(How) Do Risky Perks Benefit Firms? The Case of Unlimited Vacation

Jiayi Bao, Business Economics and Public Policy, The Wharton School

Abstract: This paper addresses the recent trend of offering unlimited vacation to employees. While potentially useful for acquiring human capital benefits, unlimited vacation is a risky perk for firms due to the possibility of abuse. Does unlimited vacation actually benefit firms? If so, how? And what are the contingencies based on organizational conditions? I explore the phenomenon in three empirical settings. Setting 1 provides background on macro-patterns of unlimited vacation adoption based on qualitative online benefits reviews. Setting 2 illustrates what unlimited vacation does to employees in a large high-tech company through a difference-in-differences design. I find that the perk leads to more vacation time and higher subjective productivity; the latter effect is much larger in close-knit teams but becomes negative in teams with weak interpersonal relationships. In Setting 3, guided by a formal model predicting worker behavior, I conducted a randomized controlled trial with two experiments and hired online workers for a month-long job to cleanly examine the effects of unlimited vacation on firms by itself (n=631). In Experiment 1, I varied worker type (high- vs. low-performers), work contract (unlimited vacation, capped vacation, or a choice between the two), and firing threat (strong vs. weak). In Experiment 2, I introduced additional treatments to separate out the vacation feature from other typically bundled practices in the unlimited vacation contract. I find that unlimited vacation leads to higher overall labor efficiency through three channels: (1) attracting more high-performers during recruitment, (2) increasing worker productivity in the performance stage, and (3) inducing extra work from more engaged and happier workers. A strong firing threat conditional on performance reduces the slacking rate. A performance-oriented bundled system strengthens the performance gains, but unlimited vacation also improves productivity by itself. This paper demonstrates how managers can create a highly skilled, productive, and motivated workforce through the perk of unlimited vacation. It further highlights the contingencies based on social dynamics, bundled HR practices, and the culture for punishing under-performance.

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Michelle Eckert is Marketing and Communications Coordinator for the Mack Institute, where she works to engage students, researchers, and corporate partners in opportunities for collaboration. Michelle received her B.A. in Art from Valparaiso University in 2007. Her background includes two AmeriCorps terms of service working to teach mathematics, computer literacy, and job readiness skills to out-of-school youth in Philadelphia, focusing particularly on promoting access to post-secondary education.