A small but growing number of companies have done away with “fixed-number-of-days” vacation policies, instead giving employees–with the approval of their managers–the freedom to decide when and for how long to take time off. These companies have, in essence, an “unlimited” paid time off (PTO) policy. Of course, this lack of a vacation policy is, in fact, a policy of sorts.

These unlimited policies aren’t common; only one percent of U.S. companies offer them. And the top 10 of Fortune magazine’s top 100 best places to work in 2013 favor traditional or flex-time models. Even some forward-thinking employers like Google don’t have an unlimited policy, instead allowing employees to accrue more vacation days the longer they’re with the company.

Is an unlimited PTO policy something you should consider for your company? This article explores the most commonly cited benefits–and drawbacks–that you should consider as you weigh your decision.

But before you examine all the pros and cons of all-you-can-take vacation packages, take our brief survey and let us know what policy your company has!

Productivity and Morale

One of the primary benefits touted by proponents of unlimited PTO is increased employee efficiency and morale. Halley Bock, CEO of leadership and management consulting firm Fierce, Inc., implemented an unlimited plan in June 2012. Bock says she’s received a wealth of positive feedback from her staff, and believes that the plan has helped boost productivity and her employees’ enthusiasm for their work.

“You can feel it as a sort of buzz around here,” says Bock. “There’s just a lot of energy, because when employees show up here, they are here absolutely because this is where they want to be … and with that comes great energy and focus.”

However, if unlimited PTO is implemented without guardrails, it could potentially be overused. While Bock says Fierce hasn’t had any problems with abuse of the policy since its implementation, there is still the very real possibility that employees might try to take more time off than they should, thus decreasing productivity.

Bock was careful to note that at Fierce, “It’s not a free-for-all. You do still need to obtain approval from your supervisor, and assuming that’s okay and your deliverables are in check, then you are free to go.”

At the other extreme, without a set number of vacation days allotted, some employees might err on the side of caution and take fewer days than they would like for fear of being seen as a “slacker” by their boss or colleagues. If employees don’t take vacation, the purpose of the unlimited policy–to allow staff to de-stress and re-energize when they need it most–is obviated.

For Bart Lorang, the founder and CEO of software vendor FullContact, this was the primary factor when he decided on a more traditional policy of 15 days paid vacation. “I looked at some of the data, and the data’s showing that some of the people actually take less vacation when they have unlimited vacation. So I said, well, that’s not good.” Lorang added, “If you get a number, you will actually use it.”

Recruitment

Attracting top talent has been a chief goal for employers, and generous vacation policies have been particularly prevalent in the highly-competitive tech sector. Companies such as Chegg, Gilt Groupe, TIBCO Software and Zynga offer unlimited vacation benefits to catch the eye of the best candidates.

However, unlimited PTO might not be enough to attract engineers in a field that has begun to offer the policy more frequently. As a consequence, companies like FullContact have had to think even further outside the box.

Lorang contends that the recruiting incentive was a key reason behind FullContact’s paid, paid vacation plan, implemented in July 2012. In this unusual twist of a policy, the company actually pays employees $7,500 for taking a week-long vacation, on top of their salary.

Lorang says when FullContact’s unique policy was implemented, his number of applicants skyrocketed. “We got 4,200 engineering applicants, which is just unheard of. And engineers are really hard to find in tech. So it’s helped, for sure.” He adds, “I think we have a first mover advantage in this.”

On the other hand, while companies may see gains in the quantity of applicants to due to an unlimited PTO policy, Bock says the quality of applicants to Fierce has remained largely the same. “I wouldn’t say it’s improved the level of candidates that we’ve had. I will say we probably get more applicants. Yet we’re still weeding out for very specific skill sets.”

Employee Retention

A liberal or innovative PTO policy cannot only help attract top talent, but also retain it. At FullContact, Lorang says the policy has improved retention–“nobody’s quit,” he notes. However, more data needs to be collected in order to prove a correlation between vacation policies and retention. And there are some kinks.

For established organizations that currently have a seniority-based vacation policy, switching to an unlimited model could be tricky. Some senior employees could view that as a penalty, or a benefit being taken away from them, because they might feel that they had to work for years to “earn” their vacation time but younger or new employees don’t.

Simultaneously, if junior employees don’t need to work up to a certain number of vacation days, they may have less incentive to stay with the company long-term.

Administrative Costs

Unlimited PTO could cut down on HR costs, or at least save your organization time. For Bock, the policy has been a timesaver. “As someone who previously would need to sign off on a lot of time sheets, or engage in a lot of conversations about, ‘Well I traveled on Sunday, can I take a comp day here?’ I am sure I have saved several weeks–no kidding–of time, just not having to engage in that.”

However, in order to circumvent purposeful or unintentional favoritism on the part of supervisors, larger companies would most likely need to train managers on how to communicate the policy to their teams. The cost of training could then offset any savings the HR department had made by avoiding the time-consuming task of tracking time accrued in a fixed-leave policy.

What’s The Verdict?

Obviously, whether the benefits of an unlimited vacation plan outweigh the costs will depend entirely on the specifics of your organization.

But if your company is to reap all the benefits of increased productivity and morale, more effective recruiting and retention, all while saving on administrative costs, there seem to be two core values a company must have: accountability and open communication. If your company is strong in these two areas, unlimited vacation days could save your company both time and money.

As Bock says, “I wouldn’t recommend it carte blanche to every company. Because you do need to have some things in place before you uncork the bottle. You need to have a culture where people understand that it is up to them to achieve their objectives.”

Thumbnail image provided by Moyan Brenn