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The genius of Starbucks' new employee tuition program

This woman might get tuition benefits soon. But it's not because Starbucks is just being nice.
This woman might get tuition benefits soon. But it's not because Starbucks is just being nice.
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Starbucks has announced that it will offer hefty tuition reimbursements to its employees. The program will cover the full cost of an online degree with Arizona State University for employees working 20 hours per week or more, the Wall Street Journal reports. This expands a program announced last June, when the company only offered to partially cover the first two years of tuition, then the final two years fully. Altogether, the company says it could spend up to $250 million on the program by 2025, expecting to benefit 25,000 workers.

That's a nice perk for Starbucks employees, there are two big reasons why this is great business for the corporation as well. One is the tax benefits that come from compensating employees with tuition money rather than salary. In addition, the program benefits employers by attracting the kind of high-quality employees who are likely to be drawn to a tuition benefit.

Starbucks is far from the first company to offer a tuition benefit — in fact, the company had, before this program, offered around $1,000 per worker in educational reimbursement. But now they will be spending an unusually large amount on it.

"It's very generous. Most large organizations will provide tuition reimbursement up to $5,250" — the line at which the IRS starts taxing the benefits for both the employee and employer, says Bruce Elliott, manager of compensation and benefits at the Society for Human Resource Management.

Around 54 percent of all companies offer some form of educational reimbursement, according to one SHRM survey.

In addition, many companies that offer reimbursement tend to only offer the assistance for programs that will specifically boost their performance at work, as the Wall Street Journal reports. Starbucks, meanwhile, will allow employees to choose their programs, which could potentially help them leave the company in the future.

The Starbucks offer is extended to both part- and full-time employees — anyone who works 20 hours or more per week, and it has no strings attached. Employees who take the company up on the offer are not under any obligation to stay at the company after that.

However, Starbucks' new program isn't about altruism. Research shows educational reimbursement can have big benefits for employers. One reason is taxes. The first $5,250 in tuition benefits accrue to workers tax-free, making tuition payments a way to get more bang for your compensation buck.

But another issue is that different employees will value a tuition benefit differently, and tuition assistance might disproportionately appeal to higher-quality workers. In a 2002 NBER working paper, Wharton School of Business Professor Peter Cappelli studied Census data and found that employees who use tuition assistance are more productive than their peers.

In addition, those extra abilities are not readily visible to most other employers who are competing for talent; the very act of offering tuition assistance draws in people with those higher abilities. An employer doesn't have to go looking for them.

That's not the only way tuition assistance can sort great employees into a firm. It may also have to do with a worker's "discount rate" — that is, how much the employee values a dollar today versus that dollar's payoff in a few years, as University of Minnesota professor Colleen Flaherty-Manchester wrote in a 2012 paper. The sorts of employees who take advantage of tuition assistance are more willing to hold out for that eventual payoff, she writes.

This benefits a company through employee retention — the workers who take advantage of the degree programs have an added incentive to stick around. This is great for firms, as it can be very expensive to replace an employee: a 2012 assessment from the left-leaning Center for American Progress found that replacement on average costs around 21 percent of a worker's annual salary, though some estimates have ranged above 100 percent.

And the savings will likely come not only from retention but from hiring; expanding the pool of educated Starbucks employees means expanding the pool of promotable Starbucks employees.

"If you think about it, it's much cheaper to hire from within than it is to hire externally, especially at the management level," Elliott says. "This is a way really to develop their quote-unquote 'farm team' for future roles within the organization."

The only downside, he adds, is the potential cost to Starbucks. It's hard to know right now how many workers will take the company up on its offer, but the pool of potential ASU students is large. As CNN reported last year, around 70 percent of the company's 135,000 store employees don't have undergraduate degrees.

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