Cutting Costs: Tread Carefully When It Comes to Benefits
Thomas Flannery thinks it should be self-evident that for every action there is an equal and opposite reaction. “The reaction may not be obvious and it may not be immediate, but there will be a reaction,” says Flannery, an Ernst & Young partner who specializes in human resources strategy. Yet, he says, in the rush to deal with today’s sluggish economy, American companies often fail to adequately think through what they are doing and wind up creating morale problems. That’s particularly true when it comes to cost containment. And, because the cost of employee benefits seems to be stuck on the up escalator, companies might think that’s a spot to hold the line on expenses.
“Just about every company is looking at the cost of their benefit packages,” Flannery says. “When the trend line of health benefits goes up, sound business [practices require] that you evaluate what benefits are costing you.” He cautions, however, that this is not a simple accounting issue. “Companies get in trouble when they make these decisions in isolation,” he says. “They need to make cuts in a way so that it is not seen as wielding an ax.”
In response to rising costs, 19 percent of small employers have made changes in their health care benefits over the past two years, according to the Employee Benefits Research Institute. Most of the changes were to increase employees’ share of premiums, adding higher deductibles and copayments, or cutting back on benefits. A survey by the Society for Human Resources Management found that 92 percent of companies nationwide have experienced increased health benefit costs this year and one-quarter have decreased other benefits to compensate.
“You can leave a bad taste in the mouth of your employees if you do it wrong,” Flannery says. “The disposition of employees about the employer will change, and you may not see that surface for six months, 12 months or 18 months, but it will.”
Last spring, financially troubled American Airlines pushed three of its unions to agree to $1.6 billion in wage concessions. Finally, just a few days after employees agreed to help save the company, news surfaced that the company had set up a trust fund to protect the pensions of 45 key executives. Technically, American Airlines had done nothing wrong. But its employees felt betrayed and that’s what mattered.
Chris Cerone of Triad, an employee benefits consulting firm, says most employees have an entitlement attitude when it comes to benefits. “Once they have them, they think they deserve them,” he says. “And, even though they may be aware that the costs of benefits are increasing, they still expect the company to pick up the cost.”
Triad’s Dave Allen says employers need to discuss rising benefit costs with workers and solicit their ideas about how to control them before taking action. “You don’t create the illusion that you’re going to do what the employees say, but getting input from the employees and considering it helps mitigate the impact when the changes are made,” Allen says.
Flannery urges employers to tread carefully when cost cutting affects benefits. In the current economy, no one is probably going to leave a job because benefits were reduced, he says. “But when things improve, they just might leave,” Flannery says. “And, then you are left with recruiting new workers. There’s a cost to that, and it’s something you need to take into consideration before you cut benefits in the first place.”