LINCOLNSHIRE, Ill. – Despite efforts by U.S. companies to maximize the value of their employee benefits programs, a new survey by Hewitt Associates, a global human resources services company, suggests that companies are potentially losing millions of dollars in payroll expenses and employee productivity because they do not track and manage employees' time away from work.  In addition, while companies believe that time off is a critical retention and recruiting tool, most employers do not design their programs to effectively attract and retain employees.

Hewitt's survey of 421 companies found that only 11 percent of companies provided the same time-off programs across all employee groups, making them difficult to administer, track and manage.  In fact, only 57 percent of companies formally tracked sick days for their exempt employees, and less than half (46 percent) tracked personal days.  Further, most companies revealed they did not know the financial cost associated with their employees' time away from work, even though they were allowed to provide an estimate.

Three-quarters (75 percent) of companies could not provide an actual or estimated cost of their sick pay as a percentage of payroll.  Those that did, however, estimated the potential cost to be between 1 percent and 3 percent of payroll.  For a company with $450 million in payroll, the cost of sick time could potentially be between $4.5 million and $13.5 million a year.  Expanding the example to include all types of time-off pay – sick time, vacation time and disability – overall costs could reach an estimated 9 percent of payroll, or $40.5 million in time-off expenses.

"Time-off programs are important tools for attracting and retaining employees, but they've gotten so complex that the administration of the programs typically overshadows this," said Kim Stattner, a principal in Hewitt's Health Management Consulting practice.  "It's critical that companies design holistic time-off programs that enable them to better manage, track and quantify the amount of time off that their employees take, especially since these programs are just as expensive – if not more so – as health care benefits, particularly when you factor in indirect costs such as overtime, temporary labor and employee morale.  Doing so can potentially save companies millions of dollars in payroll expenses and, at the same time, positively impact employee productivity and satisfaction with their benefits."  

The Need for Comprehensive Disability Programs

According to Hewitt's survey, companies reported that approximately 5 percent of covered employees experienced a short-term disability in a year, generally lasting between 40 and 42 days.  For a company with 20,000 employees, that means a total of 42,000 days would be lost to disabilities – translating to more than 160 employees not working for an entire year, or more than $8 million lost in productivity (assuming an annual salary of $50,000 and using 260 workdays a year).  

To manage this type of cost, almost 80 percent of companies tracked short-term disability of their exempt employees, and 87 percent outsourced their short-term disability and/or long-term disability programs.  However, less than half (44 percent) offered a return-to-work program for employees with work-related disabilities, and less than a third (28 percent) had a program to manage nonoccupational disabilities. 

"Short-term disability can potentially cost companies millions of dollars in lost employee productivity, but tracking data and implementing return-to-work programs can help minimize costs," said Stattner.  "Companies with return-to-work programs more readily comply with doctors' restrictions, such as shorter hours or lifting limitations, which enables employees to get back to work sooner, leading to improved productivity and, often, earlier recovery.  In addition, companies that track disability absence data can analyze it in conjunction with medical data, allowing them to identify co-morbidities that exist among disabled workers and enabling them to integrate disability with condition management programs."

Flexibility of Paid Time Off Programs Gaining Popularity

According to Hewitt's survey, the majority of employers offered vacation time based on service, ranging from a median of two weeks at hire to five weeks at 25 years of service.  Nearly two-thirds offered standard holidays only, while 37 percent offered both standard and floating holidays. 

"Most employers offer separate 'buckets' of time for vacation, holidays, sick and personal time and apply a different mentality toward each of their time-off programs," said Carol Sladek, a principal in Hewitt's Talent and Organization Consulting practice.  "In many cases, this type of compartmentalizing results in companies offering more time off to employees than intended."
 
In order to better manage costs and give employees more flexibility on how they want to use their time off,  a growing number of companies are offering employees paid time off (PTO) banks – which often include a combination of vacation, personal days and incidental sick time.  In a survey conducted by Hewitt in 2000, nearly one-fifth (18 percent) of companies offered PTO bank time, while in this year's survey, between 22 percent and 32 percent of companies discussed PTO banks. 

"PTO banks are becoming increasingly popular, because they often result in a win-win – allowing companies to more effectively manage their time-off programs and attract and engage talent, while providing employees more flexibility in taking time off," said Sladek. 

Employers with PTO banks provided approximately six additional days at most service levels, compared with vacation schedules, with time ranging from a median of more than three weeks at hire to six weeks at 25 years.  In addition, most PTO schedules provided employees with time off when they were hired followed by additional time off after one year, whereas most vacation schedules do not.

Implementing Incentive and Disciplinary Programs to Drive Behavior Changes

According to Hewitt's study, nearly two-thirds (65 percent) of companies said they did not use a disciplinary policy to discourage unscheduled incidental time off by their exempt employees.  Of those that did use a disciplinary policy, approximately half (53 percent) use a verbal warning or written warning.  Surprisingly, one in five who said they use a disciplinary system to discourage unscheduled time off said they had no formal policy in place.  In addition, only a small number of companies (9 percent) had incentive programs for employees (exempt, non-exempt or both) who have sick time remaining at the end of the year. 

"Most companies do not have disciplinary policies or incentive programs in place for a variety of reasons – whether it's because they lack the ability to punish or reward employees for something they don't track or they feel strongly about 'incenting' people to show up for work when the paycheck should be reason enough," said Stattner.  "But Hewitt has found that in the right environments these types of programs can be extremely successful at influencing employee outcomes, thus boosting productivity." 

What Employers Can Do

According to Hewitt, creating and implementing a successful time-off program requires employers to adopt a new paradigm – one that views employee health, absence and disability as interconnected and translates into the adoption of new strategies.  Hewitt recommends that companies consider the following steps to maximize the value of their time-off programs:

• Take inventory.  Most time-off programs have been built in pieces over the years.  Companies should take a holistic inventory of the current time-off programs they've developed over time and make sure the purpose of the overall program still meets the needs of their employee population.  In some cases, simply the way in which various time-off program segments are combined can make a significant impact on costs and employee productivity.
• Identify the totality of time-off program costs and establish a formal tracking plan.  Because time-off programs are so complex, companies have found it difficult to identify and assess how these programs directly impact the bottom line.  Once companies have a comprehensive inventory of their time-off programs, they need to take time to identify the total costs associated with those programs and establish a formal plan for tracking and managing future costs. 
• Review the design of your time-off program.  Often, the high-level design of a time-off program itself can minimize unscheduled time off.  As the workforce changes, employees are looking for more flexibility in their time-off programs.  To accomplish this, companies may want to consider offering floating holidays or adding a PTO bank, which not only enables employers to manage time-off programs more effectively, but gives employees more freedom to choose how they spend their time off. 
• Consider outsourcing short- and/or long-term disability.  According to Hewitt's survey, more than half (51 percent) of companies that outsourced short-term disability and/or long-term disability experienced reduced disability duration, and just about half (47 percent) experienced more effective application of their return-to-work programs.  More than one-quarter (27 percent) noticed reduced disability incidence. 

About Hewitt Associates

With more than 65 years of experience, Hewitt Associates (NYSE: HEW) is the world's foremost provider of human resources outsourcing and consulting services.  The company consults with more than 2,300 organizations and administers human resources, health care, payroll and retirement programs on behalf of more than 340 companies to millions of employees and retirees worldwide.  Located in 33 countries, Hewitt employs approximately 24,000 associates.  For more information, please visit www.hewitt.com.

Maurissa Kanter

,  Hewitt Associates,  (847) 883-1000

Suzanne Zagata-Meraz

,  Hewitt Associates,  (847) 442-7657