If you would like to receive each new issue of Perspectives automatically via e-mail, please let us know.

Using PTO Programs to Improve
the Health of the Organization

Once considered simply a "good idea," paid time-off (PTO) programs have quickly become a valuable benefit for many employers. The explanation is simple: PTO programs reduce employees' inappropriate use of sick days. They also enhance an organization's health by empowering employees to better manage their time off to meet personal needs.

PTO programs help employers improve productivity and morale by changing the fundamental nature of paid time off — it becomes the employees' time to use however they want, so they don't have to take sick days as unscheduled absences. According to the 2006 CCH Unscheduled Absence Survey,¹ the absenteeism rate was 2.5 percent in 2006, up from 2.3 percent the previous year. At a typical organization, 65 percent of the people who don't come to work aren't physically ill.

PTO programs support a healthy organization by reducing friction between managers and employees (the employee rather than the manager manages unscheduled absences), promoting honesty (employees don't have to lie to access sick leave) and improving employee morale. According to a 2006 WorldatWork survey,² 79 percent of respondents reported that having a PTO program in place is "generally good" for morale.

Overview of PTO

PTO (also known as earned time) programs replace traditionally distinct programs — vacation, sick days, personal days, salary continuation programs and (in some cases) certain holidays — with a single block of time that is earned based on service. Although not everyone thinks that paying for time not worked is an "employee benefit" in the traditional sense, vacations, holidays, sick leave, short-term disability leave, parental leave and personal days make up the largest percentage of the total payroll expense for many employers.

PTO programs require workers to give advance notice of absences, whenever possible. This allows employers to take steps to accommodate the anticipated absence, minimizing manager and co-worker stress as well as the need for overtime and/or temporary help.

PTO typically includes a total number of days or hours that is less than the sum available under separate programs. The difference is that employees get to decide how to use the time they have coming. As a result, PTO programs that allow employees to take time off in blocks of hours rather than only as entire days present a viable option for helping to meet the needs of a diverse workforce. If employees choose to take an unscheduled day, it reduces the number of days they can use for a vacation.

According to the CCH survey, employers say PTO programs are the most effective program to control unscheduled absences. If the program is designed properly, unscheduled absences can be reduced by 25 percent or more.

The Financial Impact

A typical employer spends about 17 percent of its employee compensation budget on costs related to employees not working (see the graph below). Looking at it another way, the cost of absences averages 129 percent of a company's net income or 30 percent of payroll, according to the 2004 Full Cost of Absence Study by the Integrated Benefits Institute. These costs include replacement pay as well as lost productivity, reduced productivity of co-workers who must cover for absent employees, overtime paid to covering workers and hiring and training temporary workers.

Compensation for Not Working is Significant

Sources: Sibson Consulting compilation of data from The 2006 Employee Benefits Study by the U.S. Chamber of Commerce and Considering a New Employer Healthcare Strategy: Linking Medical Care to Productivity by the Integrated Benefits Institute

Smaller Organizations Suffer More

Unscheduled absences are a particularly acute problem for smaller employers, as well as for larger companies whose workers operate in small departments or project teams. A cycle can develop when any unscheduled absence increases the burden on those who report to work. Heavier than expected workloads create stress, which leads to further absences and higher health care costs.

Employees and PTO

PTO is a key component of the Employee Value Proposition (what an employer offers its employees in exchange for their effort and commitment). Employees want respect for the demands created outside the workplace, and a PTO program communicates that the company is in sync with this priority.

Time off ranks near the top of employees' preferences, above cash bonuses, modest raises and even future career advancement, according to a survey conducted by Sibson Consulting. In fact, vacation days are the second-most-cost-effective reward (after stock grants). In addition, employees who have generally used their sick days only when necessary will receive an economic benefit, because they will have more time off available than under a traditional vacation and sick leave policy. As a result, a PTO program can be an effective tool, not only in an employer's recruitment and retention tool kit, but also to enable employees to engage in their work. When the resources are there, employees are better able to perform their jobs and meet their objectives, especially in environments where work is performed in teams.

Design and Implementation of a PTO Program

There are four phases to designing and implementing a PTO program:

• Assessment Gathering information is the first step. Start by looking at how employees currently use their vacation, personal and sick days. What issues or challenges exist with the current design or the way it is communicated? How ready is your organization for PTO and what opportunities exist? Make sure you have a clear understanding of the objectives for the program, how it fits into your total rewards strategy and how it will promote a healthy organization.
  
  
• Design Program design will depend on your corporate culture and financial considerations. Ideally, employees will be included in the process to achieve maximum buy-in. Carefully consider how it affects current employees. You may need to consider a transition strategy to get away from accumulated banks of time.
  
  
• Implementation Launching a PTO program requires a well-functioning administrative infrastructure. Also important are tracking systems and supervisor training. Ultimately the success of the program will depend on the way it is communicated.
  
  
• Monitoring In order to determine if the PTO program is having the desired impact and to be able to develop future strategies to address causes of absence, it is important to establish metrics along with regular reporting. Consideration also must be given to employee satisfaction, supervisor support in encouraging employee compliance and any possible legal risks generated by inconsistent implementation or other issues.

In addition, employers must ensure consistency in how all employees account for their time away from work. Those who do not follow the procedures should be penalized. If the requirements of a PTO program are followed erratically or the program is not strictly enforced, it will collapse and may result in unintended legal liability.

Bases to Cover When Designing a PTO Program

There are many areas to consider when designing or redesigning a PTO program. Examples include:

• Scope How much PTO will the company give employees? What type of PTO will the program include? How may employees take PTO (for example, can time be used in blocks as small as 30 minutes or an hour)?
  
  
• Employee Preferences What do employees value about the current programs? What aspects of the current programs create particular challenges for employees and supervisors?
  
  
• Features While there are several components to be addressed, two examples include leave donation, which allows employees to donate time to a co-worker or the value of the day to a charity, and a buy/sell feature, which allows the employer to encourage or discourage employees from selling (or buying) days by "balancing" the selling price of a day with pay against its purchasing price.
  
  
• Extended Benefits If PTO can be carried over from year to year so that employees can accumulate a large amount of time, employers may want to encourage them to save it for a particular purpose, such as to fund retiree medical on a tax-favored basis.
  
  
• Procedures Written policies and procedures for requesting time off will encourage employees to schedule the use of their PTO well in advance. Be sure to stipulate how much notice people must give and how the program coordinates with other programs such as disability, workers' compensation and FMLA.
  
  
• Winner/Losers It will be important to understand who will win and who will lose so you can plan accordingly in the rollout of the program. For example, a program designed to be cost neutral, will always have some employees that win and some that lose. Understanding who is losing will enable you to strengthen the message before these employees try to derail the program or the revise the design.
  
  
• Administration After the initial installation, HR and supervisors must jointly manage the PTO program and oversee compliance. How will these responsibilities be divided to streamline the process while minimizing any legal risk and supporting the employee-supervisor relationship? Ease of administration will depend on the program design and the size of the workforce.
  
  
• Transition There may be certain features of the current program that will require a well-thought-out transition plan, such as accumulated sick banks.
  
  
• Compliance It will be necessary to understand how the changes being made are affected by various federal, state and local laws and regulations, private letter rulings as well as union contracts.
  
  
• Communications The manner in which you communicate a PTO program to employees ultimately will determine the success of the program and how it is perceived by employees. It can also have a major impact on how and when the program gets used.
  
  
• Litigation Risk While there are no guarantees against litigation, it is important to understand where you may be at risk for litigation and plan accordingly.

In Summary

More employers are taking a hard look at PTO programs or reviewing the programs they already have in place because of the important role they play in the employee value proposition and in promoting a healthy organization as well as their ability to reduce costs and improve productivity. While PTO programs will never eliminate unscheduled absences (people will always get sick unexpectedly), they can reduce unscheduled absences by employees who believe they are entitled to all of their paid time-off, thus promoting a more effective working environment for all employees.

Steven F. Cyboran, ASA, MAAA, FCA, is a Vice President and Consulting Actuary with Sibson Consulting, A Division of Segal, in Chicago. He can be reached at 312.984.8558 or scyboran@sibson.com.

1	More information about the 2006 CCH Unscheduled Absence Survey is available on this Web page.
2	Paid Time Off and PTO Banks: An Update on Current Member Practices.