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Unlimited Paid Vacation: 'Jedi Mind Trick' or Good Policy?

Richard Branson made waves last month by announcing the Virgin Group will follow the lead of many Silicon Valley startups and offer unlimited paid vacation.

Is this a “Jedi Mind Trick” aimed at saving money while keeping secretly keeping employees chained to their digital desks? Recent pieces in TimeBusinessWeek and The New York Times suggest so.

Criticism of unlimited vacation policies fall into two opposite camps: employees will abuse the policy and take too much time off or employees will take no time off.

“It is not so clear that the no-limits vacation policy benefits the people (Branson) claims to love so dearly,” psychologists Peter Coleman and Robert Ferguson wrote in Time. “What is clear is that so-called ‘endless summer’ vacation policies benefit the companies that implement them.”

Related: Richard Branson Announces Unlimited Vacation Policy for Virgin Staffers

If you look deeply at what critics say, however, you’ll notice their cynicism is pure speculation: They offer no evidence of abuse. Maybe there’s not enough data yet. After all, only a handful of American companies have ditched vacation policies. The Society of Human Resource Management (SHRM) estimates approximately 1 percent of companies in the U.S. have unlimited vacation policies.

Still, a senior SHRM official told Business Insider: "There really isn't a lot of abuse in these plans … they work really well in high-performance organizations."

Our company Nerdwallet, a personal-finance startup, has had an unlimited vacation policy since our founding in 2009. It’s worked when we had two employees, and it’s working with more than 100 employees. Done right, unlimited vacation is a no-cost way to lure employees and boost productivity without fear of abuse. Here’s how unlimited vacation policies work and why the critics have it wrong.

The Industrial Revolution is over. 

Unlimited vacation reflects the world as it really is. As Branson wrote in his blog: “Flexible working has revolutionized how, where and when we all do our jobs. So, if working nine to five no longer applies, then why should strict annual leave (vacation) policies?”

Most company vacation policies are still stuck in an industrial-manufacturing mode, dribbling out paid vacation as rewards for unpleasant assembly-line labor. But in today’s high performance environment, employees like what they do. If you still think of employees as economic units and automatons of productivity, then you’ve got bigger problems than your vacation policy.

You are not your employees’ parents.  

We already live in an era where work bleeds outside the traditional eight-hour workday and employees sneak away from families at the beach to check work emails. If work is stealing hours from their private life, employees deserve -- and need -- the right to take that time back, when they need it.

Old vacation policies essentially “parent” employees: They are a carrot to be earned by company longevity and a stick to spank workers if they misbehave. That kind of thinking has to go.

Company managers must lead by example. 

NerdWallet co-founder Tim Chen and I have never hesitated to take two or three weeks vacation when we needed it. We set the expectation with direct reports that we want them to take time. Sometimes that requires prodding. If an employee is wrapping up a huge project, encourage them to go home. To be creative and productive, down time is crucial. Leaders in companies with unlimited vacation policies have to walk the talk -- which means walking out of the office to the beach. 

Yes, it will scale. 

Some argue that this works only for smaller companies but not for large companies. Critics note that Branson is only rolling out the unlimited vacation policy to the 200 employees of the Virgin Group as an experiment -- they are watching whether the 50,000-plus employees of the company’s subsidiaries follow suit (which Branson says he will encourage).

Related: The Secret to Increased Productivity: Taking Time Off

Naysayers here just need look at Netflix to know the answer  -- the video delivery and streaming company has more than 2,000 employees and an unlimited vacation policy. To be sure, there are some industries where this likely wouldn’t fly – largely companies that pay employees an hourly wage, such as food service and manufacturing. But for higher-skilled jobs, there’s no reason it can’t scale.

It saves money. 

Critics complain that not tracking employee hours and vacation is just a slick way to avoid paying overtime or unused vacation time when an employee departs. For startups, there certainly is a cost benefit -- largely in not needing the human resources infrastructure to track vacation time. But that’s not why Tim and I decided we wanted an unlimited vacation policy. We were drawn to it because we want to build a creative, productive culture, and the best way to build that is to trust your employees.

Trust pays. Employees crave it more than cash: a study by the University of British Columbia shows that a 10 percent increase in workplace trust is equivalent to a 40 percent increase in income for employees.

When you trust your staff to manage the thing most precious to them – their own time – the dividends are huge, both for your employees and your company.

Related: How Taking Time Off Can Help You Get Ahead