Pare back perks at your peril

Jul 25 2008 by Nic Paton Print This Article

In a downturn cutting back on benefits may seem like a win/win decision. After all, you're simply taking a slice out of something most employees rarely notice or take for granted and are even less likely actually to calculate their true value.

But, according to leading U.S business school Wharton, firms that take an axe to their benefits may live to regret it as it could lead to, at best, a disgruntled and, at worst, a disappearing workforce.

On its Knowledge@Wharton website, the school has highlighted the decision earlier this summer by Google dramatically to raise the price of its day-care programme, a move that prompted some employees to weep and, more seriously given its importance as a retention tool, a sharp reduction in the numbers on its waiting list.

The furore over Google's decision illustrated the difficulty in eliminating any employee perk, argued Wharton management professor Nancy Rothbard.

"Once you have the perk, to take it away is seen as a violation of a psychological contract you have with your employee," she said.

Employee perks can, of course, range from the traditional company car, gold-plated pension and corporate jet to, at the highest echelons, highly personalised perks, such as personal trainers, laundry service, and pet-friendly offices.

The Google scheme, for example, also gives parents $500 to spend on take-out dinners during their first weeks with a new baby.

The current economic slump could well trigger a round of corporate de-perking, predicted Wharton professor Peter Cappelli.

"The issue is whether these practices are important in recruiting and retaining people. If the economy softens, there will be push back again. We did see that when the economy softened in 2001," he pointed out.

Inexpensive or no-cost perks such as casual-dress days, free coffee and food discounts may not add much to employee morale or productivity but they also don't hurt the bottom-line much either, he argued, whereas doing away with them certainly can do.

"If you are taking anything away from employees, it's important to explain the need for doing it," he said.

"It helps a lot if the need is something driven by factors outside the firm. The need to improve share price isn't going to satisfy a lot of people."

His view was echoed by Wharton colleague professor Sigal Barsade. "I do not recommend taking away perks, but if a company has to, management needs to remember that taking things away from people almost always leads to feelings of unfairness," she said.

Employees typically come to feel that even a small perk is something they "own". To remove it therefore is one of the most direct routes to employee anger, which in turn, leads to lower levels of motivation and retaliatory behaviour.

This retaliation can take on a psychological form, such as less commitment to the job, or a behavioural form, such as working less hard.

"If management does such a thing, it has to be very sure to explain very, very clearly why it was necessary in a way that seems fair to the employees," she added.

While perks have historically been used mostly for top executives, when times are good companies may add more perks lower down in the organisation with the cost then coming back to bite them when times get harder.

Part of the problem at Google, said Rothbard, was that the price hike was perceived as limiting accessibility to a perk that previously had been enjoyed by, or at least offered to, a large number of employees.

But Google is clearly not the only one looking at this area hard. A study by executive compensation firm Towers Perrin earlier this year found that 11% of Fortune 500 companies had cut out perks. The top item cut was the company car, followed by club memberships, financial planning services, insurance benefits and security measures.

A "middle way" is for companies to extend perk packages that their employees can choose to accept or ignore, according to Chris Hill, chief executive of employee discount firm

Employers win because they can provide a benefit to their employees that cost nothing and vendor companies win because they can access new customers for their products.

"We have seen an expansion into voluntary benefits. As the costs of health care and traditional benefits are rising, employers are looking to provide at no cost to them something that's perceived of as valuable to the employee," he said.

Another reason companies are unwilling to eliminate perks is that they don't want to lose their place on lists of good companies to work for.

"Companies that don't have perks aren't on the lists," said Rothbard, though acknowledging that "perks are not the only thing companies need to make it".