Strategy

Mandatory Fun

How does mandating the use of vacation time affect profitability? Does it?
CFO.com StaffMay 11, 2001

Q: Companies that are mandating that employees take vacation days seem to be doing so in order to take short-term measures to improve profitability. I don’t get it. It’s obvious how mandating unpaid time off would save expenses and therefore pump up earnings — but how does mandating the use of vacation time accomplish that?

In my company ($2.5 million revenues), we accrue vacation on the books as a liability, but expense it when it is used. Certainly, vacation liability decreases when vacation is taken — but that doesn’t affect immediate expenses or earnings. Do these companies keep books differently from the way we do? Or is there a different goal from what I’m assuming?

Name Withheld

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A: Mandating the use of vacation time in fact has no effect on short-term profitability. However, accrued vacation time does increase liability, and companies hope to reduce this exposure in an organized way.

For example, let’s say an employee whose salary is $100,000 has four weeks of vacation. He doesn’t use it and eventually accrues eight weeks. That’s almost $16,000. Let’s say there are 10 employees who do the same thing. That becomes a significant liability on the balance sheet that companies would rather spread out over the year. A slowing economic environment presents an opportunity for employees to take vacation when productivity doesn’t need to be at its peak.

That said, an equally important reason for compelling individuals to use their vacation is to avoid disenfranchising their personal and emotional well-being. “A” players in “A” roles are the most likely not to take vacations for extended periods. This legitimate motive of preventing burnout is often missed because of the apparent insensitivity of mandatory vacations.

When considering the actions of any organization there is a need to consider the financial balance sheet of the organization and the needs of individuals to take a break.

Tom Casey
Principal, Unifi Network, a subsidiary of PricewaterhouseCoopers LLP

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