Want to Study Accounting or Medieval History? Chances Are, Your Employer Will Foot the BillPublished: September 11, 2002 in Knowledge@Wharton
Peter Cappelli, director of Wharton’s Center for Human Resources, began his research into employer-paid tuition programs with some skepticism.
Why, he asked himself, would employers pay for workers to develop a credential (education degree) that is useful to other employers and will raise the workers’ marketability? After all, many employees go to school precisely to change jobs. Furthermore, if the employer’s goal is to give workers skills for their current job, why not just offer training in-house?
After several months of research, Cappelli has found some surprising answers. First, he says, virtually all employers offer this benefit, to some degree. Second, employees do not pay for this benefit in the form of lower wages. In fact, employers actually pay higher wages when they also have this benefit, suggesting that the workers must be more productive to compensate the company for the higher salaries.
In addition, employers who offer this benefit are able to hire more qualified workers. “Anyone who is willing to work their way through college and go to classes in the evening has to be pretty motivated,” says Cappelli. Moreover, he adds, referring to data he collected with the U.S. Census Bureau, “employees stay longer with the company, perhaps simply to make use of the benefit.”
Employers who pay for college courses may benefit for another reason, Cappelli notes: “Workers are sharing the cost [of these courses] by doing the work on their own time. If employers mandate training, the law says that they have to pay both for the training and for the time the workers spend doing it.”
Investing in Human Capital
Part of Cappelli’s research, which is summarized in a paper entitled, “Why Do Employers Pay for College?” focused on industry-wide use of tuition reimbursement. Among the biggest users are the hotel industry and the business services industry (e.g. consulting firms). Also high were retail and wholesale trade. Those industries that offer the lowest levels of tuition reimbursement include food and tobacco, textile and apparel, lumber and paper, and printing and publishing.
His research, Cappelli says, doesn’t show exactly how much tuition companies paid or what the restrictions were, even though they can be significant. The rules “vary enormously across firms. Some let you take anything and pay for everything. Some only let you take an approved course, and that could be a community college class based on applying Total Quality Management. Another place might let you get your BA in English literature.” The Harleysville Insurance Co., which has 30% of all employees currently using tuition assistance, “encourages everyone to take courses. They seem to like the idea that you are in class because it keeps your brain sharp.”
In addition, Cappelli says, unlike some benefits, tuition assistance is not compromised by economic downturns because employees tend to stay in their jobs longer when companies around them are laying off workers.
One aspect of tuition reimbursement which Cappelli’s study didn’t look at was whether people are actually more productive and effective once they have had extra training and education. “I’m sure the answer is yes,” he says. “My gut feeling is that typically an employee ends up doing the same job better. He or she gets pushed into work that involves higher responsibility and often the pay doesn’t go up proportionately. So for companies it ends up being a good deal.”
Cappelli’s research has led him to consider how companies might handle tuition reimbursement more strategically. “We know companies don’t think systematically about how to use this as a way to develop employees,” he says. “For the most part it is administered out of a benefits office; it’s not thought of as a human capital investment.”
Employers could, for example, incorporate the benefit more explicitly into the development function, he says. They could also measure which employees take the courses, how they benefit from them and what impact this has on company performance.
Middle-Aged and Senior Students
In exploring the question of why so many employers fund general skills training, Cappelli cites one prevailing theory suggesting that employees pay for this benefit by accepting “training” wages that are typically below the market wage while they are being trained. But Cappelli rejects this argument for a number of reasons. “There are no arrangements [I know of] in companies to hold down or reduce wages explicitly while employees are receiving tuition benefits … So the question would be whether tuition benefits are used at a point where wages are otherwise held below their productivity, such as at the beginning of their career.”
But, Cappelli says, this is unlikely. “First, most employers prohibit access to tuition benefits for new hires. For example, 57% of employers make employees wait a year or more of service before they can receive such benefits.” While a year doesn’t sound like a long time, Cappelli points out that most employees don’t stay long with a given employer. Over the past 20 years, he says, “one in five employees had tenure of less than one year, and 45% stay four years or less.”
Second, once employees are eligible for these programs, “they are usually the ones who decide when to sign up. While some compensation models suggest employees use the tuition benefits at the beginning of their career, when wages are probably kept relatively low,” this doesn’t happen as often as one might think.
In a study of the pattern of usage at several organizations, Cappelli found that United Technologies, for example, reports that the company’s average tuition benefit recipient has five years with the company; average tenure there is closer to 15 years. Xerox Copier Division says its average user is over 30 years of age while the average worker in the division is closer to 40. At the University of Pennsylvania, average employees who use tuition benefits for their own education have been there five years while employees in general stay at Penn for nine years.
These and other organizations, Cappelli notes, indicate a “wide distribution of use by age and tenure levels. Indeed, some of the oldest and most senior employees use them as well.”
In describing who these employees are, Cappelli speculates they may in fact be “systematically better workers in ways that are useful to the employers as compared to employees who do not have that interest. Evidence suggests that firms offering general skills training do attract better quality workers, arguing that self-selection mechanisms are part of the story … Poorer-quality applicants who lack the ability, discipline or motivation to succeed in post-secondary education will see no advantage from taking jobs with such a benefit. And, unlike most other employee benefits, employees must share in the costs of using tuition assistance through an investment of their time and effort, typically outside of work hours, as well as some of the financial costs.”
Employers, he adds, “may even have an incentive to … raise wages somewhat above the market rate in order to induce these good workers to stay with the firm.”
Locking in Low Turnover
Employers that offer tuition assistance should also benefit from low turnover, Cappelli argues, “partly because many employers require that employees be with the firm for some period before they receive tuition assistance. Some other employers require employees to sign contracts that make them reimburse the costs of the tuition benefits should they quit before some specific date. About 20% of U.S. employers have such requirements, and the average length of stay required is six months.”
The fact that turnover is lower helps the employer pay for tuition benefits by earning a margin longer, Cappelli adds. “Lower turnover in itself is a source of cost savings for employers by reducing search and hiring costs.”
In his paper, Cappelli offers a theoretical model of tuition assistance that goes like this: “Workers who have greater ability and motivation self-select to join firms with tuition assistance plans. Their marginal productivity is above average levels in the market. Information about their superior ability is at least not immediately or perfectly available to other firms (the signal comes when they actually begin using tuition assistance) and so their market wage does not rise to the level of their marginal productivity. Because their productivity is above market levels, employers can pay them the market wage and still earn a margin on their performance. … The employees who receive tuition assistance are tied to the firm for many years … Once they finish their education, their market wage rises to reflect the level of their new general skills and their greater ability and motivation is signaled by essentially working their way through school using tuition assistance. At that point, their market wage rises to their true marginal productivity, and the employer no longer earns a return that could be used to pay off the tuition benefits.”
Other facts that Cappelli turned up in his research include:
- Roughly 20% of graduate students are receiving some financial assistance from their employers to attend schools; roughly 6% of the much bigger pool of undergraduates receive such aid as well.
- If one looks only at adult students, 24% of adults in post-secondary education programs of the kind that offered credentials (e.g. degrees or certificates) were receiving tuition assistance from an employer, and 53% were either receiving tuition support or paid time off from work.
- Financial assistance from employers is the most common source of financial aid. The average level of employer-provided assistance per recipient was equal to about one-third of the average annual cost paid by post-secondary students.
Employee tuition assistance plans vary widely: Some meet only a fraction of the costs and are limited to a narrow range of job-specific courses while others cover virtually the entire cost of post secondary education, even for degrees unrelated to current jobs.