Determining an Ideal Amount of Paid Time Off (PTO) for Your Team

Over the years, attraction, recruitment, and retention have gone beyond the offer letter and multiple zero-salary baits. Employees will only stay at your workplace for the perks. Those benefits hold greater significance than salary bumps.

This emphasizes the need to incorporate perks such as Paid Time Off (PTO) into your company's benefits package. You will not only be retaining the existing workforce but also attract prospective employees and boost your employer branding. 

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But how do you determine the PTO strategy that works best for your team, considering the size, growth level, and operational needs? 

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This article shows you how, based on existing statistics. Plus, we simplified major PTO strategies, highlighting their pros and cons, and how practical they can be, if you adopt them. 

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The Value of PTO

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Adding a PTO policy to your company's benefits isn't just for the sake of it. Knowing this helps you determine the right amount and strategy to use when coming up with a plan. 

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Employees are attracted by company culture, and the central focus of a great company culture is employee well-being. 

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A generous PTO (Paid Time Off) policy can signify your company's commitment to employee well-being in several ways:

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• Work-Life Balance: A generous PTO policy allows employees to take time off for personal needs, such as vacation, illness, or family obligations, promoting a healthy work-life balance.

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• Reduced Burnout: By providing ample time for rest, employees are less likely to experience burnout, resulting in higher job satisfaction and productivity.

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• Health and Wellness: Regular breaks and time off can contribute to better physical and mental health, reducing stress levels and promoting overall wellness among employees.

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The Business Case for PTO

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A 2023 survey by the Pew Research Centre revealed that 46% of workers in the US use up only some of their PTO.  Additionally, according to a Harvard Business Review report on vacation and well-being, half Americans forfeit their paid time off. It reported a 2018 survey that revealed 768 million days of unused vacation time, with over 30% completely lost. Consequently, over 50% of managers reportedly experienced burnout, affecting overall productivity across workplaces. 

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While PTO might be primarily employee-centric, the overall effect reflects on the business. Adequate PTO has the potential to significantly reduce burnout and turnover rates among employees. Studies consistently show that taking regular breaks and vacations helps employees recharge, reduce stress, and prevent burnout. This leads to higher job satisfaction, increased morale, and ultimately lower turnover rates. When employees feel supported in taking time off to rest and rejuvenate, they are more likely to remain committed to their organization, resulting in greater employee retention and stability within the workforce.

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Industry Standards and Competitor Analysis

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At the Federal level, the Fair Labor Standards Act (FLSA) of the US Department of Labour does not require payment for time not worked, such as vacations, sick leave, or federal or other holidays. 

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(However, some cities and states mandate businesses to offer a minimum level of paid time off (PTO). Some also rule that a company must compensate employees for unused PTO upon termination. Your company's legal team should guide you on this).

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 Hence, PTO is governed by the terms of the employment agreement. Although this is the case, it's a wise move for employers to offer this as an employment perk. 

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Since the law does not exactly back PTO, to understand the right amount for your team, you need to draw insight from industry data and observe competitors' best practices to be able to stay above the curve. 

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Across all industries, the average PTO in the US is influenced by a multitude of factors, including: 
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• Type of Employment: The type of employment significantly impacts the average PTO. Civilian, private industry, and government sectors each have distinct PTO norms. While private industries often compete fiercely to attract talent by offering robust PTO packages, government positions may adhere to standardized leave policies dictated by legislation or collective bargaining agreements.

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• Years of Service: Another key determinant is the length of an employee's tenure with a company. Many organizations offer tiered PTO benefits, where employees accrue more paid time off as they gain seniority. This encourages employee retention and rewards loyalty.

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• Structure of the PTO Plan: The structure of the PTO plan can vary between consolidated and separate leave policies. Consolidated plans combine various types of leave, such as vacation, sick leave, and personal days, into a single PTO bank. Separate leave policies, on the other hand, allocate distinct pools of time for different purposes. The choice between these structures can impact the overall amount of PTO available to employees and the flexibility in its usage.

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Additionally, industry-specific factors such as labor market dynamics, employer practices, and regulatory requirements further influence the average PTO offerings. 

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For example, industries with high competition for skilled workers, such as technology or healthcare, tend to offer more generous PTO benefits to attract and retain talent. Conversely, industries with traditionally lower turnover rates or where PTO is mandated by regulations may offer fewer days off on average.

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Reported data from the US Bureau of Labor Statistics (2021-2022, reported in April 2023)

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Based on data from the official US Bureau of Labor Statistics, the average annual paid time off for employees of the private industry with consolidated leave plans is as follows:

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• 14 days after 1 year of employment
• 18 days after 5 years of service
• 20 days after 10 years of work
• 23 days after 20 years of service.

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For vacation, the private industry statistics, as of 2022, are as follows:

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• 11 days per year after 1 year of service,
• 15 days per year after 5 years of service,
• 18 days per year after 18 years of service, and
• 20 days per year after 20 years of service.

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On an industry basis, the percentage of PTO for workers, as of 2021 (either private employees or Government workers) is as follows:
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• Finance: 95%
• Manufacturing: 95%
• Information: 90%
• Education: 82%
• Health services: 82%
• Construction: 82%
• Business: 81%
• Trade, transportation, and utilities: 81%
• Leisure and hospitality: 43%

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The most recent percentage of access to PTO 

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The latest numbers for private employees report that, in 2023;

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• 80% had access to paid holiday
• 79% had access to paid vacation 
• 78% had access to paid sick leave 
• 43% had access to wellness programs
• 27% had access to paid  family leave
• 46% had access to medical care plans

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Hence, to remain competitive in the job market using this data on average PTO offerings across different industries, consider the following strategies:

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• Benchmark against Industry Standards: Compare your company's current PTO offerings with the averages in your industry. If your company's PTO falls below the industry average, it may be necessary to consider increasing PTO days or offering additional perks to attract and retain top talent. For instance, if your most recently employed staff get 8 days PTO after 1 year, you may want to review that to 11 days which is what the statistic says. 

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• Tailor Benefits Packages: Use the data to tailor your benefits packages to meet the expectations of potential candidates. Highlight your competitive PTO offerings during recruitment to attract candidates seeking work-life balance and comprehensive benefits.

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• Flexibility and Additional Perks: In addition to PTO, consider offering flexibility in work hours, remote work options, or other perks such as wellness programs, parental leave, or paid holidays. These additional benefits can enhance your overall competitiveness in the job market.

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• Employee Satisfaction Surveys: Regularly survey employees to gather feedback on their satisfaction with the company's benefits package, including PTO. Use this feedback to make adjustments and improvements to remain competitive and meet the evolving needs of your workforce.

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• Go above the statistics: who says you have to remain on the same level with other organizations within your industry? Remember that PTO has its foundation majorly on agreement and not law. You have the right to be flexible about it. Going above industry standards and statistics might be the edge you need to retain more employees than others. 

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However, you should make this decision based on what the company can accommodate. 

For instance, a larger team can afford to increase PTO, unlike a smaller team. Also, a larger team with employees who can substitute for each other will be able to increase PTO. 

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• Assessing Employee Needs and Preferences: to guide your PTO decision-making, it would be wise to make a few decisions based on feedback from the employees you provide this PTO for. Employee feedback helps tailor PTO policies to better suit their needs and preferences, resulting in a more accommodating and supportive work environment.

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Aligning PTO policies with their preferences can enhance productivity and job satisfaction as employees are more likely to utilize time off effectively when it fits their needs.

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Additionally, when employees feel their preferences are considered, they're more likely to feel valued and remain loyal to the company, reducing turnover rates. 

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So, what are possible methods for gathering and analyzing employee feedback on PTO? 

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1. Surveys: Create anonymous surveys to gather employee feedback on various aspects of PTO, including accrual rates, flexibility, and types of leave offered. Analyze survey responses to identify common trends and areas for improvement.
2.  Discussions: Host focus one-on-one discussions between HR and each employee to delve deeper into their preferences regarding PTO. 
3. Encourage open dialogue to uncover specific needs and concerns.
4. Feedback Box or Portal: Establish a feedback portal, such as a suggestion box or online portal, where employees can submit suggestions and concerns regarding PTO policies.
5. HR Software: Utilize HR software that includes features for collecting and analyzing employee feedback on PTO. This can streamline the process and provide actionable insights through data analytics. (Do we have products/software on this we want to promote? If not, I could find and fix some there.) 
6. Periodic Reviews: Conduct regular reviews of PTO policies and gather feedback from employees during performance evaluations or check-ins. This ensures that policies remain aligned with evolving employee needs and preferences over time. 

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Balancing needs with operational demands: Aligning employee needs for PTO, how they want it, and how it affects the operational capacity of the business requires a delicate balance to ensure that essential business operations are not compromised. It could be tough: there may be clashes, and even though their needs might be justifiable, the business might not have the bandwidth to accommodate a certain (reasonable) amount of PTO. So, what do you do? Try these:
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1. Transparent Communication: Sometimes, you can be vulnerable with them. Communicate the operational demands of the business to your employees, including peak times and periods of high workload. Likewise, encourage them to communicate their PTO preferences and plans well in advance. 
2. Flexible Scheduling: Implement flexible scheduling arrangements that accommodate both employee PTO requests and operational needs. This could include staggered work hours, compressed workweeks, or telecommuting options.
3. Cross-Training and Backup Plans: Cross-train employees in critical roles to ensure coverage during peak times or when key personnel are on leave. Develop contingency plans and designate backup employees who can step in when needed.
4. PTO Blackout Periods: Identify specific periods of the year when PTO requests may be restricted or subject to approval based on operational needs. Communicate blackout periods well in advance to allow employees to plan accordingly.
5. Fair and Equitable Allocation: Develop fair and transparent policies for allocating PTO during peak times, taking into account factors such as seniority, performance, and the needs of the business. Avoid favoritism or perceived inequalities in PTO approval.
6. Technology Solutions: Take advantage of technology solutions such as workforce management software to forecast staffing needs, track PTO requests, and optimize scheduling to ensure adequate coverage during peak times.
7. Employee Incentives: Offer incentives or bonuses for employees who volunteer to work during peak periods or forgo PTO during critical times, encouraging a sense of shared responsibility for maintaining operational continuity.
8. Continuous Monitoring and Adjustment: Continuously monitor staffing levels, workload distribution, and employee satisfaction with PTO policies. Be prepared to adjust strategies as needed to address changing business needs and employee preferences. 

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PTO Policies and practices you can adopt for your business

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In many cases, PTO serves as a flexible leave option that employees can use for various purposes, including vacation, personal days, or unforeseen circumstances like illness or bereavement. Offering a comprehensive suite of leave options allows employees to manage their time off effectively while balancing their work and personal responsibilities.   

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But you can distinct policies such as:

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• Making Sick Leave Separate: Differentiating sick leave from other types of time off allows employees to prioritize their health without dipping into their general PTO pool, fostering a healthier work environment and reducing the spread of illness

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• Traditional leave: When companies provide traditional leave, they categorize the specific reasons for an employee's time off, including vacations, holidays, sick days, and personal days. Additional leave categories may include bereavement, jury duty, or volunteer days.

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• Sabbaticals: Sabbatical leaves are prolonged breaks granted by employers to employees who have achieved certain milestones or tenure. Unlike regular paid time off, sabbaticals can last anywhere from a few months to a year. While some sabbaticals come with pay, employers must arrange for temporary replacements or delegate tasks to other team members to cover the extended absence.

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For employees experiencing burnout, sabbaticals offer a valuable opportunity for rejuvenation and renewal. 

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• PTO based on the number of years they have worked: Employees who have worked for several years (e.g. over two or three years of tenure at a company) may be eligible for extra paid time off days annually. This serves as a rewarding incentive for employees to remain with the company for an extended duration.

• Unlimited PTO: Unlimited PTO offers employees the freedom to take time off whenever necessary throughout the year, without being restricted by a fixed number of days. Generally, employees need to request time off in advance and obtain approval from their manager. As there is no accumulation of specific PTO days (which are considered a liability on payroll), companies are not mandated to provide compensation for any unused PTO days when an employee leaves the organization. However, there are also potential pitfalls to consider:

1. Abuse: Employees may abuse the system by taking excessive time off, leading to decreased productivity and potential resentment among other team members.
2. Burnout: Without clear guidelines or encouragement to take time off, employees may feel pressure to work constantly, leading to burnout and decreased performance.
3.  Inequity: Unlimited PTO policies may inadvertently create inequities among employees, with some taking advantage of the policy more than others.
4.  Lack of coverage: Unlimited PTO policies can make it difficult for managers to ensure adequate coverage during busy periods, leading to operational challenges.

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Accrual vs. Lump-Sum PTO Policies

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Employees earn paid time off (PTO) gradually typically based on hours worked or length of service. Accrued PTO balances increase with each pay period, and employees can use accrued PTO as they earn it. In a Lump-Sum PTO Policy, however, Employees receive a fixed amount of PTO upfront at the beginning of a designated period, such as a year. This fixed allotment of PTO does not increase over time and must be used within the designated period.

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Take these for example: Company X implements an accrual-based PTO policy for its employees. Full-time employees earn PTO based on their length of service as follows:

• Employees accrue 0.0833 days (equivalent to 4 hours) of PTO for each bi-weekly pay period worked.
• PTO accrual increases to 0.125 days (equivalent to 6 hours) per pay period after completing one year of service.
• Accrued PTO can be used after the completion of the first 90 days of employment.

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Hence, an employee who has been with the company for three years would accrue 0.125 days per hour worked, totaling 3 days (24 hours) of PTO every six months.

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On the other hand, Company Y adopts a lump-sum PTO policy, providing employees with a fixed number of days off at the beginning of each calendar year. Unused days do not carry over to the following year.

• All full-time employees receive 15 days of PTO at the start of each calendar year.
• Part-time employees receive PTO on a pro-rata basis depending on their hours worked.

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Hence,

-An employee hired on January 1st would receive 15 days of PTO for the entire year, while an employee hired on July 1st would receive 7.5 days of PTO for the remaining six months of the year.

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Where would either of these policies fit in? 

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1. Traditional office environments:

• Accrual-based PTO may align well with traditional office environments where employees have predictable work schedules and value flexibility in scheduling time off for vacations or personal needs.
• Lump-sum allotments could also work if the company culture emphasizes simplicity and predictability, and employees have similar work schedules.

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2.  Shift-based or hourly work environments:

• Accrual-based PTO might be more suitable for shift-based or hourly work environments where employees have varying schedules, as it allows for fair distribution of PTO based on hours worked.
• However, lump-sum allotments could be preferred if the workforce is largely stable and has consistent schedules, simplifying administration and reducing the risk of disputes.

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3. Project-based or creative industries:

• In industries where project timelines vary and employees may need time off sporadically to recharge or work on personal projects, accrual-based PTO may be preferred for its flexibility and fairness.
• Lump-sum allotments might not align well in such environments unless they are combined with a flexible time-off policy that allows for adjustments based on project milestones or workload fluctuations.

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4. Service-based industries:

• Accrual-based PTO could be beneficial in service-based industries where employees interact directly with customers and need flexibility in scheduling time off for personal or family needs.
• Lump-sum allotments might work if the company can plan for staffing needs in advance and employees are willing to adhere to a fixed time-off schedule.

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5. Remote or flexible work environments:

• Both accrual-based PTO and lump-sum allotments could align well with remote or flexible work environments, depending on the company's culture and employee preferences.
• Remote work often involves greater autonomy, making either method suitable as long as it meets the needs of both employees and the organization.

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Ultimately, the best method for each work environment depends on a careful consideration of the company's priorities, employee preferences, and the nature of the work being performed. It may also involve a trial period or feedback loop to adjust the PTO policy based on its effectiveness and impact on employee satisfaction and productivity.

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To evaluate the impact of PTO on employee morale and company performance, consider the following metrics:

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1. Employee satisfaction surveys: conduct regular surveys to measure employee satisfaction with the company's PTO policy. Include questions about the ease of requesting time off, fairness of allocation, and overall satisfaction with the benefits provided.

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2. Employee retention rates: track employee turnover rates to assess whether the PTO policy contributes to employee retention. High turnover rates may indicate dissatisfaction with the company's leave policies and overall work environment.

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3. Absenteeism rates: monitor absenteeism rates to determine if employees are taking appropriate time off when needed. A decrease in unscheduled absences may indicate that employees feel adequately supported by the PTO policy.

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4. Productivity measures: assess productivity levels before, during, and after periods of PTO to determine if there are any noticeable changes in employee performance. This could include metrics such as output per employee, project completion rates, or customer satisfaction scores.

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5. Employee engagement levels: measure employee engagement levels through surveys or other feedback mechanisms to gauge whether the PTO policy positively impacts employee morale and motivation. Engaged employees are more likely to be productive and contribute positively to the company's performance.

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6. Recruitment success: evaluate the company's ability to attract top talent by considering feedback from candidates during the recruitment process. A competitive PTO policy can be a valuable selling point for prospective employees and may contribute to recruitment success.

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7. Cost of turnover: calculate the cost of employee turnover, including recruitment, training, and lost productivity expenses. Compare these costs to the investment in PTO benefits to assess the impact on the company's bottom line.

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8.  Employee performance reviews: incorporate feedback on the use of PTO and work-life balance into employee performance reviews. Assess whether employees who take advantage of PTO benefits are still meeting or exceeding performance expectations.

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9. Employee wellness and health metrics: consider metrics related to employee wellness and health, such as stress levels, burnout rates, and overall well-being. A well-designed PTO policy should support employee health and reduce the risk of burnout.

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Conclusion:

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While you might not always be able to offer competitive salaries, compensating with benefits like PTO can be equally effective. A well-thought-out PTO policy is key to enhancing employee well-being, which in turn, boosts productivity and morale.

Note: Our content is for general information purposes only. Levy does not provide legal, accounting, or certified expert advice. Consult a lawyer, CPA, or other professional for such services.