Unlimited #vacation leave policy – a pricing error

It sounds like a good thing – unlimited holiday time, still meeting budget, making bonuses. Here’s a recent piece on the topic. It might work for some, perhaps not others.

It will be clear if it isn’t working. Customers will suffer, other colleagues will complain about being overworked to make good the leave, budgets will not be met. It will be a shambles, obvious very early on.

But what is happening when, on the face of it, it is working? The work is being handled, the clients are happy, colleagues are happy, budgets are being met. Yet you are on a month holiday (yes, another one) in Europe? What actually is happening is the demonstration of an inherent pricing error. The more agricultural description of a pricing error is a rip-off. Someone is being ripped off.

One possibility is that the customer is being ripped off. This would be the case if the work quality or output suffers yet the price charged remains unchanged. Hence, the profitability of the firm and the employee are unaffected but the customer is worse off.

Another possibility is that the price charged to the customer is reduced to reflect the lesser output. In this case, the firm’s shareholders are being made worse off, as revenue falls but costs do not.

Perhaps the work output is unaffected, the customers remain happy and the revenue and costs are unchanged. In this case, it is clear that the firm’s shareholders are being ripped off. The production combination of labour and capital has surplus labour if the labour component can be reduced, capital held constant and overall production is unaffected. The shareholders have not had their interests protected by management and return on capital is lower than it could be.  The surplus labour was less obvious before the employee took extra leave.

This third scenario is probably the most likely and in practice would be feasible where market conditions of trade and competition restrictions are such that achieving efficiency in the production function is never possible. Hence, mis-pricings are rampant.  These mis-pricings could be in the form of unnecessarily high prices for customers, unnecessarily low shareholder returns, depressed wages for employees or a combination of all of these. This is another example of the truth in the old saying ‘There’s no such thing as a free lunch’.