If my company replaces earned vacation with an unlimited PTO policy, will there be any income statement impact? We won't be accruing any vacation expense and we won't have to pay out unused accrued vacation in the future when employees leave. Does the elimination of the vacation expense (debit) and accrued vacation liability (credit) lower my GAAP operating expenses year over year?
unlimited PTO
Answers
It depends on your state but in general you cannot take away the previously accrued vacation that was earned when switching to an unlimited vacation plan. Your liability only goes away when the employee is paid out. You no longer have to accrue more vacation so yes your expenes year over year do decrease.
I am also interested in whether this program of unlimited PTO has been successful specifically what is the
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I was at a company for 3.5 years where "flexible" PTO was in place (HR hated the term unlimited!). The company had always had the policy (it was a late stage start up when I joined), but the workforce seemed to embrace and appreciate it. Although employees enjoyed saying 'I have unlimited vacation days', most people ended up taking less time off than if you tracked days. Managers still needed to approve time off, in advance, etc. Therefore, the abuse was limited to a few, which would get discussed during their review sessions.
We're looking at switching to unlimited PTO also. Virgin Group and Netflix currently do this. The only expectation is that all work is complete and it will not have a negative impact on the business. I would say the ultimate success would be
I do not understand who "thought of this". Good in theory, but I do not see the value in reality. I have had it in more than one job, and so have many people I know. Once you get to the point of actually having earned unlimited PTO (in theory), you never have time to take vacation more than a few weeks (if that). Those who are not "seasoned" will for the most part see this as an excuse to "slack off". I see this policy as only a negative in terms of actual value unless your superstars want to tell their colleagues they have "unlimited PTO".
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Unlimited PTO is really more about establishing a ROWE (Result Only Work Environment) than it is about vacation/sick time. This is great in theory and practice if you can manage the culture change needed. In the end everyone in the organization has to be willing to evaluate output only, and that is scary if you aren't accustom to it. It is no mistake that most of the companies that boaster these programs are relatively young. They have the benefit of creating the culture, rather than dismantling an old culture and rebuilding it.
Managers have to get past the "who's in the office" thing, and focus on who's accomplishing goals. Your strategic deployment or goal setting / cascading needs to be fine tuned process for this to work.
Most leaders, myself included, cut our teeth in an environment where
When an employee gets immediate gratification for a job well done (time away from work) it is amazing how hard they will work to be the very best, and most efficient they can be. In the traditional system, we reward hard work and efficiency with more work. When an employee is being inefficient, if its considered "acceptable", they are just wasting company time and not their own. Sure there are hard workers, and they are rewarded with promotions etc, but that cost the company extra $, and often times forfeits tribal knowledge. It also only benefits those of us who are career oriented. Some folks love their role and want to be the best at that role and nothing more. Traditional systems don't typically reward those people. ROWE also puts the onus on each person to manage their work/life balance. Instead of work demanding something and life getting what is left over.
The instant gratification, freedom, and ownership of the unlimited PTO / ROWE, is everything. You can't really grasp it, until you have seen it and lived it.
Ernie, Your response is 100% on point. The performers don't really benefit from unlimited PTO - the slackers do. This results in significant resentment with the performers that causes morale problems. Not a plus for the company or the people that you want to reward
Although tempting to divide us into Theory X and Theory Y managers based on our response to this question, I suspect that age, as mentioned in one of the comments is more appropriate.
Those of us in upper management or executive positions and old enough to have been around the block a couple of times are concerned with unlimited anything when it comes to employment. Time has shown us that you can't change human nature.
The younger folks amongst us are more enthusiastic about the idea because it excites them and they know they would never abuse it. And that leads them thinking no one else would ether. They maintain a positive outlook on human nature.
As always, time will tell. :-)
I completely agree, that some people will abuse it. Some people will abuse any system in place (including the existing one). Do you really want to run your organization under the facade that you are protecting against bad employees or to reward good ones?
The rub is that in an ROWE, the abusers, put themselves out of work and give you an air tight alibi to protect against litigation. You have clear expectations and everyone has to meet them.
Remember, they are only abusing the system, if their results aren't up to or exceeding your set expectations. If they are a rock star completing work in half the time it takes others (huge exaggeration, its normally more like minutes each day adding up to a few hours here and there), that isn't abusing anything.
I agree human nature is what it is. Poor performing employees are going to perform poorly in every situation. Find the root cause, before you sink the ship trying to regulate the exceptions.
Since many employees "use" their accrued and unused Vacation/Sick as a "savings account" in case of termination, I would be very careful in detailing how this "unlimited" PTO works. In concept I agree with the policy, e.g. take time when you can, not based upon how much time you have available. But in practice, its a nightmare.
Also, this is very much a white collar, salaried employee issue. Hourly workers, and those on an assemble line, construction crew, etc. don't have the luxury of saying: "But my work is done." If you have a mix of both salary, hourly, white collar, blue collar, office, and plant folks think this thru. Sure it works for Virgin, Netflix and other businesses that have mostly high paid, college educated, white collar office workers. Don't see a lot of businesses that make "things" doing this.
I agree with anon that it doesn't make sense for every organization. My CEO was talking about doing it for leaders only, my fear with that is the morale of the non leaders. I, as others mentioned typically lose some days as well, and it's definitely designed for high performers who can get the job done because that's just what they do, everyday regardless of pay or benefits. If your policy is written well people can't save it all up and get it paid out when they leave.. The way I have seen it written, Its not accrued.
I agree with unlimited PTO concept, however, there is just one thing that concerns me about it.....
How do you determine that you are "maximizing" returns from the employee. There is NO immediate feedback as far as knowing if your employee is overworked or on the other end, underworked. Do you just increase "expectations" quarter in and quarter out? When do you say....okay, since you availed of 30 (just a random number), I will give you other responsibilities.
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I see the determination of whether you are "maximizing returns" from employees as a managment issue, regardless of unlimited PTO or not.
However, if you track time (ex. professional services organizations), then you can use utilization reports to make this determination.
If your company makes the change to unlimited PTO at the end of year 1, the P&L impact in year 2 is a decrease in operating expenses equal to the year 1 vacation expense accrual. The amount that employees banked as accrued vacation in year 1. But you'll also take a cash flow hit in year 2 as you have to pay out the accrued balance in cash. No different than a bonus on the employee's W-2.
Let us see beyond
This also seems like it would work best only for those who work completely independent of others. You may be done with your work and can take tomorrow off, but my project needs about an hour of your time tomorrow and you wont' be here. I can see that scenario becoming a problem.
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You make a very good point Steven, but you are making the same misguided assumption everyone makes with unlimited PTO. It doesn't give anyone a free pass to skip responsibilities, or at least not anymore than limited PTO.
If they are part of your project team, or are needed, then they have to find a way to be engaged. In today's world that can easily be done with a laptop and a quiet room anywhere in the world. If anything, unlimited PTO, restricts some careless PTO behavior that limited PTO allows. With unlimited, you aren't really ever out of pocket, because there is no "my time" vs "company time", there is only duties fulfilled or not.
Certainly everyone learns to respect each others time, but if you are needed, you are required to be there. It's no different than evenings during close at most businesses. Sure the rules don't say accountants work till 9:00pm, they just do because that is what is needed to achieve their goals.
It is important to remember this concept isn't the existing PTO structure without limits, it is a brand new definition of what PTO even means.
I think if everyone were honest, most managers aren't all that worried about tracking/enforcing their exempt staff's PTO in a limited system. So is it really that big of a change?
Said differently: What value is tracking exempt employees PTO driving in your organization right now? I suspect the answer would something like "it's preventing abuse", or "ensuring fairness". Both of those things are fixed with a good goal structure. I would ask is it really doing anything other than pretending to do something? At the core, I think it is a non-value add activity. I think it is masking poor performance by saying lots of hours offset poor output efficiency, or unreasonable expectations.
"It doesn't give anyone a free pass to skip responsibilities, or at least not anymore than limited PTO."
No. But it does give managers,
If an employee is completing all assignments with plenty of free time to spare, either the employee is exemplary and it's in the organizations best interest to utilize the employee more responsibilities (growth or promotion?) be that quantity or quality.
On the other hand, if an employee finds themselves unable to complete all assignments such that they can't utilize much of their "unlimited" PTO, then either the employee is lacking or the management assigned responsibilities are too great...........and likely comparatively unfair to other employees.
In my experience, it is usually the later case. And, the employee pays the ultimate price for it unless they leave. There is little management incentive to ease an underling's workload if it is acceptably getting done despite the employee's struggles. Unlimited PTO would exacerbate this IMHO.
The employee pays the price for this. Not the organization. This tends to punish the hardest, most efficient workers unfairly. They get loaded up until the proverbial straw breaks their back.
And, how does one do this with a manager? When has a manager met all of their responsibilities? Is one's department ever all caught up? Isn't there always more that can be done?
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Do you feel managing utilization is not a management issue with limited PTO?
I always struggle with this topic, because many assume unlimited PTO means more PTO. It doesn't! It means less structured PTO, with more structured responsibilities. You can't simply remove the existing PTO and replace it with unlimited. Your culture, goal deployment, and management strategy is likely incompatible.
I would say think of it like commission based compensation. Imagine you wanted to change your entire organization to be paid on commission. What things would need to be in place? You would need big changes to make it work, right? You wouldn't necessarily be paying more or less, just structuring different. The sale's pitch is that the employee's earning potential is "unlimited". Reality: it is limited, but limited by their performance. Unlimited PTO is similar. Not really unlimited, but instead limited by performance. It can mean more time away, but it can also mean less.
I agree, there is risk of abuse by employees and employers alike. However, I think a thorough investigation would show that those risks are present in a limited PTO system as well, we are just comfortable with them, so it isn't given much thought.
I believe the question was whether there is a change in accounting for unlimited PTO and the elimination of "pay on exit".
You accrue for any PTO that will be paid to the employee if they left the company. So going forward, you will not accrue any additional expenses.
The other question is what are you doing with the existing accrued vacation that was set aside for the employees? Are you seriously considering wiping that out? I would advise against that. You will probably end up in court since those benefits were already accrued to them. You need legal advise on this, quick.
You should also check the labor laws in the states in which you reside for the impact of removing this benefit. In some states you are required to give notice you are changing the policy.
Finally, you might also be careful with employees who are never allowed to take their vacation time or very little vacation. It's fine to say you can take unlimited PTO, but there will be some who don't get to take any vacation because of a bad boss or being overworked. Those individuals will see the "no pay on exit" policy a bit harsh. And if they have been prevented from taking vacation by you they will probably sue, and you will probably lose.
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