Paid Time Off

How to Determine Your PTO Policy

How to Determine Your PTO Policy
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This story appears in the March 2015 issue of Entrepreneur. Subscribe »

The average American worker got 15 paid days off in 2014, one day more than in 2013, according to Expedia’s annual “Vacation Deprivation Study.” But those days weren’t all fun in the sun.

The Society for Human Research Management (SHRM) reports that while 98 percent of businesses provide some form of paid vacation to full-time employees, 58 percent of those surveyed offer paid-time-off (PTO) plans, which bundle sick days, vacation time and personal days, vs. the 40 percent that have stand-alone paid vacation plans. 

“Ten years ago, those numbers probably would have been flipped,” says Bruce Elliott, a compensation and benefits manager at SHRM. “The majority of employers just throw it all into one bucket.”

Here are four factors to consider when determining a PTO policy for your business.

1. Calculate vacation as part of the total benefits package.

According to Elliott, the overall benefits package is typically valued between 25 and 40 percent of an employee’s base salary. This includes everything: 401(k), life insurance (if offered) and medical insurance, which can eat up as much as three-quarters of that budget. This is why PTO plans have risen in popularity—they eliminate the need for employers to document (and budget for) sick vs. vacation days.

2.Examine employees’ current use.

“If you’ve been around for a while, you’re going to have an idea of the amount of time your employees take on an annual basis, and how they take their vacation,” Elliott says. Use that information to make adjustments to your current offering. 

For instance, if employees frequently miss work because of a sick child or aging parent, it might be smart to move away from a vacation-plus-sick-day plan toward a general PTO offering. But if they are getting ill themselves, don’t cut back on sick time, because they could come to the office while impaired—or, worse, contagious—rather than forfeit precious vacation days.

3.Look at your staff’s demographics.

Generation gaps are starting to show real value differences in the workplace. “Research is showing that the Millennials, as much of a pain as they can be at times, are bringing a lot of flexibility into the work force,” Elliott says. That includes more adaptable time-off policies. Young, single employees appreciate the flexibility of lump-sum PTO plans, while Gen Xers and Baby Boomers—who may have parent-teacher conferences and doctors’ appointments on their calendars—would rather use vacation days for relaxing, not running errands.

4.Keep up with the competition.

The right vacation policy isn’t important just for current staffers; it’s vital for attracting future employees, too. This is another reason PTO plans are on the rise. “If most of your competitors are offering PTO, I would definitely consider it, because PTO offers maximum flexibility,” Elliot says.

But the creative vacation strategies don’t stop there. “If you’re a startup and you’re recruiting from other startups, there’s a better than decent chance that those startups probably already offer unlimited vacation,” he says, citing it as a common benefit among technology companies. And as that radical plan shows, PTO policies are always evolving. So either change with the times or risk being left behind.


Alternative vacation models

Pocket is a service that lets users save web content to enjoy later, when they have more time. But when it comes to taking vacation at the San Francisco-based company, time is not an issue—because Pocket offers its employees unlimited paid time off. 

“It’s one of the best things we have in terms of benefits,” founder Nate Weiner says. “It makes taking time off much less stressful.”

Studies have shown that this radical plan actually gets more out of employees, says Laurie Ruettimann, a Raleigh, N.C.-based human resources consultant and author of I Am HR. “If you give someone four weeks of vacation time and you define it, they are more likely to take that four weeks or a higher proportion of it.”

On the other hand, Pocket’s policy doesn’t require that employees take off any days at all (though Weiner says everyone does). That’s something Ruettimann believes companies should emphasize. “I would like to see a policy that forces you to take vacation,” she says. “Then I would be impressed.”

“Pre-cations” are another trend floating around (and out of) Silicon Valley. Designed to refresh workers who are suffering from burnout, pre-cations give new hires a week (or more) of paid vacation before they begin their jobs. But Ruettimann advises against adding the policy to your benefits package. Instead, she says, go with a traditional signing bonus.

“Vacation is actually time that’s compensated that you’ve earned,” she says. “I think a more respectful and professional way to do this is to hearken back to the days when you used to treat employees like adults. Giving someone a pre-vacation—it seems a little paternalistic to me. I’ll manage my own time, thank you—I’m an adult.” 

Edition: December 2016

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