Who Pays for the Manager? Human Capital Theory and the Economics of Leadership Training

In 1964, Gary Becker predicted a company sending its manager on a Leadership Development Program was an economic decision. He developed his Human Capital Theory (a foundation of Labour Economics), which states that training not only improves productivity but also indicates the source of funds needed for such training. Today this distinction between General Human Capital and Firm-Specific Human Capital is of even greater economic significance than when Becker wrote.

Becker identified two types of training investment: General Human Capital and Firm-Specific Human Capital. General Human Capital provides the worker with a skill set applicable to all companies and therefore increases the worker’s potential productivity at all companies. These skills are transferable across many companies. Firm-Specific Human Capital provides the worker with a skill set only applicable to the investing corporation, which may include knowledge of internal processes, knowledge of corporate culture, proprietary process knowledge, and other information unique to that corporation. The economic consequence of these differences is simple: Companies are not inclined to pay for General Human Capital development of their employees because they have no way to stop these employees from leaving their company and taking the skills learnt at the company's expense to another company, while employees will pay for this training because they will enjoy the full return of their investment in skill development through increased salaries through their career.

Training for Leadership and Management

Training for Leadership and Management falls under the definition of General Human Capital. That is, the skills learnt through a Leadership or Management training programme (for example, communication, strategic thinking, managing people, managing projects) are portable throughout a person’s career and applicable at every company that may employ them. Therefore, according to Becker's theory, an individual should pay for their own leadership and management training. However, this assumption does not reflect the true state of affairs, and empirical evidence supports this complexity.

The training market for companies worldwide is growing rapidly. According to an analysis from Global Market Insights, the training market was valued at approximately $370 billion in 2023 and will exceed $600 billion by 2030. Much of this money will come from companies investing in their employees' education, contrary to Becker's predictions.

Many economic factors help to explain why the corporate sector is investing this way, even though Becker expected most firms to stop paying for training.

First, labor market frictions reduce the risk of an investment in worker training. For example, workers don't always go and immediately find a job with a competitor after receiving training. Rather, there are many reasons they stay with their companies, such as switching costs, being tied to a specific location, social connections, and having only a partial understanding of the job market.

Second, when teams are managed properly, companies benefit tremendously from productivity increases from the teams and employees working together. Even if a worker leaves a company after training, the company still receives benefits immediately.

Third, companies have learned they can use investment in employee development (the training process) as a signal of their intentions to hire and retain an employee. When an employee receives training, they become more attached to the company, leading to decreased turnover for that employee — that is, the employee will likely stay longer than if they had not received training from the employer.

A good illustration of this principle is IBM. For years, the company has invested heavily in developing its managers and leaders' skills through various training programs, using primarily general management skills. IBM's internal studies have found that workers who have participated in structured training programs are far less likely to leave the company — one study indicated training increased retention by as much as 40%. The returns to IBM from its investment in training employees come not only from the increase in productivity from the employees participating in the program but also from not having to hire a replacement for those employees, which the Society for Human Resource Management has estimated costs between 50% and 200% of the annual salary of a person hired.

Several organizations, including Amanet, have designed their entire business models around this principle by providing general management and leadership training programs simultaneously to both individual job seekers and to corporate clients.

Rising Demand and Skill-Biased Technological Change

There are a variety of structural economic forces contributing to increased demand for general management training. Skill-biased technological change represents the trend whereby technological developments increase the relative productivity of higher-skill workers over lower-skill workers. As organisations adopt artificial intelligence (AI) technologies for automating routine administrative and operational management duties, this dynamic becomes increasingly significant. According to the Future of Jobs Report 2023, published by the World Economic Forum, nearly 44% of all workers' core competencies will be disrupted within five years. Skills that are likely to be least affected (and, therefore, have the greatest potential to support job creation) over this period include leadership, communication, and analytical thinking skills.

As such, the demand for management training is based on the fact that, as AI systems absorb routine management functions, the comparative advantage of human managers will begin to shift from performing routine tasks to exercising judgement, managing interpersonal relationships, and making strategic business decisions. Therefore, the businesses that choose to invest in the development of these human manager capabilities are making an economic investment, not out of goodwill alone.

In Becker's original theory concerning the demand for management training and funding for management training, he proposed this issue almost 60 years ago. At the time, the internet and globalised labour markets had not yet transformed how companies will manage and distribute their human resources. Regardless of the date of Becker's presentation, the theoretical foundation he established remains the most precise lens available. Understanding who pays for management training, and why, is not merely an academic question — it is one that shapes labour markets, firm strategy, and economic growth.