But unscheduled absences hurt a company financially also. According to the 1995 Unscheduled Absence Survey of 327 employers, conducted by Chicago- based Commerce Clearing House, average annual use of paid sick days ranged from just less than four to almost seven days; costs ranged from $212 to $668 per employee. Actual cost will be even greater: Figure in all the related expenses triggered by unscheduled absences (cost of temporary replacements, loss of productivity, and so on) and then you add 10% to 25% more.
Paid sick time was intended originally to provide salary continuation while employees were ill. Unfortunately, today employees don't necessarily take sick time because they're under the weather-the CCH survey reported personal illness as accounting for only 45% of unscheduled absences. Other reasons cited were: family issues (27%), personal needs (13%), entitlement mentality (9%), and stress (6%).
Clearly, traditional approaches aren't working as intended. Companies are beginning to realize that often, paid sick leave sends the message: "Don't come to work and still we'll give you benefits." How many of your employees' absences are due to the mentality "time is due to me-whether I'm sick or not?" Just look at your employee handbook. Does it say employees "are granted 10 days a year for sick time" or "employees earn one sick day a month"? If so, what message is conveyed to employees? Why be surprised employees view sick time as a use-or-lose benefit? This is why salary-continuation practices need to be reviewed and updated.
As marketplace competition heats up, companies have been trimming down for the fight. They've snipped off benefits and slashed through workforces. Yet many have skimmed over the problem of unscheduled absences, which chip away at a company's competitive advantage more than most realize. According to the U.S. Chamber of Commerce, companies spend 12.1% of payroll on time-off benefits-more than the cost of legally required benefits.
The key question, then, is how do you control the cost of unscheduled absences while acknowledging employee needs for time off to meet family and personal obligations? One effective approach is a paid leave bank or paid time off (PTO). How effective? During the three-year period following conversion to PTO, Rockford, Illinois-based Rockford Memorial Hospital experienced a positive impact of $2,723,000. It did so in accordance with an eight-step model any company can use:
Step 1: Clarify corporate objective(s)
Step 2: Conduct financial analysis
Step 3: Create preliminary design
Step 4: Meet with swing people (influential employees)
Step 5: Finalize PTO design
Step 6: Present PTO design to all employees
Step 7: Implement PTO
Step 8: Follow up
Rockford looks to PTO for healing its attendance gap.
Just three years ago, Rockford Memorial Hospital's sick-leave policy was ailing. The program granted full-time employees 12 sick days a year, three personal days (to be used by year-end), and vacation time based on tenure (one to four years was 10 days; five to nine years was 15 days; and 10+ years was 20 days). Sick time could accrue to 1,300 hours-and employees with greater than 480 unused, earned sick hours (and there were many) received cash for excess hours upon termination. The liability of accrued paid sick leave was calculated to be more than $1.5 million and growing.
Rockford's time-off pay policies weren't supporting the current business environment. With fast-paced changes occurring in the health-care industry, traditional practices threatened the hospital's competitive position-a situation many other industries also are facing. Rockford saw PTO as the vehicle to address its business concerns while responding to employees' needs for time off to take care of family and personal matters.
The PTO concept is very straightforward. Employees receive a bank of time to be used for absences (sick, vacation and personal time). Legal holidays are often excluded and handled as they are observed. Including legal holiday time in the bank would increase costs because holidays occur unevenly during the year. Other time-off benefits, such as jury duty, bereavement leave and military leave are also excluded because not all employees use them.
Every time employees need time off, they dip into their reserve of days. So if employees have 20 days of paid time off in the bank, they are empowered to use those days however they wish-and use them wisely. Employees no longer have, for instance, five days allotted specifically for sick leave. Companies that have used PTOs for a while find employees appreciate not having to fib to access their sick days-instead, they just take a personal day. Employees like this self-management aspect, while managers appreciate being able to plan ahead for the absence.
Before implementing a PTO, however, Rockford conducted Step 1 of the eight-step model: It clarified its corporate objectives. Hospital executives concluded previous time-off policies had become too costly and did not encourage good attendance. Therefore, the goals of the hospital's new program were defined to reverse the situation. They included: lowering costs of unscheduled absences, rewarding good attendance and providing employees with greater flexibility in scheduling time off for meeting family and personal obligations. Would PTO fit the bill?
- Lowering costs of unscheduled absences: Reducing unscheduled absences increases productivity without increasing costs. Companies are already paying for the time. The difference is that employees are at work (being productive) rather than at home (or somewhere else).
- Rewarding good attendance: Employees who rarely use all of their sick days may take the extra sick days and use them toward vacation.
- Provide employees with greater flexibility in scheduling time off: Companies that have used PTOs highlight the value of employee empowerment and responsibility for business decisions. Employee self-management of time off is an extension of this "quality" philosophy. Employees could now manage their own time instead of the hospital telling them how much time is available for sick, vacation or personal time.
It looked like PTO might work.
The hospital fleshes out its plan.
With these questions answered, Rockford could move on to Step 2: conducting a financial analysis of PTO. In this phase, companies will realize that upon implementing a PTO, some employees will receive more time off with pay-namely, those employees who rarely used their sick leave under the old system, and would now have those extra days available to them in the PTO. This immediately raises a red flag. Why should you expect the CFO to support any program that increases costs? The reason: Total costs (looking at bottom line) decrease.
For example, if unscheduled absences are costing the company $1,000,000 a year, how would you feel if total costs were reduced to $900,000 without any adverse consequences to the company? Most CFOs would give their support even if it means some employees will gain (as compared to under the prior system). The losers are those who abuse or mismanage their time-off allowance.
Candidly, some non-abusing employees who need considerable time off due to medical reasons, may not come out ahead with PTO. Companies need to assess benefits of PTO as well as any downside. Also, if money is tight, companies need to weigh the impact of other austerity measures against PTO's effect.
To help make a wise decision, calculation of true unscheduled absentee costs is essential. Ideally, the analysis should include the following cost information:
- Amount of paid sick hours and cost in dollars
- Replacement costs to cover for unscheduled absences. These include:
a. Overtime dollars and hoursb. Straight time payment for employees working on a non-overtime basis c. Temporary help costs, either from external or internal pools d. Vacation pay in lieu of sick time e. Productivity downtime f. Decrease in responding to customer demands g. Deadlines that were missed h. Cost to manage replacement system i. Additional supervisory time to adjust work schedules.
Do not be misled by normative absentee rates. Some companies take the position that if their absentee rate is 3%, and the national norm is 3.2%, then they are doing OK. Yet, how many companies are satisfied with being average? A more appropriate question to ask is: If unscheduled absences cost the company $1,000,000 annually, are you interested in reducing it? If yes, then PTO should be considered. (For a hypothetical example of a financial analysis and key PTO features, see "PTO Financial Analysis and PreliminaryDesign,".)
With its financial analysis looking positive, Rockford headed into Step 3-creating a preliminary design. In this phase, Rockford's HR people, in particular PTO point man Steve Eckberg, worked very closely with the hospital's CFO; this is a highly recommended approach. It's essential to PTO success for the CFO to support the design-having the top numbers person vouch for a project's fiscal soundness carries considerable weight.
In designing a PTO, every company needs to decide how aggressive it wants to be in cutting costs. Employer costs are reduced by limiting the amount of sick time placed in the bank for an employee's immediate use. If an organization averages seven sick days per employee, it may want to cut down the days placed in the bank to five.
However, some companies place not only the actual average amount of sick time in the bank, but also vacation and personal time allotments. These companies believe increased productivity (due to fewer unscheduled absences) will meet their cost-savings goals without making cuts in the allotted days off.
Rockford is one such example. Previously, new employees accrued 25 paid days off per year (10 vacation days, three personal days, and 12 sick days). Average sick time used was five days per year. The PTO design enabled new employees to accrue 18 PTO days, and seven catastrophic account (CAT) days per year. (CAT provides coverage for a short-term illness causing absence for more than five consecutive workdays.) Caps were 27 days for PTO, and 60 days for CAT. Employees with greater tenure received greater PTO annual allowances due to increases in vacation.
With the preliminary design complete and the CFO's support, the CEO gave the green light to move ahead. HR could now do what it does best-work with the employees.
Rockford takes the workforce's pulse.
Now the major concern was convincing employees that PTO was in their best interest as well as the hospital's. Just as companies test market a new product, Rockford introduced the PTO program by convening a meeting of swing people (Step 4). All companies have swing people. They're the influential non-management personnel-a cross section of the organization. Politicians refer to them as "centers of voter influence." If they support you, you're more than halfway there. If they oppose you, then back to the drawing board. In essence, their support is crucial to your cause.
Usually two to three meetings are required in testing the waters. At the first meeting, reasons for change and the PTO design itself are explained. Employees are asked to think about the design and be prepared to ask questions at the next session. The second meeting should be scheduled approximately two weeks later. Employees can then offer their reaction, followed by a general discussion based on employee comments. A third meeting may be necessary for management and employees to reconsider issues left unresolved at the second session.
At Rockford's first meeting, Eckberg explained (with numbers) the cost of the current absentee program, and how the expenses threatened the hospital's welfare-which means employees would be impacted. Eckberg discussed how new competitive pressures in the health-care industry mandated all health-care facilities to alter practices or face fairly dire consequences. Some of the 15 to 20 swing people liked the PTO concept. However, many had reservations. Even though employees understood the hospital's position, two main concerns were identified:
- Why was the hospital discontinuing sick-time payout upon termination? Many employees, especially long-term workers, felt the hospital owed them the sick-time payout upon termination-it had been promised, and employees felt they had worked hard for the benefit. This became a "lightening rod" issue.
- Why will employees have less sick time (since most wouldn't dip into the CAT fund)?
Clearly, not everyone was happy. It's not unusual when presented with changes (even if the change makes sense) to initially focus on why not to change. As Lester Thurow said in his book "Head to Head," "Facts are very difficult to deal with when they conflict with previous experiences. Before changing beliefs, most people will spend long periods of time pretending that the facts that conflict with their beliefs are incorrect, thus hoping the new information will somehow magically go away." Or, as economist John Kenneth Galbraith said, "Faced with the choice of changing one's mind or proving that there's no need to do so, most people get busy on the proof."
The PTO designers experienced the same phenomenon at Rockford. They expected resistance-and they got it. But they gave people a chance to hear the reasons for change, and then gave them time to think about it. Employees intellectually understood the why; they then needed time to internalize the reasons for converting to PTO, especially the value to them. Therefore, a second meeting was scheduled so management also could think about employees' concerns and be prepared to respond to them.
The final design is approved-and successful.
Between meetings, hospital management spent considerable time reviewing the main employee concerns, in particular sick-time payout upon termination. Hospital executives felt pressure to contain costs as managed care began to dominate the health industry.
Stopping payouts of unused, earned sick time in excess of 480 hours at termination (with a projected liability of $1.5 million and growing) was viewed as essential. On the other hand, Rockford prided itself on being a credible employer and an excellent place to work. Sensitivity to employee issues is a core value. Finally, a compromise was decided. Management felt employees had a valid point by highlighting the hospital's commitment to a benefit. Therefore, Rockford agreed to continue payouts for current employees, but decided to discontinue it for new employees. Also, payout liability was capped upon PTO implementation.
At the second meeting, the compromise was explained. Eckberg also discussed employees' second concern-why less sick time. He explained that, being a health-care system, there was constant pressure to cut costs. A good way to do this was to decrease the level of acceptable unscheduled absences. But at the same time, a PTO policy would benefit employees by giving them something they'd never had before: ownership of their time.
Employees were given time to think about PTO and the competitive pressures forcing management to consider alternatives to current benefits. In the end, the group accepted management's position. With the swing peoples' support, top management completed Step 5: endorsing and finalizing the PTO design for implementation. It set the implementation date for January 1993.
The hospital then announced employee meetings to explain the PTO design and reasons for its adoption. In this, Step 6, companies should distribute the PTO policy and may use swing people to assist with presentations (see "Rockford Memorial Hospital's PTO Policy Guidebook" ). Rockford scheduled employee meetings around-the-clock so the staff on all three shifts could hear Eckberg's explanation of the PTO design. Employees had a chance to look over the PTO policy-and acceptance was high. The actual hard work was accomplished by proving to swing people that the PTO design was in the employees' best interest as well as the hospital's. Swing people attended PTO orientation sessions, and their support helped seal the approval of the 2,400 employees affected.
After Step 7, implementation, Rockford completed the final step: follow up.
Companies should assess their PTO's impact one year after implementation, and then annually. Measurement should include:
- Amount of sick time used (hours and dollars)
- Percent change in scheduled and unscheduled time
- Change in overtime hours and dollars
- Impact in use of temporary help (internal and external)
- Employee surveys concerning their feelings about PTO
- Impact on meeting production deadlines and quality standards.
Over three years, Rockford experienced a positive impact of $2,723,000:
- $391,660 savings in lower overtime
- $1,982,783 in increased productivity at no additional cost. This was because of a 36% decrease in unscheduled absences
- $350,000 saved in reduced temporary help from internal and external pools.
In addition, employee appreciation of the new system was high.
Clearly, PTO was a winning solution to Rockford's problem. The company had followed the eight important steps and proved that implementation could benefit the hospital financially while still supporting employees personally. Companies that currently are feeling the sting of unscheduled absences may, like Rockford, find that PTO offers relief.
Personnel Journal, March 1996, Vol. 75, No. 3, pp. 115-120.