Recession Strategy: Which Perks to Cut

Cutting employee perks could be a smart way to save money during this economic crisis, but managers should choose wisely

By Matthew Boyle

Before taking the more drastic measures of cutting salaries or conducting layoffs, companies routinely target employee perks—free coffee and snacks, corporate cars, nights out on the town—where the return on investment is minimal, or so corporate bean-counters think. A recent survey from outplacement firm Challenger, Gray & Christmas in Chicago found that 20% of companies have eliminated perks to save money during the current economic crisis, and another 10% are considering doing so.

Here's the problem. Once given, perks are extraordinarily difficult to take away. And the way companies go about slashing them—which is often haphazard and arbitrary—can have an impact on employee morale, retention, and productivity. However, if management makes it clear what is being cut and why while also maintaining some perks that have a direct impact on the performance of its more valued staff, what might be viewed as petty penny-pinching could be seen as prudent.

"I call it surgical cutting," says Bill Morin, founder of leadership consultancy WJM Associates and a pioneer in the human resources field. "Use a scalpel, not a machete."

Take food, for example. Corporate cafeterias, often subsidized, offer the clear benefit of keeping employees close to their desks and focused throughout the day. Close those down, or make them less attractive an option, and watch productivity plummet as workers take longer lunches off-campus, says Rick Beal, managing consultant for Watson Wyatt's (WW) Northern California operations.

Less Holiday Cheer

Holiday parties are another matter. Companies such as Morgan Stanley (MS), Goldman Sachs (GS), and Viacom (VIA) have canceled their boozy yearend shindigs this year. Some, like the Estée Lauder Companies (EL), are taking a portion of the party budget and donating it to charity. More than half of all organizations recently polled by Towers Perrin said they are somewhat or very likely to scale back this year's party to save money. Travel is another prudent cut to make, especially with teleconferencing technology that allows managers in Los Angeles and London to meet up virtually.

What's less obvious is that when it comes to cutting perks, employees should not be treated equally. "The last thing to go are incentives that would motivate people to make sales," says Morin. "You want to hang on to anybody who has a connection to customers."

Ravin Jesuthasan, the head of the Rewards & Performance Management practice at Towers Perrin, agrees. In previous downturns—2002 and 1991—companies cut perks indiscriminately, he says. Not only should employees in pivotal roles be largely spared, he argues, but they might even get a bonus or slight raise during these tough times to keep them happy and productive. Indeed, an October Towers Perrin survey of more than 450 companies found that 41% are considering targeted salary increases to retain top performers.

Above all, communication is the key, experts say. Many a company will turn the loss of free coffee into Bastille Day by not explaining why that perk is being cut and how it will help the company in the long run.

A much dicier issue, experts say, is whether to let employees choose which perks are cut. On the one hand, employees are more likely to go along with decisions they help make. But Morin and Beal, at least, feel these moves are for management to make. "This is what managers are supposed to do," Beal says. One thing managers can certainly do, though, is open the books and lay out the bottom-line impact of these cutbacks.

"Once you give somebody something, they give it up reluctantly," says Jesuthasan. "So you need to come back to the business rationale of why you are doing this." Telecom giant Sprint Nextel (S), for one, has saved more than $7.5 million through the first half of 2008 by cutting back on travel. A company spokesperson says employees are "O.K." with the firm's cutbacks, which also included closing two corporate food-service facilities. In fact, employees are even sending their own cost-saving ideas to Chief Financial Officer Robert Brust.

Boyle is deputy Corporations editor for BusinessWeek.