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Vacation An Untapped Recruiting and Retention Tool

June 1, 2001
Related Topics: Benefit Design and Communication, Retention, Featured Article
Paid time off programs (including vacation) are cornerstone benefits that areeasy to overlook.

    These programs often appear to employees, potential hires and employers asgivens. However, in the current business environment, they should be examinedas potential tools for employers to use in boosting recruiting and retentionefforts especially when budgets and bottom lines are being carefully scrutinized.Further, studies have found that given a choice between more time off or moremoney, roughly half of those polled would select time off.

    Although vacation programs may seem simple to design and administer, there'smore to consider than the number of weeks to offer based on length of service.Employers must think about accrual methods, ease of administration, communications,employee demographics and economic conditions. Following is a brief discussionof these issues:

Designing a vacation policy
    Employers should consider several issues in selecting a vacation accrual methodology:

  • Prospective or retrospective and frequency --Vacation can be earnedeither in advance or at the end of a selected period of time and is typicallyaccrued monthly, quarterly or annually. Prospective accrual allows employeesto take vacation in advance and assumes that they will remain employed fora certain amount of time. Retrospective accrual credits vacation to employeesafter they have completed a specified service requirement. For example,if an employer uses a prospective monthly accrual offering one day of vacationper month, then the employee could take 12 days of vacation at some pointduring his or her first year. If this were instead a retrospective annualplan, at the one-year anniversary, the employee would receive the 12 daysearned in the prior year.

  • Rolling or static -- Vacation accrual can be calculated either ona rolling basis (each employee accrues vacation based on his or her individualdate of hire) or on a static basis (as of a certain date, say January 1,vacation accrual is established for all employees). Some employers designhybrid plans that which combine the features of rolling and static accrual.

  • Tenure, level, or merit -- Employers must decide how to scale vacationtime. For example, how long an employee has been at the company, what hisor her job level is, and how good the employee is at the job (merit). Alot of companies use length of service; some use job level. Until now, almostnone have used merit as a basis for accrual. However, some employers arereviewing their philosophies around offering expanded vacation to rewardtop performers.

  • Use it, lose it or save it -- Employers must decide whether unusedvacation days can be accumulated (moved forward into a future year) and,if so, for how long they can be saved. They must also consider whether ornot to pay employees for unused days. Employers may also want to think aboutestablishing "community banks" to which employees can donate unusedtime that may be used by others with unusual needs for time off (for example,to care for a critically ill family member or to be used by an employeewho must undergo time-consuming medical treatment).

Administering a vacation policy
    Administration requires special attention to the design elements just discussed.One consideration is the availability of systems support. Is there a computersystem? Or, is vacation accrual still being done on a manual basis? If an employerdoes not have adequate systems support, then the vacation accrual policy maybe well designed but cannot be practically used.

    In addition to supporting the transaction of vacation, actual accrual and anyassociated financial liability must be tracked by the company's systems. Forsome employers, these liability issues may require adjusting accrual design.Employers should consult with their financial and legal advisors about vacationaccrual liabilities and any potential impact on a company's balance sheet.

Communicating the vacation policy
    In addition to the necessary documentation in employee handbooks and policymanuals, manager training and employee awareness are necessary to ensure thatvacation policies are understood. Employers make a considerable investment inproviding paid time off and will want to get appropriate perceived value fromemployees. This can be achieved through a carefully communicated explanationof vacation time.

Demographic and economic issues
    Although the unemployment rate has been increasing over the past few months,it has remained below 5% for the past three years, a period of unusually lowunemployment. Prior to 1997, the last time the unemployment rate dipped below5% was 1970, according to the Bureau of Labor Statistics. In light of potentialemployment and economic shifts, human resources professionals should reviewtheir staffing and recruiting needs. They should re-examine both traditionaland innovative benefits to ensure that all offerings fit their company's currentstrategic plan.

    When considering how vacation-plan design fits with a company's strategy, employersmust be mindful of the demographics included in their employee base, as wellas those existent within the potential workforce. One of the most importantdemographics to heed as Baby Boomers begin to retire is the succeeding (andmuch smaller) generation, dubbed "Generation X."

    Currently, there are 56 million Gen-Xers included in the 136 million-personworkforce in the United States. Gen-Xers represents 42% of the workforce.

    Gen-Xers have become demanding in what they want and will accept from potentialemployers -- especially when it comes to work/life balance. Companies that donot provide time for their outside needs may not retain skilled employees fromthis generation. Find out what your Gen-X (and other) employees want in theirvacation policy, and tailor that policy accordingly.

    For example, you may considerintroducing additional types of time off, such as forcommunity/volunteering, education pursuits, or child and eldercare needs. You also may consider (while being careful with labor laws) allowing fractional use of time off, rather than whole days. Lastly, you may want to look at combining time-off into a larger discretionary bank that employees can draw from without specifying the reason for the need.

    If the economy continues to slow, layoffs will become more common. It is thenreasonable to assume that the hunt for talent will not be as challenging asit was during the past several years. Although this may be true for some positions,expectations are that skilled candidates for mid-level and senior positionswill continue to be in high demand. These positions typically require experiencedcandidates who have been active in the workforce for a considerable length oftime.

    These mid-career hires pose a unique problem for employers. In order to becompetitive, companies must make attempts to match what the candidate was givenby former employers. This has typically been accomplished on a case-by-casebasis. If an interested employer is to successfully recruit a candidate whohas become accustomed to a particular number of vacation weeks, then matchingthat number is essential.

Planning guidelines and policy reviews
    When determining vacation plan design and thinking about which method of accrualto use, it's important to keep it as simple as possible. It is not possibleto appease every demographic segment with a customized accrual method withouthaving an administrative nightmare. Before implementing an adjusted accrualmethod, it would be wise to conduct a benchmark study to determine the use ofvariable vacation accruals among market competitors.

    There are two constituents to consider when reviewing a vacation policy -- thecompany, and the employees. Arguably, they are one and the same, but to focuson one without thought of the other would compromise the successful impact ofthe plan.

    Today's employees are more aware of what benefits are offered by competing companiesthan ever before. Therefore, it is essential for employers to pose such questionsas:

  • Is the current vacation program competitive? Within the respective industry?Geographic location?

  • Is the program responsive to the various demographics of our employees?Is the program flexible enough to meet the needs of future demographics?

    Equally important in the review process are company interests. The company needsto address feasibility issues, such as:

  • What are the costs associated with potential program changes? If the projectedcosts are higher than those of the current program, might the discrepancybe reconciled by a potential reduction in turnover?

  • Are possible changes compliant with federal and local legal requirementsfor both exempt and nonexempt employees?

    With careful consideration and an organized approach, adjusting vacation accrualscan play a powerful part in a company's recruitment and retention efforts. Inthe past, employees were content to work for an employer offering little morethan pay and job security. Potential and existing employees today have a solideducation, demands for competitive compensation and benefits, and growing concernsover their work/life balance.

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