ALTECH'S VACATION DILEMMA The headline proclaimed, "Why we're letting Virgin staff take as much holiday as they want" (Branson, 2014). Alma googled the headlines and found the announcement was getting a lot of pressboth CNN and the BBC covered the story. Some, like the British paper The Guardian, thought the decision to change was just an attention-getting move; othersincluding USA Today--felt that Branson was adopting an altruistic and progressive approach to employee relations. A search of corporate websites disclosed other sizeable firms with an unlimited vacation policy for non-hourly workers (and adoption year) including Netflix (2004), Best Buy (2004), Morningstar (2010), Adobe (2012), Lexmark (2013) and MGM Resorts (2013). Alma thought the stories interesting, but she also thought that they missed the point. As a senior director of human resources for a mid-size technology firm, Altech, Alma had been involved in her firm's switch to an unlimited PTO policy several years earlier. She knew that the decision to change the vacation policy had not been driven by concerns about employee morale. The decision to switch had largely been the result of straightforward business analysis based on dollars and cents, especially management's concerns with the size of the accrued PTO liability. Firm Background Altech, a software solutions firm, was established in the 1980's in California's Silicon Valley, home to many computer and technology startups. Altech prospered by combining investment in research and development, product engineering and world-class manufacturing with customer service. Altech's success has led to not only increased assets and earnings, but an increase in its employee headcount (see Appendices A, B and C). Accounting for Vacation Pay Increasing headcount naturally resulted in increased employee compensation expenses, including salaries, health and other insurance costs, and retirement benefits. Vacation pay, or paid time off (PTO), was another component of employee compensation, but its impact on compensation expense was neither consistent nor predictable. Because Altech is headquartered in California, it is subject to that state's strict laws concerning vacation policy. In California, a "use it or lose it" policy for vacation is illegal. Firms must compensate employees for up to two weeks of earned but untaken vacation time annually, either by giving time-off or its equivalent in pay (Suastez v. Plastic Dress Up (1982) 31 C3d 774). Since California is home to approximately 20% of U.S. firms, this one state's PTO laws affect many businesses. Firms spend considerable time and resources tracking vacation days earned, taken, and paid for. Altech's vacation policy provided employees from 14 to 28 vacation days annually, with an average of 16 days. PTO was earned proportionally throughout the yeareach month 1/12 of the current year's PTO was earned. PTO could be taken as earned, or up to 20 days could be rolled forward, or banked, for one year. Untaken vacation days at the end of the year became a liability on the next year's balance sheet whose ultimate disposition was unknown. If employees used their banked PTO as days off in the subsequent year, the banking accrual was unnecessary--no additional expense was incurred by the firm. When employees didn't take use their banked days as time off, they were paid for them. They received compensation beyond their base salary for for extra time worked, increasing Altech's expenses. Depending on employees' behavior, compensation expense (base salary plus paid PTO) could swing widely between years. Altech actively encouraged employees to take time off, but many employees preferred to receive cash for banked PTO. Departmental managers received memos about the PTO status of their staff throughout the year, reminding them that the behavior of employees regarding PTO would affect both their departments' expenses and cash flow in the current year, and would make budgeting for the next year difficult. Calculating whether banked PTO would be used as time off or would require a cash payment was always a guessing game. Alma wasn't sure she understood the problem, but the controller's office said there was a difficulty because the contingent liability associated with PTO was created in one year while its eliminationthrough payment or time off-- occurred the next year. Some had suggested not booking the vacation expense until it was taken as either time off or in pay, but the controller's department said this wasn't possible, saying that the banked PTO met the definitions of both a liability and contingent liability, terms that just left Alma confused. They also said that both the size of the accrued PTO balance and its volatility impacted the firm's financial statements. Unlimited Vacation During the time that top management at Altech was mulling over this issue, a new concept, called "unlimited vacation," or "unlimited PTO" was catching on in Silicon Valley. Netflix, Zynga, and Xobni dangled the policy as they competed for top engineers, hoping to appeal to top talent. Though not appropriate for hourly workers, unlimited vacation time had many benefits for firms whose employees were salaried professionals. Firms involved in newer technologies and the "new economy" typically had a large, unquantifiable asset in employee knowledge. These firms needed to ensure that their most important assettheir employeesremained. Both the controller's department and the human resources department at Altech believed that this new policy could be the ideal solution for them. A popular version of a work environment being cultivated to complement the unlimited vacation policy was called ROWE (Ressler & Thompson, 2008)-- Results Only Work Environment--where employees were expected to work as needed in order to achieve a specified goal. Altech management realized that, as a relatively young company with a casual workday approach, it was a prime candidate. A company with a more traditional approach to work might find it difficult to measure performance any other way than by time spent in the office, but Altech already offered flex-time, and employees expected to occasionally work from locations outside the office. Much of what was done at Altech was research and service related, so it was not necessary to have all employees on-site at any particular time. Most projects had beginning and end points and were completed in teams, making the company a perfect candidate for the implementation of ROWE. The switch would eliminate costs associated with the tracking of vacation days. Management also loved that the change would greatly diminish variability in compensation expense and eliminate the contingent liability arising from rolled over PTO. In an effort to find out how employees felt about the change, and how the companies making the change had been impacted, management scoured many articles on unlimited vacation policies and ROWE; they found that some employees loved it feeling that they had finally achieved a wonderful work-life balance, while others disliked the change, complaining they could never really take a vacation. Some felt cheated out of the "compensation bonus" for unused vacation days they'd been counting on. What management found regarding company efficacy after the change, however, convinced them to embrace this new policy. Companies, such as TheGap, Evernote, ASC, Chegg, Dynaronix and tens more, had found that once they converted from a traditional work environment to ROWE, there was expanded individual and team capacity, increased productivity, higher levels of customer satisfaction, a better ability to attract top talent and a lowered turnover rate! Altech concluded that the change would be a good one for them. Making the Change The last year that vacation pay could be "earned and banked" was 2009; final payments for rolled vacation days were made in 2010. The transformation took time, but overall, the change proved to be a positive one. After the initial hit to the income statement caused by recognizing all banked PTO as an expense, the PTO liability disappeared and compensation expense decreased; the bottom line, even without considering the touted added productivity, increased. The "triple bottom line" was up, and the financial statements and related ratios looked better than ever. Alma, and management, was pleased. Student Instructions: Answer the following questions. Your responses should be written in essay form; include all appropriate calculations. 1. Explain why the balance for accrued PTO liability is difficult to calculate. You may use an example