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Which is better for employee and employer, paid vacation or pay raise?

pay raise vs vacation


Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

I think it depends on the age of the person. We found our younger associates want more money in the their pocket now and the older associates like time off. What's better for the employer ~ set up a pay for performance system tied to NI. When everyone does their part to help see the business grow and keep expenses down; everyone wins.

For Paid time off, don't allow them to roll it - have it annual and what you don't use you lose, but don't be afraid to be generous with it. We give 15 days after one year and it grows each year. Those of us with seniority typically lose a few days, but by the time you get up to 20 PTO days, it doesn't bother you. That is plenty to allot for illness and vacation.

With a pay raise comes more taxes for both. You can easily cost this out; you can give an associates a $1.00 but how much are they really going to see by the time taxes come out and if it puts them into a higher tax bracket it will be even less.

We have found the Pay for Performance to be the most effective all the way around.

Brian Kennedy
Title: President
(President, |

That makes sense Christine. Younger workers can pack a lot of activity into a short time.

Mark Matheny
Title: VP - FInancial Planning and Analysis
Company: Novolex (formerly Hilex Poly)
(VP - FInancial Planning and Analysis, Novolex (formerly Hilex Poly)) |

I think a bigger question is how long the concept of paid vacation going to be around. We are connected 24/7. We can work from almost anywhere. I know that we say we need the downtime to regenerate and be productive, but what is the reality.

Brian Kennedy
Title: President
(President, |

It seems that HR and owners will need to constitute a policy on how connected a person on vacation needs to be? I.E. Contact only in emergency; check in once a day; be available to respond to emails.... good points.

John O'Dea
Title: Director Exit and Succession Planning
Company: National Financial Partners (NFP)
(Director Exit and Succession Planning, National Financial Partners (NFP)) |

Compensation can get very sticky very fast. One process to use to help you gather the elements that will help you compare/contrast tools in your organization is: Current situation, how perceived, and what outcomes do we expect/want to achieve as a result of the change/investment.

One item I start with when helping shareholders compare different compensation tools, is to consider the context and culture within which the total compensation element being evaluated needs to operate.

For example, In an environment of low associate trust of management - you won't get any positive lift from either one. With a high proportion of actively disengaged employees, the either move will be used as ammunition about the poor work environment.

Additionally, you need to look carefully at how valuable (real and perceived) the existing total comp structure is from a competitive standpoint. How do associates currently view the comp plan relative to market rate. And, in real numbers how does your comp plan actually stack up - financial (base, bonus, benefits, long term incentives-stock) and non financial (development, autonomy, mastery, purpose) etc.

It is also important to acknowledge at what level in an organization is the compensation system decision being made. If a line manager is trying to decide how to spend a small portion of their discretionary budget on their 10 - 20 direct reports, that is a different set of issues/context than an executive team setting broader policy for hundreds or thousands. Most engagement, productivity and turnover is directly tied to employee/manager direct relationship. Freeing managers to understand the unique nature/interests of each individual employee and tailor or individualize the opportunities for reward can be powerful within the legal and cultural confines of discretionary decision making.

Finally, I carefully uncover or unpack the decision makers expectations regarding the outcomes they intend to experience as a result of the expense. Extrinsic rewards (pay for performance, cash and other contingent financial rewards ) can have a positive impact in a specific role type. Leveraged compensation plans that create if/then reward structures (if I hit my goal, then I get my bonus) that are helpful when the role requires an exclusive focus on a specific controllable result in a narrow time frame between action and reward (piece rate line work). It is also shown that the improved performance from if/then rewards brings less desirable unintended consequences of short term thinking (impact on customers, long term profit, innovation, etc). Additionally, there is good solid studies regarding the negative impact that pay for performance can have on creativity, innovation, and other lateral thinking often critical in many businesses today.

So, while vacation v bonus is on the surface can appear to be a small innocuous question - there is an important difference in how both parties feel when giving a gift vs. providing a bribe. A process to investigate current context, existing tools, and objectives/goals may help you compare and contrast the advantages and disadvantages of different reward system components.

Muhammad Aqib Zulfiqar
Title: Vice President Finance
Company: Jamjoom Medical Industries Co. Ltd
(Vice President Finance, Jamjoom Medical Industries Co. Ltd) |

Well, I think paid vacation is better for both employee and employer. I would like to share my own experiences. In my career I have tried both, took paid vacation and enjoyed it thoroughly and due to some work requirement or to earn more cash, I have en-cashed my vacation as well. But, trust me encashment severely affected my efficiency, mood and creativity, which eventually ruined my performance and cost to the company as well. I feel we must encourage vacation and break the spell of monotony.

Gary Johnson
Title: IT Audit Project Manager
Company: Colorado PERA
(IT Audit Project Manager, Colorado PERA) |

From an audit standpoint, in most financial institutions, paid vacation is required, and the employee required to take a minimum of 5 concurrent days off at least once per year. This helps detect fraud when an employee needs to be present to keep covering up their activities. By having someone else "cover the desk", irregularities may get noticed and brought to the attention of internal audit or management. Paid vacation is beneficial to the employer for that reason alone.

Lorenzo Morales
Title: Administrative Liaison
Company: Ajo Ambulance, Inc
(Administrative Liaison, Ajo Ambulance, Inc) |

In our small company we offer paid vacation. The employee has the option of cashing out with no time off or taking the time off. We have a tiered system in which employees earn more vacation time the longer they work for the company. As an ambulance company employees work 48 hours and are off 96 hours. The vacation time is offered as shifts off - one, two, three, etc shifts. We have not experienced any problems with this method. Many employees cash out their vacation time.

tai aguirre
Title: CFO
Company: taico productions
(CFO, taico productions) |

Paid vacation or pay raise? In my experience it certainly depends on the individual. However, as Muhammad Zulfigar aptly pointed out, paid vacation is better both for the employer and employee. To add his point, providing an experience (paid vacation) to a recipient as opposed to just cash gives a more longer lasting positive result. In most cases individuals will use pay raise for bills and necessities. If my goal is to enhance employee performance or my ROI, providing employee something positive to remember, paid vacation or paid experience, this will improve retention and community.

Dennis Milosky
Title: Senior Controller
Company: Makena Capital Management
LinkedIn Profile
(Senior Controller, Makena Capital Management) |

Paid vacation or pay raise? The context of your question is not clear to me; and I think that it makes a difference. For example, are you a new company and establishing a new policy? Or, are you adding an incentive layer to an existing plan?

There have been some very good points that have been made and, for me, Christie has a very good perspective. I really do believe that younger employees generally prefer financial compensation as they are trying to build their personal wealth. In general, experienced employees tend to prefer additional time off.

However, giving the employee the choice provides the added benefit of allowing them to accept the reward that will provide them the greatest level of satisfaction which will lead to greater motivation. Since keeping employees motivated and committed is a key attribute of our benefit plans, that should be a key part of the decision process.

It could be structured such that there is a conversion rate for the incentive such that a certain number of dollars equates to time off. That could also give the employee the option of choosing some financial incentive and some time off.

Of course, all of this assumes that you consider the impact on cash flow of raises vs. additional time off. The points have been made about the impact on payroll taxes, but higher compensation also impacts things like workers compensation premiums on an annual basis, local payroll taxes that some cities impose, etc.

Topic Expert
Linda Wright
Title: Consultant
Company: Wright Consulting
(Consultant, Wright Consulting) |

There is not much more than I can add, other than to say that, while time off is very valuable to both parties and to the integrity of the system, the employer must insure that the employee can really take the time. Nothing positive is accomplished if the employee is or has to be accessible via phone and email 24/7.

Sandra Maxey
Title: VP Treasury and Planning, Asst. Corporat..
Company: Cobra Electronics
(VP Treasury and Planning, Asst. Corporate Secretary, Cobra Electronics) |

My company instituted a PTO policy several years back where the employees accrue PTO time throughout the year at a level based on their length of employment. There is then, based on that level, a set number of days they have to use or lose, a maximum number they can carryover, and a maximum number they can choose to have paid out at end of year. This gives people some flexibility but yet requires them to take sometime off, which we believe is in both the company and the employee's best interest. Some choose to take frequent long weekends and others traditional vacations.

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