How to Avoid the Hazards of an Unlimited PTO Policy

Merely a few short years ago, the concept of unlimited paid time off (PTO) was reserved only for “cool,” “hip” Silicon Valley companies. By 2014 unlimited, and in many cases, untracked PTO has become the norm for an estimated one to three percent of US companies.

Companies cite a variety of reasons for removing limits on PTO, but the ultimate benefits to the company boil down to two main factors. When a company “gives” PTO to an employee, that company must carry the liability of this “gift” on the books from year to year until the employee leaves the company. At that time, any unused PTO will be paid to the employee at his current salary rate. By offering unrestricted PTO, the employer is no longer giving a quantified benefit to an employee and has no balance to pay off if the employee leaves the company. Second, companies use unlimited PTO as a perk to recruit top talent, believing that it gives them a competitive edge that doesn’t necessarily cost the company more money.

Employees at companies that offer unlimited PTO agree that the perk is nice, but some do miss being able to bank their vacation time. Aaron Sagray, director of product design at software startup mPATH, said, “It’s a good policy, but there are some drawbacks. Because the PTO isn’t tied to compensation you can’t be paid out on the accrual.”  “Elliot,” a senior software engineer at a 3,000-employee enterprise software company said, “I like the policy.  The only downside is you don’t get paid out for vacation time. But it’s not a huge downside.”

Detractors of unlimited vacation policies generally cite concerns that employees will abuse the policy and work won’t get done. Elliot said that in practice this is not a big concern for his company. “If someone’s taking too much vacation, it’s likely affecting their performance in other ways, and that’s what should be measured (instead of vacation days taken).”

Even companies that have the implicit caveat “take time off as long as your work is getting done” don’t necessarily have formal processes in place to measure whether or not that work is getting done. Sagray said, “My work is measured by whether or not I’m meeting deadlines, but a problem always exists of seeing who is contributing. Companies can mitigate this by keeping teams very small with a team lead to keep track of people’s performance.”

Bob Chen, software engineer at Infer, a 20-person software startup, said that although there’s an unspoken expectation that time off will only be taken “as long as you’re getting your work done,” concerns that employees are working are nonexistent because, “everyone has a stake in the company.”

Balancing all of concerns about PTO reveals a deeper issue faced by most companies.

At many companies there is a fundamental misunderstanding of how to measure quality work. And this applies not only to the amount of vacation or sick time an employee takes, but also to remote employees and distributed teams. Most managers don’t receive formal training on how to set and measure team goals and are expected to evaluate employee achievement of what are often vague un-measurable goals.

So how can companies add meaningful measurement to their management structure?

1. Know what your goals are

Companies must know what their goals are. And they must communicate these goals to their employees. A company goal of “mimic the competition” will produce drastically different results than a goal of “differentiate yourself from the competition.”

2. Understand the difference between quantity and quality

Is it more important to judge employees on the quantity of their work? (“I wrote 300 blog articles this year.”) Or is it more important to judge the quality of that work? (“I wrote 20 blog articles that engaged 10 million readers.”) Depending on the stage of your work, there could arguably be a case for either. But effective evaluation depends on knowing when an employee should be striving for quantity and when an employee should be striving for quality—and measuring the appropriate outcome.

3. Be in constant communication

Annual reviews are not enough. You must implement a policy of active and ongoing feedback for employees. And while manager feedback may be the best way to evaluate employee progress toward specific goals, 360-degree feedback, which includes comments from managers, peers and subordinates, is also a helpful tool to see a broader view of employee accomplishments.

Elliot said, “Our performance is measured by peer feedback twice a year. You can solicit feedback from particular peers, but people can also leave anonymous unsolicited feedback.” And while your peers may not know what your specific goals were or how close you came to achieving them, Elliot said, “My peers know the impact my work has on code quality, whether or not that specifically was my goal.”

While unlimited PTO and similar flexible work arrangements such as telecommuting can be a good way to attract and reward motivated employees, it does require more active management to understand and evaluate performance. The good news is, as managers improve at setting and quantifying goals and outcomes, the entire business will benefit from having a clearly defined roadmap and vision of success.

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