Holidays as an employee benefit

If you read nothing else, read this….
Extra holiday can be offered instead of a pay rise or to reward performance in place of a bonus.
Offering more time off can boost morale.
Holiday trading can be included in flexible benefits schemes to raise employees’ allowance at no extra cost to the employer if staff choose to sell days.
It can enthuse employees about the business and their benefits without a direct cost to the employer.

Holiday trading can soften the blow of pay freezes and boost employee morale, says Sarah Coles

Anyone hoping that the pain of pay freezes was going away got a slap in the face at the end of January, when Bank of England governor Mervyn King announced: “The patience of UK households is likely to be tried over the next couple of years. There is little scope for growth in real take-home pay, which may remain weak even as output recovers.”

The removal of pay rises, budget increases and bonuses has dented the arsenal of the reward professional, but there is one benefit that can replace them all: holiday.

This can work in a number of ways, and some employers are using it to make up for pay cuts. Jacqueline Otten, head of flex consulting at Towers Watson, says: “We have one client that reduced pay by 15% and allowed employees to cash out their pension contributions and sell holiday to counteract as much of the cut as possible.”

Holiday can also be used to soften the blow more generally by offering it at salary review time as compensation for a pay freeze.

Replace bonus
Extra days off could also replace a bonus, says John Puddephatt, a senior associate with consultancy Mercer. “It may be used as a reward for hitting a target. It may also be used for people who have put in long hours for a project. It may not be the same as a cash bonus, but it is appreciated all the same.”

Holiday can be also used to fuel a flexible benefits plan by allowing staff to buy and sell days. If they sell this gives them a higher allowance to spend without employers having to add any extra cash. The perk can also reinvigorate a scheme, says Otten. “Staff really like holidays in flex. It can get people to appreciate the whole flex package.”

Workplace and scenario planning
But before offering more flexibility around holiday, there are some vital matters for employers to consider. First, they need to do some workforce planning. “Organisations worry about manpower planning, especially in workplaces such as factories or call centres,” says Otten. “These employers may be more cautious and flex two or three days [holiday a year] to test it out.”

Scenario planning is also important, says Puddephatt. “Look at the behaviour of staff. Are there a large number already not taking their holiday who are likely to sell? What impact will that have on costs? Then consider the operational perspective. What will happen if large numbers decide to buy holiday? There is the financial benefit of lower employer national insurance, but what if a business-critical team takes more holiday? Employers have to think about the cultural angle. They may believe people should be taking holidays for their own good.”

Although these considerations may act as a barrier to launching holiday trading, many concerns are unfounded. “When we have done research, for people with around 25 days’ holiday, more people buy than sell,” says Otten. “It is only when they receive around 30 days that you get more selling. Most people do not buy or sell much.”

A holiday trading scheme can be structured to encourage desired behaviour among employees. The cash value that is attributed to a day, for example, can be used in such a way. Typically, holiday is valued as one-260th of salary, but it can be valued at one-300th to encourage staff to buy more, if a business wants to cut costs. And limits can be imposed. Using holiday to make up for a smaller reward budget is not foolproof, but it can succeed, says Puddephatt. “It is a big benefit for the employee without necessarily having a direct financial impact, because people tend to get the work done in the time available. It is a very recession-friendly benefit.”

Read articles on managing holiday entitlement.