Paid Time Off (PTO) is an important benefit provided to employees for planned vacation and illness, and can be critical to maintaining productivity and employee morale. However, the capture and management of Paid Time Off (PTO) is an area which is poorly managed across companies of all sizes, leading to a significant portion of PTO that is taken but not reported or recorded. In most companies, senior management views this area with a sense of apathy, knowing that abuse exists, but paying little attention to it. The underlying assumption is that there is little return on investment associated with managing PTO.
However, in recent years, many companies are realizing that the liability of PTO is indeed "real money", especially when large amounts have had to be paid out during layoffs. As voluntary turnover increases, fueled by an improved economy, companies once again are facing large payouts of unused PTO balances. All of a sudden, senior executives are seeing the management of PTO as an opportunity to improve ongoing operating costs and reduce liability.
Given the recent interest in this area, AppMail, a market leader in the Human Capital Management space, commissioned an international survey into the financial and management issues surrounding Paid-Time Off. This report presents our major findings to date and details the most important best practices that we have uncovered to address the problem.
Major Findings
1. The combined PTO liability carried by companies across the U.S. and Europe is about $780,000million, of which $195,000million is resulting from abuse of PTO. These estimates are based on our research findings, resulting in an average per employee PTO liability of $1700 in the U.S. and $3300 in Europe. (see detailed results in appendix). According to AppMail´s discussions with companies across industries and countries, a conservative 25% of the liability ($195 billion) is driven by PTO abuse.
2. PTO can be a significant portion of a company´s total operating costs, especially in knowledge centric industries where it can be as much as 15% of a company´s operating costs. This is especially true of companies in Europe where standard PTO allowances are higher. See chart below. The Lesson: PTO is a meaningful number - controlling PTO abuse can have a significant impact on the bottom line.
3. Most CFOs do not have an accurate estimate of their company´s PTO liability. 73% of the CFO´s we surveyed did not know what their liability was, and when the actual number was uncovered, 82% of those felt that the number was significantly higher than what they would have guessed. The Lesson: Companies should track and review their PTO liability - it could be an unpleasant shock!
4. PTO Abuse, and the money flowing out of the company, is real. The number of unreported PTO days is very difficult to track, however based on our interviews of U.S. and European companies, where there were few formal PTO tracking systems in place, we estimate that an average employee takes about 3 days of unreported PTO annually. (This number is higher in Europe and Asia, and higher in certain industries, see Appendix). In Silicon Valley, where our company is based, this abuse translates into an operating cost of about $330,000 annually for a 1000 person company with an average annual salary of $115,000 and 20% turnover. The Lesson (once again): PTO is a meaningful number - controlling PTO abuse can have a significant impact on the bottom line.
5. There is a higher prevalence of sickness abuse in Europe and Asia. The average number of sick days in Asia and Europe is 9 days per employee, and based on our research, about 4 of these days were abused. Our interviews revealed that, while there is a greater cultural acceptance of this practice, there are also very few systems in place to manage and curb the abuse. Senior managers stated that without formal systems to track PTO, they were reluctant to try to confront employees and try to change the company culture. The Lesson: Systems and processes can be valuable tools to control a cultural pattern.
6. The process of requesting, reporting and tracking PTO is manual and cumbersome in most companies. As with any process, we have found that when employees or managers have to go through multiple, cumbersome steps to complete a task that is not considered a priority, they are likely to put it off or not do it at all. In addition, companies typically still leave it up to the employee to initiate and follow-up on the process of requesting time-off. Since this requires a long, paper based request form and a walk down to the HR department, it is easy to "forget" or put-off. This is especially true of the occasional afternoon or day-off due to an illness or dental appointment. The Lesson: Make it easy and intuitive to report PTO, and it is more likely to get done..
7. There is little senior management oversight given to PTO planning and management. In many companies, we found that employees (and managers) took a fairly cavalier attitude towards reporting time-off, especially unplanned PTO. The occasional afternoon off, sick-day, etc. are not really getting reported. This is especially true in companies that have loose, often manual systems of reporting the PTO. The Lesson: Signal to employees that their PTO is being tracked and they are more likely to report it.
8. Companies that institute a "use it or lose it" policy still have a PTO abuse problem. In our interviews, many companies did not initially acknowledge the problem of PTO abuse because they had a "use it or lose it" policy (U.S.) or required PTO to be used up at termination (Europe). When we dug further, it became apparent that PTO abuse was still prevalent even though it did not translate into real money walking out the door. Instead, it resulted in loss of productivity, negative morale among remaining workers and the necessity to bring in temporary workers. The Lesson: PTO abuse is a major cost, even if it does not translate directly into real money. Implications
Our research revealed a significant degree of apathy regarding a business issue that has major cash, liability and productivity implications. In a few cases, we found companies that employed "best practices" that lead to cost and liability control, higher productivity and higher employee morale. Some of these best practices are discussed in the section below. Our research suggests that companies that have been able to more accurately capture and report PTO are able to see significant improvements in this area. Here are some examples.
- AON Consulting estimates that companies that "get serious about sick time abuse" can expect to see a four percent improvement in payroll costs
- PersonnelToday.com reports that companies that have put in automated systems to track PTO have achieved five to 40 percent reductions in absenteeism
- PersonnelToday.com also reported that a U.K. company that automated its PTO system, and linked it directly to the payroll system, was able to reduce the time it took managers to capture and report PTO by 85%.
During the research, we also identified a number of best practices among companies, that allowed them to control and manage the PTO problem. Some of the most effective best practices are discussed below:
Make it Easy, Make it Intuitive for Employees and Managers
When the employee is able to report both planned and unplanned time-off in a quick, easy way, they are more likely to do it. While this sounds obvious, we found that in the majority of companies, employees still have to report PTO using cumbersome methods like filling out a long paper-based form, going to a complex intranet site (having to remember passwords), or learning and interacting with a new software application. In contrast, the best companies use a simple, intuitive, on-line method which requires no set-up or training time. The same applies to managers who approve and review PTO - if it is easy, they will do it, if not, it will get left for another day. In many cases we examined, PTO was applied for, reported (and taken) by the employee, but because the approval form was still on the manager´s desk, the PTO was never deducted from the employee´s PTO account.
Set Appropriate Expectations and Allow Managers to Track PTO
This is the old management adage that if you start measuring it, it will improve. In many companies, we found that employees (and managers) took a fairly cavalier attitude towards reporting time-off, especially unplanned PTO. The occasional afternoon off, sick-day, etc. were not really getting reported. However, in companies where a formal system was introduced, and it was apparent that PTO was being carefully tracked by the manager and company, as well as reported back to the employee on a regular basis, employees realized what was expected of them. In such companies, we saw significant improvements in PTO reporting, especially unplanned.
We asked managers: how sure are you that your staff actually formally report all sick days even though they call to tell you they were sick? The vast majority of managers were really NOT sure and didn´t have an easy way to check. One way: enable the manager to quickly record directly into the system when an employee calls in sick. At a major educational software company, when an employee calls in sick, rather than just making a mental note, the manager makes a quick entry in the PTO system. When the PTO system next delivers a PTO report to the employee, the sick-day is already pre-recorded and the employee merely confirms or denies it. This reduces the chance that the manager or employee "forgets" to report the time off, without the manager ever having to confront the employee. This educational software company has also found this useful in differentiating between days when the employee is tele commuting vs. taking time off. See Figure 1 for further details.
Close the Information Loop
Again, this is obvious, but in so many companies, this simply doesn´t happen. An employee fills out a PTO request, the document is filed in the HR department until it is entered into the system. In the meantime, the employee, the manager, and the company do not have an accurate accounting of actual PTO planned and taken. Even worse, there were many cases where an employee requested PTO leave, but because of business reasons was unable to take it. Unaware of this, the HR department, when it finally entered the form into the system, deducted the leave from the employee´s account anyway. This of course causes enormous frustration for all concerned. A solution that some companies have implemented is to not only enable employees to enter PTO into a real-time system, but to then provide regular reports back to the employee and manager. This allows employees to correct any discrepancies, and just as importantly, gives the employee a reminder to report recent unplanned time off.
Provide Management Reporting and Tools
Once the PTO data was accurately captured, we found that many companies were able to go to the next step of using the information for management and accounting purposes. When managers were provided with bi-monthly or monthly reports on planned vacations, absenteeism, etc. which they knew to be accurate, they were able to better mange their operations, as well to address absenteeism issues with the appropriate employees. We found some companies have set up triggers in the system, which alert managers to employees that are taking excessive unplanned PTO, or if a large number of employees have requested time-off at the same time. More importantly, with improved reporting systems, the controller and CFO´s offices were better able to accurately forecast PTO, minimizing year-end surprises.
Selected Detailed Findings
PTO Liability is higher in Europe than in the U.S....
PTO Liability tends to be lower for larger companies...
PTO Liability varies dramatically by industry...
