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Vacations Going Once, Going Twice, Sold

August 1, 1996
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Related Topics: Benefit Design and Communication, Featured Article
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Maureen Davey is entitled to three weeks of paid vacation time. If she wanted to spend a month in the Scottish Highlands, she could. All she'd have to do is buy more vacation time to view steep valleys and blue lakes, and to watch sheep grazing on the emerald hillsides. But the receptionist for Dole Food Company Inc. in Westlake Village, California, prefers to buy time and save it for a rainy day. "If I get really tired or stressed, it's handy to have the extra days like money in a bank," she says. This year, she and her husband of almost 40 years will meander up the Pacific Coast to Vancouver, British Columbia—using only 10 of her accrued vacation days.

Mercedes Stratton, a secretary at the same company, says she prefers to sell a week of her three-week vacation entitlement. As a single mom, she can barely afford to pay her medical benefits at the end of the year. "It's difficult to cover the insurance premiums with the salary I make and the expenses I have. So I apply the money [from selling vacation time] toward buying the insurance," she says. Nevertheless, she and her son, Daniel, still manage to spend each Christmas holiday visiting her family in Guatemala. She simply stretches the remainder of her accrued time with two weekends and the holidays to make her annual vacation last a month.

Two women. One is married. The other is a single mom. Both have different dreams and different needs. Herein lies the beauty of one of the sunniest benefits floating atop the corporate horizon—buy/sell vacation options. You already know the general flex-benefit trend: American workers want to improve their quality of life. Employers want to improve morale and productivity, and lower costs. So it's not surprising both interests increasingly are merging in the area of flexible vacation benefits. Some options are familiar, such as carry-overs and cash-outs of unused vacation days. Others are benevolent, such as employees donating time to co-workers for compassionate leaves. But the latest one to splash against the HR shoreline is the buy/sell option.

For human resources executives—faced with downsizings, cutbacks and demoralized employees—a buy/sell vacation option can turn a pale situation into a rosy opportunity. It can help companies save money, recruit and retain valuable employees, perk up employees' spirits, manage an excess workforce—and definitely soften the blow of imminent cutbacks. Fortunately, you don't have to start from scratch. There's plenty of happy campers leading the way. At Boston-based Fleet Financial Group, HR offered the flexible buy/sell vacation benefit solely as an enhancement, and an equal number of employees elected to buy and sell time. At Dole, HR offered the option as a means of helping employees subsidize other cafeteria-style benefits. In that case, most eligible employees sold some of their vacation time. And at Arlington, Virginia-based System Planning Corp., when HR offered the option as a way to soften the blow of take-aways, most employees bought more time. So any way you package it, both sides can win.

Demographics and legislation drive flexibility.
Clearly, American executives didn't just leap out of bed one morning and decide to flex their companies' benefits—especially those involving vacations. They're simply following their business instincts. According to New York City-based William M. Mercer Inc.'s 1996 Work/Life and Diversity Initiatives Benchmarking Survey—conducted among 800 U.S. organizations with more than 1,000 employees—86% of those surveyed agree they can't remain competitive in the '90s without addressing work/life and diversity issues. Indeed, today's workforce comprises two-earner families, an aging population, single-parent households and other diverse segments. To meet employees' varied needs for flexibility, 28% of those mid- to large-sized companies surveyed now provide buy/sell vacation options. And 11% currently are considering such benefits. Moreover, other firms such as Hewitt Associates LLC in Lincolnshire, Illinois have surveyed smaller companies with less than 500 employees. Even with fewer resources, 11% of those companies still have chosen to offer buy/sell vacation options.

In spite of these growing numbers, some analysts are conservative in their enthusiasm. Corporate generosity, they say, slowly evolves over time. It's an acquired practice. "I don't see a massive trend in a single direction. Most organizations that allow buy/sell options put a limit on them. A lot has to do with the will of management to make it work," says Eileen Canty, principal and organizational psychologist at William M. Mercer in New York. "How you design the program and how you communicate it will [affect] employees' perception of it as a take-away or a benefit."

The notion of buy/sell vacation options isn't new. It followed the tray of cafeteria-style benefits that gave workers more control over the ones they wanted. As early as the mid-1970s, employers began to offer employees a choice among benefit types and levels. Then, Internal Revenue Code (IRC) Section 125, created by the Revenue Act of 1978, formally introduced tax-qualified flexible benefit plans. These cafeteria-style plans include all those that offer employees a choice between at least one qualified nontaxable benefit (such as health insurance) and one taxable benefit (such as elective vacation days or cash), according to the Employee Benefit Research Institute in Washington, D.C.

Later, in 1989, supplemental regulations issued by the IRS expanded the situation under which employees can revoke or change annual benefit elections, and also clarified the treatment of buying and selling vacation days under a cafeteria plan. Because cafeteria plans are generally prohibited from offering benefits that defer compensation, vacation days selected through a flexible benefits plan may not be carried over from one year to the next. In short, employers use it or lose it. (Some states, such as California, however, mandate employers to cash out unused vacation days—up to a reasonable limit.)

Now that you know it's legal and feasible—are you ready to dive in? If not, sip a glass of iced tea. And watch a few companies swimming in the deeper end of the pool.

Flex vacations can be an employee enhancement.
Most, if not all employers, want their employees to take vacations. Relaxation rejuvenates the spirit, especially when it feels like the walls are closing in. As one Ritz-Carlton Resorts advertisement notes: "Sometimes, even adults feel like running away from home." On average, most U.S. employers—about 82%—normally provide two weeks of paid vacation after one year of employment. And at companies where buy/sell options are permitted, approximately 24% opt to buy vacations and 6% opt to sell, according to a 1995 survey conducted by Hewitt Associates.

One of the first companies to institute buy/sell vacations was Fleet Financial Group. With 35,000 employees nationwide, the company offered the option in 1988—long before others began using flex benefits primarily to offset rising medical costs. "It was an enhancement, not something we offered with a take-away," says Pamela Stenberg, vice president of corporate benefits in Providence, Rhode Island.

Fleet's normal vacation entitlement (nonelected) exists for full-time and part-time employees. It includes two weeks of paid vacation for those with one to four years of service; three weeks for those with five to 14 years of service; four weeks for those with 15 to 24 years of service; and five weeks of paid vacation for those with more than 25 years of service.

With such a large and diverse population, HR recognized Fleet's employees had individual needs. Flex vacations seemed appropriate. But the company's policy had stipulations. To take advantage of flexible vacation days, employees must be on an accrual level of three weeks and only are allowed to buy or sell up to three flex vacation days. "We don't allow those with two weeks entitlement to sell any days. We feel everyone needs two weeks of vacation on an annual basis," says Stenberg.

If an employee elects to sell flex vacation days, the individual receives additional benefit credits to buy other benefits, or receives the value of vacation time as taxable income paid equally over 26 pay periods. If an employee buys flex vacation days, he or she pays for them with benefit credits or one's own pre-tax dollars. "We encourage employees to be very thoughtful because they're required to make a decision during the annual enrollment period in November. Once they make a decision, they have to live with it for the whole year because it's a pre-tax benefit [under IRS regulations].

"At the same time we were taking away some vacation time, we wanted to make that change attractive."
— Winder Heller,
Dir. of Corp. Staff Development, System Planning Corp.

When Fleet designed the program, the company formed a task force of 25 individuals. It included two consultants, HR managers, benefits specialists and line operators from different locations. Several issues were taken under consideration. For example, Fleet didn't have a formal paid time off (PTO) policy. PTOs often integrate vacation days with holidays and floating days, and allow employees to use that set number of days at their own discretion. Although PTOs aren't necessarily incompatible with additional buy/sell vacation options, tracking both systems can be cumbersome to administer. It requires additional reporting: more detailed time sheets, reports to payroll and meeting legal compliances under Section 125 and other tax requirements.

"If Fleet decided to have a PTO policy, we wouldn't keep a buy/sell vacation policy as such. We'd integrate all the days and make it a time-off buy/sell program," she says.

Another consideration was the program's impact on managers and activities at the workplace. If employees bought more time, would it affect staffing? Because Fleet doesn't normally add staff to cover vacations, HR had to consider how flexible existing employees would be to pick up the slack. Fortunately, Fleet's employees were willing to pitch in while co-workers took their scheduled time off—largely due to the educational efforts of HR.

Once the program was designed, HR rolled out the plan through a variety of channels, including six newsletters. After the employees received their annual enrollment packages, HR arranged personal meetings to help advise employees about their choices. Now, prior to each annual enrollment period—two weeks in November—HR conducts employee meetings and provides a voice-response system so they can announce their elections.

Since 1988, approximately 70% of eligible employees keep their basic entitlements. This year, the other 30% are split equally between those who want to buy and those who want to sell some vacation time. "We think of it as cost neutral. The only place you could see it costing us is if we had to bring in extra help or pay temps to absorb the work. But we don't," Stenberg says.

Other companies also seem willing to take the risk. In fact, some are finding that most of their employees are selling their vacations, instead of buying more time. Here's why.

Employees help subsidize their own benefits.
About three years ago, Dole adopted cafeteria-style benefits for its 600 employees. One of the features of its program was to allow them to purchase up to three additional vacation days or to sell up to five. "We wanted not only to provide flexibility for people with greater vacation needs, but also to find a way for them to subsidize the costs of their benefits," says Sue Hagen, director of HR.

Under Dole's plan, eligible employees can purchase up to three additional days per year. Similar to Fleet's requirement, the buy/sell option is offered only to those accruing vacations at the minimal rate of three weeks each year.

Hagen says about 70% have elected to sell—most likely because of increasing benefit costs. Employees, such as Stratton, would like to take longer vacations. But she has a young toddler to support and doesn't have a spouse with an additional source of income or health benefits. "I'm glad [HR] is looking for ways to help employees afford insurance," says Stratton. "When you tell someone [medical] insurance is going up $500, you need to do something."

Under Dole's cafeteria plan, all employees are given a certain number of credits to purchase their benefits. Each of the benefits has a price tag associated with it, explains Hagen. "If an employee sells vacation time, the value of that gets added into the number of credits they have to purchase their benefits," she says. Essentially, employees reduce any out-of-pocket benefit expenses they incur. In some cases, an employee may purchase all of the benefits he or she needs—and still have credits left over. In that case, the employee will receive that value back as taxable cash. "People's desire to reduce their medical expenses is driving the increased participation in selling vacations," says Hagen.

Hagen isn't surprised most of Dole's eligible employees are selling some of their vacation time. The company already provides a competitive benefits package, which includes paid holidays, floating days and sick leave benefits. "There aren't many people who feel they need to purchase more vacation time," she says.

HR, Hagen adds, also is looking into PTOs, which she refers to as flexible time off. However, should the company institute such a program, HR would design a different accrual schedule that would eliminate the vacation buying option. "We'd still allow people to sell because the same issues are there—the need for employees to subsidize the costs of their benefits and the difficulty of some in using all of their available time."

Since the program's inception, Dole employees appear satisfied. "There's increased morale and a better appreciation of their benefits," says Hagen. HR has been particularly able to accommodate working parents who need more flexibility for their children or those with elder-care responsibilities.

Clearly, in this case, both employer and employees have benefited from the flexible vacation plan. Because HR communicated it as part of its change to cafeteria-style benefits, the policy ended up being one of the highlights because it was something new and upbeat—rather than something health- or death-related. "It's probably one of the best understood benefits—much less complicated than life and medical insurance." But under other circumstances, such as a downsizing or a company's attempt to take away some benefits, employees are more apprehensive about HR's motives for offering flex vacations—at least, in the beginning.

Soften the blow of cutbacks.
Some companies, such as System Planning Corp. (SPC) began offering flex vacations as part of a cost-reduction effort. SPC provides national security research support and high-technology systems engineering for the U.S. Department of Defense. Most of its 260 employees are engineers, scientists and other professionals whose work can be arranged flexibly. So when the company decided to cut 40 hours of vacation time, HR combined holidays and vacations into one annual leave entitlement in which all full-time employees receive 160 hours (four weeks).

Rather than deciding which days are holidays, SPC encourages its employees to decide how to best plan their vacations and time away from the office, according to Winder Heller, director of corporate staff development. "At the same time we were taking away some vacation time, we wanted to make that change attractive to employees—give them more say in how they use their time," he explains.

Heller says he was skeptical in the beginning. But he has since become a true believer. He worked for SPC between 1975 and 1988, left for several years and returned last year after the policy was established. On average, he spends nearly 50 hours a week at work. But as the father of two young children—ages 12 and 9, he wants to spend more quality time with his family. With flexible vacation options, he can plan ahead for special events, such as his upcoming 50th birthday, during which he and his wife plan to hike down the Grand Canyon in Arizona.

SPC, he says, offers an incredibly flexible program. On the first of April each year, HR requests that its employees review their leave accrual rate for the next SPC fiscal year (April 1 through March 31). Employees may retain the 20-day accrual rate, increase it or decrease it. Changes in the rate are accomplished through a simple process of adjusting the paycheck by an amount equal to the employee's hourly rate multiplied by the number of leave hours to be accrued. This approach provides SPC employees with maximum flexibility, and also forces them to plan ahead. In fact, SPC employees may sell up to 160 hours of vacation time and buy up to 360. "I think it's a really attractive mechanism," says Heller. Employees can decide when they want to work, how long they want to work and when they want to take their leave. Since the program's inception in 1992, 40% of the employees have taken advantage of the option. Of those participating, 85% have bought more vacation time, and 15% have sold vacation time. In many cases, employees appear to be taking more frequent mini-vacations or longer weekends, rather than planning their vacations for two weeks in the summer, says Heller.

But before your HR punches out and shuttles employees off in such a direction, you might want to anticipate what other HR managers have learned: If a company is planning a cutback, but wants to soften the blow with flexible vacations, say so in the beginning. Pretending to be generous when you're really being more flexible can confuse, if not anger, your employees.

Be straight with your employees.
Sharon Beebe, manager of health and welfare benefits for Putnam Investments Inc. speaks from experience. The Boston-based firm, which has 3,500 employees, established its flexible vacation plan in 1995, after going with a cafeteria-style benefits plan. The goal was to put more money into the hands of Putnam's nonexempt employees without increasing costs to the company, which had experienced high turnover in customer service and accounting. "We wanted to entice people to stay without giving them a bigger salary," she says. To enable Putnam to become more flexible, it converted three vacation days into equivalent dollar values and gave the employees cash instead of time—unless they decided to sell it back for time. But when HR first rolled out the program, it didn't stress the take-away aspect as much as the new flex vacation option. "Communication is the key," she says. Consequently, the majority of eligible nonexempt employees haven't taken advantage of the program. "They probably don't fully understand it, or they're suspicious and realize if they buy three days, an extra $25 per paycheck will be taken out, and it's not worth it," says Beebe. "HR's goal shouldn't be to increase [the number buying], but just better understand why the employees may not want it or may want cash elsewhere."

Clearly, flex vacation options may not appeal to every employee, nor every company. But as Corporate America seeks new ways to help employees afford their benefits, balance work and family, or soften the blow of take-aways, flex vacations can be a passport to heaven—as long as HR designs the program to maximize flexibility, minimize costs and avoid administrative headaches. "Choice doesn't necessarily have to cost more money. [And] the only way a company can compete for employees is by using its benefits," says George R. Faulkner Jr., managing consultant at A. Foster Higgins & Co. Inc. in Philadelphia. Now, can you really afford to thumb your nose at Dole, Fleet or SPC? If you tell 'em to take a hike, they will.

Personnel Journal, August 1996, Vol. 75, No. 8, pp. 72-80.

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