Talent Development Budget: How Much Should You Be Spending?

by Feb 18, 2020Talent

The 1 percent solution.

In his bestselling book, The Advantage, Patrick Lencioni stresses that the only real competitive advantage any organization has is its ability to learn. And the faster your organization learns, the bigger and faster your competitive advantage will become. His point is not that the big eat the little as we’ve always been taught, but it’s that the fast eat the slow. This idea could not be truer as the pace of acceleration increases.

I wrote about this in a recent article where I shared some tips on how every organization can screen for potential learners in the hiring process. The point is that the reasons a company’s growth stalls out are rarely for lack of opportunity–it’s a result of not having the people who can grow their capabilities, whether they’re technical or managerial, to chase those opportunities.

That’s why every organization should have a goal of creating a continuous pipeline of talent capable of growing and learning over time. In fact, the best organizations try to create an excess of talent.

But what else can you do to create such a learning organization? Modeling being a learner as a leader is certainly one element and another is to focus on what percentage of revenue you spend on talent development.  Talent development takes many forms–such as paying for college classes, sending people to training, creating cross-functional teams, enrolling leaders in CEO peer groups, or even sacrificing profits to put a person into a new role to expand them. It’s not a bad idea to understand how much your competition spends on this area to see if you are pacing, or falling behind.

While most organizations these days offer one or more of these options, the big question is: how large should your talent development budget be?

Multiple industry surveys show that good companies spend an average of 1 percent of their revenue on talent development. The lower they are relative to that number, the more they increase their risk of falling behind their competition.

When I share this number with CEOs who hear it for the first time, they tend to be shocked. That sounds like a huge number. But if your company had just invested in a $10 million piece of equipment, you wouldn’t think twice about spending $100,000 a year–1 percent of $10 million–to maintain it. But for most companies, the most valuable asset you have is your people. Why wouldn’t you make a similar investment in maintaining and growing them?

The very best companies understand this. To be in the top quartile of talent-developing companies, you actually need to spend 2 percent of your revenue on talent development. In my role as CEO, I tried to reach this target–and found that it was really hard to do! I made it clear to the entire team that any kind of education was fair game: going to get an MBA, signing up for internal training, external training, and classes, whatever. It didn’t even have to be directly related to the business. As long as the person was learning something new, we would approve it.

Even with all that emphasis, the highest we ever got was 1.25 percent of revenue in talent development. As I said, it’s hard to get to that level. But, by putting the emphasis on learning, our people grew–and the business grew with them.

So, if you want an excess of talent inside your own learning organization, set a target of investing 2 percent of your revenue on the development of your people’s talent. You’ll be amazed at the impact on your company’s growth. As a good friend of mine likes to say: Businesses Don’t Grow, People Do.