In this episode of Thursday Thoughts, Monique unpacks the relatively recent trend of employers offering unlimited PTO to employees and why the seemingly too good to be true offer is linked to some basic accounting practices and business expenses.
Using General Electric as a corporate example, listeners will learn about how traditional 2-3 week paid time off periods can become a financial liability for companies throughout a fiscal year. By offering unlimited paid time off, companies can free their books from this liability allowing them to decrease their financial risk and operate from a place of greater liquidity even in lean times.
Let's take a moment to connect the dots. Every Thursday in under 10 minutes, I'm going to share with you real life, everyday situations to help you as an entrepreneur, a leader an innovator, or just a person who's venturing out to try something new. These stories will help you make sense of situations you may find yourself in and also provide encouragement to keep you moving forward in your journey.
Everyone has a business model, everybody, and I always say that it's important to understand when dealing with people or businesses, what is their business model? For those of you who listen to the Unpolished MBA podcast, you're probably already familiar with what a business model is and can describe yours or the company you work for pretty simply.
For those who are not clear on what a business model is, it's basically the answer to how does a company make money? What are their financial interests? Those questions about what are they selling? Who are they selling it to? What does it cost them to sell that product and even what are their prices, etc.
All of those answers point you to the answer of: how does this company or person make money? So while one of the main premises of this podcast is to debunk the myth that you don't need an MBA to be a great entrepreneur. I totally believe that, but there are some advantages to having one. It really depends on the school you go to and the experience there, as well as your prior work experience or the experience you're gaining while you're in the program working. It really does depend on those things. In order to provide you with the foundation of applying the things you learn in school and applying those concepts to the real world. One example which I'm going to use right now is unlimited PTO, which is paid time off. When I was doing my MBA, it was during the time where companies like GE were transitioning to allow all of their employees to have unlimited PTO, which PTO stands for paid time off.
Basically unlimited vacation can be taken at any time, of course with approval of your manager. At that time it was like, whoa, oh my goodness, that is unheard of how are they going to get any work done? Aren't people going to be taking off left and right, interrupting their operations? I mean, it was a really big deal.Now we're in:
It's sometimes seen as an opportunity for them to recruit the best talent because they have that perk. That's how people were viewing that brave move by GE back then. Well, you know how I was just talking about business models, right? Well set vacation time is actually considered an expense to a business.
Let's say you are an employee that gets paid $100K a year, that equates to $8,333 approximately per month. We're going to exclude taxes and all that stuff right now, just to keep it simple, but we know the IRS want their taxes but just for this example, we're going to keep it simple.
That $100K per year equates to $8,333 each month. That means you make approximately $417 a day. If you work five days a week for four weeks in a month. So at $417 a day, if you have a limit of say three weeks vacation, you're allowed to take per year as agreed upon when you were hired or based upon your time with the company or whatever. That equates to three weeks equates to 15 days at $417 a day that the company actually has to put on their books as an expense for you even before you take that time off. That's why those policies, you use it or lose it exists, because the company has already accounted for it in their years financial statements. It's an expense that can't be carried over to the next year.
It's all about accounting. It's not about making your life less convenient. So for you at $417 a day for 15 days, that means your vacation alone is an expense of about $6,255 on their books that they need you to take it and not be in debt to you to pay it because vacation is considered a liability, something that the company owes just like pensions.
You really don't hear a lot about pensions anymore and who wants liabilities and debts piling up so that they can be required to pay it in the future on short notice? Pensions are of course paid when people retire, but you can't predict when people will retire or get sick or whatever and leave the company.ean, if you look at GE now in: ing the unlimited PTO back in:
So, for everyone thinking that unlimited PTO is just to woo you into working for their company, I mean, it's a nice perk, but ultimately it comes down to them, the company themselves wanting to limit their financial liabilities. Now, this is the kind of stuff that I've been able to learn and tie together because of the foundation of my MBA, and I use a lot of the knowledge that I know to help clients of TPM Focus. Before I go, I just want to give a shout out to the Scheller College of Business at Georgia Tech, where professor Debbie laid it all down in our accounting classes. Thank you and go Jackets.
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