How to Cut Costs Without Cutting Morale

Businesses focus their cost-cutting efforts, trimming operational expenses, and rolling back what employee perks they can. If faced with a choice between layoffs and reduced perks, businesses and employees naturally favor the latter, less severe option.

It’s better to give than to receive. You’ve probably heard these words of wisdom, maybe even repeated them to yourself in an attempt to suppress your disappointment after ending up on the short end of a holiday gift exchange.

“It’s better to give … it’s better to give,” you mutter under your breath as you remove the final scraps of wrapping paper to reveal the undeniable, crushing reality of the socks that constitute your ostensible present.

Admittedly, this is a first-world problem. But it’s also a problem worth keeping in mind, because it shows the danger of runaway expectations, and holds special relevance as the tech industry’s habitual optimism is tested by news of cost-cutting and slowing growth.

The problem’s not limited to Silicon Valley, that representative par excellence of both first world abundance and runaway expectations. Companies of all types would do well to remember the example of the socks, as well as a modified version of the “better to give than receive” credo.  

When it comes to employee benefits, it’s easier to give than take away.

Employee Perks Create a Sticky Situation

To see why, consider the closely related case of employee pay. Wages are sticky: they’re resistant to change, particularly in the downward direction. When faced with a slowdown, businesses have an easier time reducing hiring, even laying off workers, than renegotiating lower pay.

This means that a small change in economic conditions can result in a big disruption – unemployment, rather than an incremental adjustment to wages.

Employee benefits work in a similar way. The major non-wage forms of employee compensation, such as health insurance, retirement plans, and equity options, are typically set by long-term contracts. Even if a business could quickly reduce these expenses, doing so would have a hugely negative impact on employee morale and retention.

So businesses focus their cost-cutting efforts elsewhere, trimming operational expenses and rolling back what employee perks they can. If faced with a choice between layoffs and reduced perks, businesses and employees naturally favor the latter, less severe option.

But cost-cutting isn’t so much “either-or” as it is “either-and.” A company that slashes employee perks likely does so in addition to, not in place of, staff reductions. Taken together, these measures can be devastating. Rather than helping to right the course, cost-cutting becomes a reminder that the ship is sinking.

Cost Cutting and Company Culture 

Spending on employee perks accounts for only a fraction of a company’s budget, which helps explain why it’s easy to justify the expense in the first place.

In industries, like tech, where lavish perks have become the norm, there’s also the fear factor: startups fret that they won’t be able to recruit talent unless they keep up in the perks arms race.

All things being equal, there’s nothing harmful about companies having generous perks programs. But spending for spending’s sake isn’t the same thing as investing in employees.

In the past, I’ve written about how companies with strong corporate cultures design their perk programs around specific objectives related to employee productivity and well-being. This form of cost-benefit analysis is important to get right the first time because changing an established policy can be highly disruptive.

It’s behavioral science in action. We register losses much more powerfully than we do associated gains.

For instance, employees at Dropbox get to bring five guests a month to the office for meals and happy hours. That sounds like a great perk, right? Unless you consider that before a round of cost-cutting, employees had unlimited guest invitations. Now that same perk is cited as evidence of austerity.

Put another way, no matter how delicious the free food in a company’s cafeteria, it’s nothing compared to the taste of bitterness that would be left in employees’ mouths if that food were to be taken away.

Communication is Key

The implications of our loss aversion extend beyond perks to other HR practices, such as employee expense approval.

Travel accounts for the vast majority of employees’ spending (and over 10% of the total budget at a typical organization, which is second only to payroll as an operating expense). Business travel is expensive – more expensive than it has to be. Not for nothing do airlines brand their premium seats as “business class.”

Of course, there are good reasons why employees might occasionally spend more to guarantee they’re comfortable, safe, and productive while on the road.

For some travelers, this might mean they really do have to fly business class if they’re going to have any chance of being well-rested for an overseas client meeting. For others, coach will do just fine. It’s better to give employees the flexibility to choose what works best, while also giving them a reason to choose cost-effective options. 

The business class example is representative of the wider problem companies face when identifying opportunities for cost savings. It’s impossible to know what perks matter to employees – unless you ask them. Obvious as it may sound, very few companies do that when making the policy and budgeting decisions that affect employees’ day-to-day sense of well-being.