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

Jiayi Bao, University of North Carolina at Chapel Hill

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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