Employee Benefits in Today's Economy

How do you cut benefits while keeping employees happy?

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Like most companies, RedPeg Marketing offers perks to its employees. The Alexandria, Virginia, experiential marketing firm hands out trophies for good performance and provides breakfast at staff meetings. Employees can compete in an annual Connect Four tournament as well as participate in lunchtime training sessions. Open the company fridge, and you'll find cold beer.

RedPeg co-founder Brad Nierenberg, however, has been known to go above and beyond with company perks. He shells out $17,000 a year to rent a three-bedroom house in Dewey Beach, Delaware, that the company's 48 employees can sign up for year round. "That's one of the perks I've kept even in the downturn," says Nierenberg, 42.

He once walked into the office carrying a briefcase containing $38,000 in cold, hard cash and presented each employee--38 of them at the time--with $1,000 for meeting company goals. "I thought, ‘I've got to make a big deal out of this; I can't just put it in their checking account because that's not as fun,'" says Nierenberg, who saw sales of $18.5 million last year. "I thought it would be cool for them to see $38,000 in cash."

But Nierenberg has also taken perks away. He ditched employee use of a Mercedes for a whole month, free gas included, because he felt it was an expense that wasn't necessary. He also stopped a company program that allowed employees to take off a certain number of Fridays during the summer because business was picking up and the company needed to make up ground after a few slow quarters. "You definitely can take a perk away," Nierenberg says, "and you should if it's affecting your business."

But wait a minute: Conventional wisdom says it's a bad idea to pull a perk once it's out there. Yank away something employees have come to expect, and you're setting yourself up for rampant conspiracy theories and angry employees. Google learned that the hard way last spring when it announced it would charge employees 75 percent more for its in-house day-care program. Employees with children didn't take the news well, and some reportedly started to cry. Google has since reduced the price and will take more than a year to phase in the cost adjustment, but at what cost to morale? "Anytime somebody is receiving something and then, all of the sudden, they're not, clearly they're going to be upset," says Deb Cohen, chief knowledge officer at the Society for Human Resource Management, an HR membership organization.

Of course, there's a difference between the perks employees structure their lives around, like insurance, day care and flextime, and the frivolous perks, like bagels on Monday. And it's these types of perks Google has also trimmed down to cut costs without affecting employees significantly: In October, the New York City division instituted limits on cafeteria hours and food selections. "No one is going to quit because they can't get free coffee or pastries," says Bob Nelson, an employee motivation and management consultant and author of 1001 Ways to Reward Employees. But the risk you run, he says, "is a panic that if the company can no longer afford coffee, it must be headed for disaster."

It's this perception that entrepreneurs want to avoid. Last Year, Expedite Group, a 7-year-old Cary, North Carolina, concierge company, debated whether to decrease the 401(k) matching contribution it offers its 17 employees. "We've struggled with matching it at times," admits founder Nancy Piepho, 39.

She decided to leave the match alone, however, because lowering it might create doubt in employees' minds. "We want the employees to have confidence in what we're doing," Piepho says. "That was one of the reasons I was like, ‘It's not going to be easy, but it's not a lot [of money] and it's the right thing to do.'"

A tough year

Next Level Café, a St. Paul, Minnesota, technology management firm, saw 2007 as a great year. But 2008, not so much. "It's been a tough year," says CEO and co-founder Rich Anderson, 38. "We haven't been growing as much." Morale was falling, so last autumn, Anderson began tracking morale through a weekly survey that he plotted on a graph. He met with the company's 25 employees and told them the truth: The company wasn't at risk of failing by any means, but it wasn't a great year and that meant fewer bonuses and perks.