Technology has made it possible for employees to be plugged in around the clock, even when they’re “on vacation.” In view of this reality, Kronos launched its open vacation policy in early 2016. To Ain’s surprise, some employees were very unhappy about it, largely for three reasons: Because the new policy required individuals to work out time off with their supervisors, some managers thought their jobs would become more difficult. Some employees who had been banking unused vacation time resented the loss of a bundle of cash when they retired. And some felt that it was unfair for new hires to get as much vacation as they themselves had earned over time. But Kronos now considers the switch a success—and 2016 was financially the company’s best year ever.

Leer en español Matt Kalinowski

When I joined Kronos as one of its first employees, straight out of college in 1979, the company gave new employees two weeks of paid vacation. Every year you stayed at the company, you earned an additional day, up to a certain level. That was how most companies handled vacation time, and although the numbers may vary, it’s the way most of them still do. By 1984 I’d been promoted to national sales manager, and four years later I became the vice president of global sales and service, an executive position. Kronos, which creates workplace management software and services, had a long-standing policy that top executives needn’t track their vacation time and could take as many days as they deemed appropriate. That made sense. Even back then, people in senior roles were required to perform 24/7. When you’re constantly working nights, weekends, and during family travel, tracking your hours or declaring an official “vacation day” becomes almost meaningless. I’ve been in executive roles at Kronos ever since then, and CEO for the past 12 years. So I haven’t been required to track my vacation time for almost 30 years.

A change like this requires fundamental trust in the people who work for you.

What’s changed since I joined Kronos is that, partly owing to technology, professionals at every level of companies are now routinely on their phones, answering e-mail, or doing some sort of work after business hours. I see this firsthand with my daughter, who is early in her own career. Her recent positions have provided only two weeks of vacation, limiting her ability to travel with my wife and me. When she comes home for Thanksgiving, it’s not unusual to see her working several hours a day over the long weekend. In an era when so many employees are plugged in around the clock, official policies that depend on clearly delineating when they’re “at work” or “on vacation” strike me as antiquated or even foolish.

Hurdles to Hiring

This sensibility provided important context when our chief people officer asked to meet with me in late 2014. For months we’d been experiencing recruiting challenges. Kronos has 5,000 employees around the world, with almost 1,500 of them at our headquarters in Massachusetts, where the job market for college-educated professionals tends to be very tight. At that point we had more than 300 open positions and were having trouble filling them; if that continued, it would affect our growth plans. We talked about specific hurdles to hiring, and one of the issues was our vacation policy. By then we were offering new employees three weeks of paid vacation, which is comparable to what local companies with which we compete for talent were offering. But when our recruiters tried to hire people in their thirties or forties with significant tenure at other companies, they often learned that those people had four or five weeks’ vacation. Vacations are important, and persuading people to take a job with less time off was a real challenge.

I asked our HR department to come up with strategies that would make us more competitive in recruiting. It created a menu of options. One was shifting to an “open” vacation policy, the kind pioneered by Netflix. Under an open system there is no set limit on how many days off an employee may take; instead, individuals work things out in consultation with their supervisors.

We decided to launch this system, which we call myTime, at the beginning of 2016. Although most employees were happy about the change, a vocal minority were really unhappy. To be honest, I wasn’t prepared for how much emotion and pushback this change would evoke, even from a small number of people. But we’ve since worked through those challenges, and we have data that proves the new policy has been good for Kronos. Unlimited vacations won’t work for every company—but employers that are considering them can learn from our experience.

You can’t even think about making a change like this unless you have fundamental trust in the people who work for you. I’ve always tended to have such trust, partly because every time I’ve extended it, people have shown my judgment to be correct. More than 25 years ago several superstar employees on my team went out on maternity leave at about the same time. In each case, when her leave ended, the employee was wavering about coming back. Each woman worried that it would be too difficult to balance a full-time office job with parenting. I didn’t want to lose them. “What can we do to make this manageable?” I asked. One wanted to work three-day weeks. Done. Several wanted to work from home when necessary. No problem. This flexibility is common now, but it wasn’t back then, when e-mail didn’t exist and companies still used fax machines. But I trusted those employees to get their jobs done, and they did. Experiences like that made my trust in our people grow.

Family First

As a CEO, I’ve also been extremely outspoken about prioritizing family over business. I talk about it so often that I worry employees are tired of hearing it, but it’s really important to me. I constantly tell our people that if their job or career is the most important thing in their life—the activity they care most about and invest the most in—they’re making a profound and tragic mistake. Family and relationships should be the clear priority. I try to behave in ways that model that behavior. When my children were on high school sports teams, I tried never to miss a game, even if it meant leaving work at 2 PM on Wednesdays. And I didn’t sneak out of the office—I told people exactly what I was doing and encouraged them to do the same thing. I’m a big believer in what the management writer Jim Collins says: If you get the right people on the bus, people who have the talent and the work ethic needed to perform, you don’t have to spend time closely supervising them. They’ll get the job done, no matter what hours they keep.

After our HR team proposed an unlimited-vacation policy, I started doing some research—basically just going online and reading about other companies’ experiences. I quickly discovered cases in which the new policy didn’t work well or companies had tried it and then reverted to a traditional approach. Reading that didn’t concern me much. Just because it hadn’t worked for them didn’t mean it wouldn’t work for Kronos.

Unexpected Challenges Rich Fuerstenberg is a senior partner in Mercer’s health consulting business and specializes in absence management. HBR spoke with him about why some companies shift to an unlimited vacation policy—and how far this trend might grow. Edited excerpts follow. When did corporate interest in open vacation policies accelerate?I’d heard about random companies having them, but around 2013 many Silicon Valley companies began adopting them. That’s when this changed from a blip to a trend. What typically sparks a company to explore moving to an unlimited vacation policy?It’s driven by several things. One of them is technology. With more of the workforce becoming 24/7, using flexible work schedules and working from anywhere, how can we distinguish between when people are working and when they’re not? Companies are recognizing that even when people record vacation time, they’re often working. Another factor is that under a traditional policy, companies accrue unused vacation as a liability. As that liability increases, they become interested in a different way of handling paid time off, or PTO. Your data shows that more companies offer unlimited PTO to executives only. Does that cause morale problems for other workers?In those situations only a few executives are getting unlimited vacation days—the same group that might be getting access to the corporate jet or other perks. It’s a small number of people, so oftentimes the broader workforce doesn’t know about the policy. It can get a little noisier as the circle expands—when it’s not just the C-suite but also senior vice presidents and directors, and goes from 10 people to 100. At a certain point it becomes impossible to keep quiet, and you may face communications issues. When companies consider this shift, what challenges do you warn them about?That depends on the company and its culture. The company is likely to have pockets in which people might be prone to abuse an unlimited-PTO policy. The fix for that is to not offer it for that function. Managers face uncertainty about how much vacation time people will actually take—and we know from our surveys that when companies make the shift, many people actually take less time off. That creates a risk for burnout. In that case, the company needs to foster a culture in which people see that it’s OK to take time off. The other challenge is that some workers—especially longer-tenured ones—may have accrued a large amount of unused vacation time. Many companies pay employees for that time, usually in cash—either as a lump sum when they leave the company or over several years. These are significant issues. We see many companies exploring the shift, but relatively few actually go ahead with it. If those are the expected challenges, what unexpected ones do you observe?I’ve read about some employers—not our clients—that go from a traditional plan to unlimited PTO and then revert to some form of more-defined limits, such as “Take up to four weeks of vacation.” Putting a number out there helps people feel safe if they take time off. Too often these systems can result in gamesmanship—one person thinks he shouldn’t take time off until the person he sits next to does—and if that person takes two days, he’ll take only one. So companies that opt for unlimited PTO sometimes make an effort to counter that behavior. How far do you think unlimited PTO could extend?We are seeing it expand among executives and extend to the executive team. We do think there are limits, however. When you extend it too far, you include people who aren’t really in 24/7 roles. And in some industries I see unlimited time off as totally untenable. Retailers. Nursing. Call centers. Those are places where you need to have a certain number of bodies predictably in their seats. It seems to me unrealistic for the majority of employers to do this, so I think you’ll see a gradual expansion as opposed to mass adoption.

I also read specific complaints from employees whose companies had shifted to an open vacation policy. Most of the complaints were driven by people’s realization that companies adopt this policy not out of the goodness of their hearts but to save money: When employers offer traditional “accrual” vacation policies, people who resign or retire with unused time off have to be paid for those accrued days. For large companies, that can be a substantial expense; even at a company our size, it added up to $2 million or $3 million a year. When a company adopts an open policy, no more accrued days are banked, so whatever money it formerly paid departing employees goes to the bottom line.

From the beginning we decided not to try to profit from abandoning an accrual system. We felt it made more sense to reinvest those savings in other employee benefits. So in addition to offering an open vacation policy, we increased maternity leave, parental leave, and adoption leave; we increased the 401(k) match; we created a scholarship program for employees’ children; we launched a child care assistance program; and we began contributing up to $500 a year toward employees’ student loans. In the end those new benefits exceeded the savings from changing our vacation policy, but I believe they were worth it.

The Leading Complaints

While I was educating myself about open vacation policies, our HR people were doing more-systematic research. They hired a consultant who had helped other companies make the shift. He gave a presentation on the pros and cons, saying that at most companies, 95% of employees prefer unlimited vacation, but 5% typically object—for reasons I’ll discuss shortly. The consultant also said that the biggest problem with the change is that some employees actually take less time under the new policy than they did under the old one, because they’re afraid of asking for too much time off. We wanted to be sure that didn’t happen at Kronos, because it would defeat the purpose.

We made one important decision early on: Although we would no longer set formal limits on time off, we would continue to track every employee’s requests and time taken, because we wanted to be able to analyze how well the new policy was working and to be sure that managers were implementing it fairly.

We announced the new policy on December 18, 2015. “Thank you for creating an environment where we trust each other so much that we can take a step like this,” I said in a companywide video. The new policy would take effect on January 1. Just as the consultant had predicted, most people reacted favorably—but a minority did not. They spoke up quickly and loudly.

A few managers thought the lack of a formal policy would make their jobs harder.

Their complaints generally fell into three categories. The first came from a handful of managers who thought the lack of a formal policy would make their jobs more difficult. They worried that employees might request excessive time, or that supervisors would spend too much energy adjudicating requests on a case-by-case basis. They were uncomfortable with the ambiguity of the new system and preferred a black-and-white policy that would automate their decision making.

The second unhappy group was made up of people who’d been treating their accrued vacation like a bank. They thought of it as dollars rather than hours, and they expected to get a cash reimbursement for unused time when they left the company. I recall one of these employees in particular: He was in his sixties and planned to retire in a year or two. He didn’t care about maternity leave, student loan assistance, or the other new benefits, because they didn’t apply to him. His vacation time was equal to a couple of months’ salary, and he’d been counting on receiving it when he left.

The third category of complaints came from people who thought the new policy was unfair because it gave every employee something that had previously been reserved for long-tenured employees. The typical lament went like this: “I’ve stayed here 15 years in order to get this much vacation time, and it’s not fair that new employees get as much time as I do from their first day.”

To address managers’ concerns, we provided training and individual coaching along with assurances that HR would offer support as needed. We also emphasized that we wanted people to take more time, not less, under the new policy, so managers were encouraged to approve most requests. We addressed the other complaints in informal conversations. I probably had a dozen of those; I’m sure our HR people had many more.

I learned a long time ago that people are entitled to their feelings. It’s never my job to tell them how they should or shouldn’t feel. When talking with people who’d been hoarding vacation time to get a cash windfall, I sympathized, but I pointed out that this wasn’t its intended purpose. “You’re supposed to use this time, not save it up for conversion into a retirement bonus,” I said. When talking with employees concerned about “fairness,” I gently pushed back on their logic. “We’re not taking anything away from you—in fact, we’re giving you the potential for more time off,” I said. “And how much vacation time another employee gets has no impact on you.” A few people were so upset that they talked about quitting, but in the end I don’t think anyone really left Kronos over the policy change.

As far as I know, no employee has abused the policy, and no customer has suffered.

We couldn’t roll out the new policy everywhere. Certain countries have very strict rules about how companies need to account for vacation time and what workers are entitled to, which makes it necessary to stick with a traditional accrual system. So initially we’ve implemented myTime in the United States and Canada.

Encouraging Anecdotes

When we launched the new policy, we began watching the numbers to see whether people took more time off. Vacation time did inch higher. The tracking allowed for transparency and communication around the issue. If an HR person or a second-line manager noticed that an employee hadn’t taken any days off in the first quarter, the likely result was a conversation beginning with “Why aren’t you taking more time?” And in cases where managers weren’t approving requests, HR could intervene. I’d estimate that 10% of managers fell into this camp. Generally they ran customer-facing teams in which absences cause scheduling complications or worked in functions in which, they believed, people’s taking more time off might have a negative effect on P&L. We told managers clearly that it was important for employees in different departments to feel they were being treated similarly. We also reminded them that employees’ ratings of their supervisors have a direct impact on compensation, so they might want to behave in ways that reflected the stated policy of the company.

We heard encouraging anecdotes about how employees were making the most of their newfound flexibility. One spent several weeks participating in a fundraising motorcycle ride through 48 states while continuing to support his customers as needed. Another accompanied her daughters while they took part in a traveling production of Annie and got her work done while on the road. One employee had previously saved all her vacation time to visit her family in India, which meant she could take no days off the rest of the year; now she can spend a few weeks in India and still take time during the holidays. I’ve received e-mails from people saying that the new policy makes it much less stressful to get to medical or dental appointments. Even some of those who complained about the plan when it was announced have become big fans, which is gratifying.

From what I’ve heard, the employee who used the most vacation time last year took slightly more than six weeks. (Under the old policy, a long-standing employee with four weeks of vacation who carried unused time over from the previous year could have taken nearly that much.) But as far as I know, not a single employee has abused the policy, and not a single customer has been negatively affected by it.

At first I thought Millennials would be the most enthusiastic about an open vacation policy. But in fact employees in their thirties and forties with school-age children seem to be the biggest beneficiaries. In the past they struggled to figure out how to spread vacation time over various school holidays. Now they feel free to take more time, reducing this strain.

Our Best Year Ever

Because we tracked the data, we don’t need to rely on anecdotes to know whether the policy is working. On average, Kronos employees took off 2.6 more days in 2016 than in 2015. In some departments the number was significantly higher. Even so, from a financial standpoint 2016 was our best year ever. I don’t think that’s a coincidence. Happy, engaged employees can make a company more profitable, and our policy makes employees happier and more engaged. We can prove that with data too. We’ve tracked employee engagement for 15 years, and for a few years prior to 2016, the share of employees who agreed or strongly agreed that Kronos was a great place to work had been stuck at 84%. (Nothing wrong with 84%, especially when you consider that global IT companies’ engagement numbers average about 60%.) A year after we launched myTime, engagement rose to 87%. Our voluntary turnover dropped from 6.4% to 5.6%, which is significant. And anonymous employee comments on Glassdoor, a website many job seekers use to research potential employers, express positive feelings about the policy. As one commenter put it: “With its unlimited vacation policy, Kronos has upped their game when it comes to benefits.”

In a way it seems ironic that we’ve shifted to this system, because our core business is providing workforce management software, and one of the things our product does is track and manage vacation accruals. If every company shifted to an open vacation policy, wouldn’t one of the benefits of our product disappear? Not if open vacation was deployed the right way. That we track our employees’ time off is a major reason our new policy works. If you don’t track it, how else will you know whether people are taking enough time to refresh and recharge, and whether managers are setting a poor example or unfairly managing time off? Tracking enables transparency and better communication, and if it’s done properly, it will build even more trust and loyalty among your employees.

Right now unlimited vacation for all employees is offered at fewer than one in 20 U.S. companies. There’s a reason for that. Not every organization has the combination of high-performing employees, passionate concern for work/life balance, and deep trust in its people necessary to make this kind of system work. I feel very fortunate to lead a company that does.