hate the game”

L&D has been fighting for years decades to get the attention of the CEO. We have played the “it’s the right thing to do,” card. We have fought through convoluted ROI calculations. We are all adults here so let’s get honest. We know what will get the attention of our CEO. Money.

This is not a condemnation of CEOs. In fact, I don’t blame them. Like economists who give up the myth of the “perfectly rational actors” in systems, acceptance of reality can make us much more effective. The idealist in me would certainly prefer to support a CEO who is a true believer in the power of learning. One motivated by the strategic advantage available to companies that invest wisely in their people. But lacking that, a bigger budget and the power to put the best (team, solutions, tools) to work is a close second.

“I got my mind on my money and my money on my mind”

-Snoop Dogg

So where does your CEO get her money? The typical CEO compensation package has a significant stock or options component. This pay usually dwarfs the cash portion. With our understanding of how incentives drive performance, we can not be surprised. We can, however, be clearer on how learning aligns with those incentives. Here is the logic as I see it.

What makes a CEOs stock or stock option plan worth more? A positive movement for the company stock in the market.

What makes her company stock go up in the market? Demand for the stock.

What makes demand go up? New money or reallocated money seeking what the company stock offers.

What creates new money or reallocations? Business performance, investor values, events or “shocks” and regulatory and structural changes.

The Value of Shared Values

L&D Leaders should understand all of these dynamics on the company. This post will focus on the investor value driver. Investors’ values change. So does the demand for specific stocks. Look at all the different flavors of funds available. No matter what your investment objectives or personal beliefs there is a fund for you. The more people that share your objectives or beliefs the more money flows into those stocks and funds.

ESG funds, which fall under the larger sustainability or stakeholder umbrella, values a variety of non-financial measures such as social impact, environmental footprint and a company’s human capital strategy.

Alex Bryan, Morningstar’s director of passive strategies research for North America, told CNBC, “There’s a great realization today that ESG issues are investment issues. They’re issues that can affect the bottom line, and that may not always be something that comes to bear immediately. But it’s something that I think more people are starting to understand is aligned with shareholder value maximization,”

As the demand for stocks that share these values increases so does the stock price. And the demand is rising fast. Combined inflows (new money and reallocated money) into both active and passive ESG-focused funds reached $71.1 billion during the second quarter alone.

The recent change at the SEC regarding the reporting of human capital practices are another indicator of this trend.  Diversity & Inclusion receive the lion’s share of the media’s current attention but a rising tide lifts all boats. Research from Europe has already shown that the simple act of reporting human capital practices leads to increased investment by companies in these areas.

L&D shares the values of this new investment wave. Not only for self-serving reasons, but also because they have always been our values. Values we try and live out everyday in our roles as learning professionals. Now these same long-held values move our company’s stock price. Think that will get your CEO’s attention?

Goofus Data

Goofus image

When I was a kid, one of the only exciting things about going to the dentist was the chance to catch up on my Highlights magazine reading.  The childrens’ magazine is famous for a monthly feature titled “Goofus and Gallant” which showed the behaviors of good children versus those of not-so-good kids.

I was reminded of these cartoons as I sat, frustrated once again, listening to the media and politicians discuss Covid data. If you wanted to put together some real life Goofus examples for dealing with data you don’t have to look any further than the local or network news. From “garbage in, garbage out” to mistaking the data as the end and not an input to a deeper insight, Goofus seems to be hard at work daily.

Don’t have unclear/inconsistent reporting standards.

What is the definition of a Covid death? When do numbers get reported (even on Sunday?)

Don’t focus on the wrong data.  

Infection count is only useful or important in the context of audience size or tests conducted.

Don’t look at daily data if the system operates on a different time scale.

We know there is a lag between action and impact with Covid.  Would a rolling 14 day average be more useful for planning and trend analysis?

Don’t lose the message in averages.

Pull out a few early states, or remove the elephant that is New York and watch how the chart of the country’s battle changes.

Don’t use the wrong units.

Percentages can be a marketers friend (100% growth of a small number sounds better than the actual number) but sometimes it is also the best way to understand the data. Percentage (%) of beds in use versus number (#) of hospitalizations is more readily understandable when ICU beds are a key capacity constraint.

Those are just some of my daily irritants.  And don’t get me started on false positive % or how an exponential function works (just watch this old shampoo commercial.) https://youtu.be/mcskckuosxQ

Do you work with data?  What would you add?

The Tail Will Wag the Dog

David Vance recently did a webinar regarding the pending legislation requiring the reporting of human capital metrics for public companies. I cannot state strongly enough the potential implications of this move. A move which I feel equally strongly is being largely ignored by my L&D colleagues. I do not have a crystal ball but simply applying the dynamics of other publicly reported numbers may help to clarify.

Publicly Reported Numbers Get C-Suite Attention

L&D has long asked for it but is it ready for it’s close up? While L&D’s current data reporting may make the industry feel good but will it stand up to the scrutiny given to financial data reporting. As a CLO can you sit with your CFO and defend the numbers, the methodology of collection and the actions taken as a result of them. Financial numbers (margins, expense, key ratios) are never good enough and always include the plan for improvement.

Transparency

Having the numbers out there without context is going to create some interesting dynamics. The L&D metrics for a company are highly contextual. This is something that I have long argued as a mitigating force to the use of benchmarks. Most companies are a cohort of one. The growth goals, competitive environment, geographic challenges and legacy paradigms are just a few a few of the things that can make a company’s metrics right for them and them alone. Without this context L&D may face pressure from new external and ill-informed senior internal sources.

Teaching the Test

If the metrics are what becomes the face of L&D the natural response is to game them. This is no different than sales organizations that pull sales forward to make a quarter look better or an operations department that delays a purchase to manage costs. When what gets delivered is in pursuit of two masters (performance and metrics) and one is highly visible, which one do you think wins.

Short-term Thinking

There are many who decry the behavior of public companies driven by a quarter-by-quarter mentality. We know that performance development occurs over time. How will our approaches to leadership, diversity, and upskilling change when they are held to the 90 day window of reporting. This is not to mention the fact that if the metrics are wrong. We all know that vanity metrics are a constant, although comforting, threat to true performance development.

What do you think will happen when L&D goes from opt-in self-reported numbers to a friendly industry organization to a federal requirement? Is your organization ready?

When is it not Capital? When it’s Human.

Every annual report talks about people being the company’s most important asset.. Except it isn’t.  A quick glance at the balance sheet reveals no line item for people.  The facilities are there.  The equipment is there. But nowhere do the people show up as an asset. 

Over the last few months I have been doing a bit of research into the historic effects of automation on the workforce.  Think elevator operators and bank tellers.  More on that at a later date. [spoiler alert: the robots are indeed coming for some of our jobs but that is a good thing] One thing that came from my research is that companies are incented to automate on multiple fronts.  It is on one of these fronts, accounting, that we may have a lever to incentivize upskilling.

A quick primer.  When companies buy a robot, or any piece of equipment, they pay for it but rather than have it simply take cash out of their account it does something else.  If they robot is estimated have a working life of 10 years the company places that “asset” on its balance sheet, reducing its value for every year of service.  This asset sits opposite the debt the company has, allowing it to borrow more. If I replace a human making $50K with a robot that costs $250K but is expected to last 10 years after the first year I have an asset worth $225K on my balance sheet (the cost spread over the lifespan less the first year).  If I spend $5K  to upskill the employee to perform at a higher level, equivalent to the robot, I have nothing but an expense that hits my bottom line.

Large publicly traded companies are evaluated quarterly by Wall Street.  The results reported often drive a short-term mindset but it also keeps key metrics front and center for these companies.  In addition to the asset to debt ratio, one of these measures is revenue per employee. This simple metric, top line revenue divided by the number of employees offers a clear way to see the benefit of automation. If a company can simply hold its revenue steady while reducing its headcount it looks better on paper than a company that might grow revenue modestly with the same, but upskilled, workforce.

So what if a company’s investment in  people could be truly treated as an asset.  Invest $1k in an employee and your average tenure for that role is 3 years. Why isn’t that a capital investment to be added to the balance sheet ($666). The switch is a case of accounting policy but what is more interesting to me is what the change in behaviors of companies might be.  If employee upskilling was treated as a true capital investment would L&D see more money, stricter reporting standards and a more respected seat at the table.?      

Some L&D Math and Some Questions

Disclaimer: I am a lover of data.

I had some time play with some of the data in ATD’s State of the Industry Report and it raised some questions for me. In order to better understand the ATD data, I looked at the “implied” results that are not included in the report. Because ATD includes data such as percentage of revenue and percentage of profit I can simply reverse the calculation to see what the trends are for both revenue and profit per employee. Since these are the ultimate measures of the success of learning, the trends in these should be trending positive or at least correlated to the investment in learning being made by organizations.

impact2

The first thing that stood out was the delta between the implied revenue per employee (RPE), a common public market metric, and the profit per employee in the ATD report and the S&P 500 average. According to Yardeni, an economic advisory, the 2016 Average RPE for S&P 500 ranged from $321,000 and $1.7 million depending on industry with a profit margin of approximately 10%. The revenue discrepancy for Consolidated cohort is understandable given the smaller size for many of the reporting companies for the ATD data. The comparison to the BEST cohort is closer but still under the S&P averages.

The comparison to profit per employee was similarly off.

craft

I then looked for a correlation between learning and an impact on revenue and/or profit in two ways. First, I looked to see how the numbers compared year over year. I then looked for a correlation between learning and an impact on revenue and/or profit in two ways.

First, I looked to see how the numbers compared year over year. This view showed that the increased percentage of investment in learning, touted as a positive reflection on businesses opinion of learning in the ATD report might be misplaced. The ATD report states “Confirming organizations’ commitment to learning, this indicator [% of profit] grew from 8.3 percent in 2015 to 8.4 percent in 2016; the ratio has climbed steadily for four years in a row.”

impact1

While ATD seems to draw a positive connection, in fact this may simply be a case of reported profit and revenue dropping, things that businesses care about. There appears to be no correlation. The resulting chart shows years where learning hours rose and the implied profit or revenue dropped. If there is a return to be captured from learning, the ATD numbers don’t seem to reflect it. I did a similar look lagging the revenue and profit a year, to let the impact of the learning spend sink in. Still nothing that showed a correlation much less a causation.

As I stated in the post on benchmarks, be careful.