HUMAN RESOURCE INVESTMENT CONSIDERATIONS Several factors will

be considered in the discussion of strategic human resource investment

decisions. As noted earlier, these will include management’s values, views
of risk, the economic rationale for investment in training, utility theory, and
alternatives to human resou1rce investments. Investments in training are
covered in this section because they are fundamental to the formation of
human capital. Firms also invest in many other human resource practices
with the expec-tation that there will be impacts on performance and
financial returns. Management Values Fundamental values must be
addressed in many human resource issues, particularly those involved in
major strategic initiatives. When senior managers formulate and implement
strategies, their values and philosophies are communicated to members of
the organization through human resource policies and practices.7 For
example, senior managers who are Page 6 STRATEGIC HUMAN RESOURCE MANAGEMENT Section
One committed to the preservation of the organization’s human resources
can manage the stress associated with major strategic events, through
such measures as dealing with rumors and providing accurate information,
so that mis-information does not have such a debilitating impact on
employees.8 How employees are treated following significant strategic
events, such as a merger or acquisition, is a reflection of these values and
communicates whether the organization views employees from an
investment perspective. Those adopting an investment perspective seek to
enhance the value of their human capital or, at the very least, prevent its
depreciation. Risk and Return on Investment Although there are a number
of important benefits to investments in human resources, such investments
contain an element of risk. Investing in human resources is inherently more
risky than investing in physical capital because the employer does not own
the resource. Employees are free to leave, although contractual
arrangements may limit their mobility. In order for investments in human
resources to be attractive, the returns must be great enough to overcome
the risks. Further, for some investments, such as cash outlays to maintain
no-layoff policies, the benefits are not easily quantified and there are
meaningful costs. Decision makers Page 7 STRATEGIC HUMAN RESOURCE MANAGEMENT Section
One have to be prepared to trade off current costs for long-term strategic
benefits, such as a more flexible, committed workforce and related positive
aspects of the organizational culture to which such policies contribute.9
Economic Rationale for Investment in Training Because human resource
investments frequently involve training, it is instructive to consider the
difference between specific and general training. Nobel Laureate economist
Gary Becker has written extensively on this subject. His distinction between
specific and general training in human capital theory provides guidance for
understanding when employers will provide training. The decision whether
to invest in training and development depends, in part, on whether the
education imparts skills that are specific to the employing organization
(specific training) or are general and transferable to other employers
(general training). Employers generally invest in or pay part of the cost of
specific training because employees cannot readily transfer such skills to
other employers. Employers recoup their investments after employees
complete training by paying employees only part of the revenue derived
from their increased productivity (marginal product). Conversely,
conventional human capital theory predicts that employers will pay for
none of the cost of general training because employees can transfer skills
developed at employers’ Page 8 STRATEGIC HUMAN RESOURCE MANAGEMENT Section One
expense to other employers. Accordingly, employers would rather hire an
employee who has the requisite general skills. When employees having the
requisite general skills cannot be hired, the employer must invest in
general training without assurance that the unskilled employee will remain
employed long enough after training for the employer to recoup the
investment.10 In reality, employers probably invest in general training more
than the specific and general training rationale would suggest. A recent
study has found the following: under certain conditions [use of
employment contracts and retention of employees based on productivity]
the firm may share the costs of and returns on investment in general
human capital and pursue no lay-off policy. General human capital will
have the same implications as firm-specific capital.11 General training can
be obtained in on-the-job training as well as in formal programs such as
tuition reimbursement. It also can occur unintentionally simply as a
byproduct of the work situation as employees learn work skills that are
applicable to other employers. Employers may make general training
investments in employees by paying a wage during Page 9 STRATEGIC HUMAN
RESOURCE MANAGEMENT Section One training, which has been reduced by the training
costs. Employers also can recoup some of their investments in general
training because employees incur costs of mobility, such as the costs of
finding new jobs and relocating. If the costs of mobility are high enough
(moving expenses, realtors’ fees, psychological costs of moving children,
etc.) the employer can pay a wage lower than the employee’s new general
skills would warrant at other places of employment.12 Labor economists
also argue that employers are more reluctant to lay off employees in whom
they have invested in specific training. (When employers pay part of the
costs of general training, the firm also will be reluctant to lay off workers
who have received this training.) Like general training, specific training can
be obtained through formal programs. It also can be obtained through on-
the-job experience, as much of what employees learn on the job tends to
be of a specific nature. Employees who receive specific training from an
employer receive a lower wage after training than their productivity would
warrant because no other employers have use for these specific skills.13
Thus, it is likely that the employer will have invested more heavily in these
employees and would not want to lose the investment. Page 10 STRATEGIC HUMAN
RESOURCE MANAGEMENT Section One To a certain extent, the distinction between
general and specific training is misleading. There are probably few skills
that have no transferability to other employers. Likewise, probably few
skills are completely general. Further, employers do not seem to make
clear distinctions between general and specific training.14 There are many
considerations in layoff decisions in addition to the employer’s investment,
such as equity, contractual obligations, and different business needs.
Nonetheless, the concepts of specific and general training can provide
insights on the conditions in which investments in human resources are
more favorable.