Why you should never cut employee benefits in a recession

Benefits are big business, especially in Canada. According to data from MaRS, the average cost of benefits for a small company still comes in at 15% of their overall payroll – with that figure rising to 30% in a larger organization.

So why then, when a crisis hits, are benefits often the first to go?

During a recession, companies may try to prioritize product teams and sales in order to bring in new business as fast as possible. Unfortunately, this can often leave managers no choice but to reduce employee benefits – something which causes much more damage in the long-term.

The dangers of cutting benefits in a recession

“Some employers may consider certain benefits to be a discretionary expense that can be easily set aside during heightened economic pressures,” says Jeff Ostermann, chief people officer at music outlet giant Sweetwater.

“The argument for some goes that employees will be more understanding during these times that certain cuts need to be made. It can also be a step to shore up the financial state of the organization in lieu of more extreme measures like layoffs.”

And while that makes sense in theory, cutting benefits may lead to lower morale, heightened turnover and poor talent attraction down the line.

“Employers that move to quickly cut benefits may be trading short-term financial relief for longer-term decreases in employee engagement, goodwill and productivity,” says Ostermann.

“Employees who begin to doubt their employer’s support of them may be the first to look elsewhere when a rebound occurs and other job opportunities present themselves.”

And the data’s there to back up Ostermann’s theory.

A recent report from LifeWorks found that benefits are the main reason 34% of Canadian employees are staying with their current company – with further data from Harvard Business Review finding that 80% of employees would choose additional benefits over a pay rise.

If employers were to start stripping these benefits away, it could only increase turnover – and by extension hiring costs - having quite literally the opposite intended effect on your bottom line.

Budgeting for your benefits

Instead of making knee-jerk reactions around benefits, employers should try calculating how much the package is costing them – and then offset that against any potential wage increases or recruitment costs.

According to Ostermann, there’s no simple one-size-fits-all answer when it comes to benefits budgeting, but it begins with determining your investments in the employee value proposition (EVP).

“Benchmarks exist for more significant programs like health benefits but other ancillary type programs can be wide and varied,” he says. “For example, at Sweetwater, we offer our HQ employees and their families a free health clinic, free confidential onsite mental health counseling, free fitness center, subsidized meals and more.

“These type of perks and benefits may not work for every organization but they have been well received by our team members and critical to us showing them how much we value their contribution.”

Supporting people with inflation-proof perks

Since the pandemic, employees have come to expect more from their employee benefits. Pre-COVID, organizations might have gotten away with putting a pool table in the breakroom or bringing out beers on a Friday afternoon, believing they had a “solid company culture”.

Now, people want more tangible perks – not gimmicks. Try looking at inflation-beating benefits, ones that offer support without breaking the bank.

For Ostermann, he suggests looking at as free financial counseling, interest-free emergency loan assistance and early earned pay access.

“Employers can work hard to maintain as many employee benefits as possible – especially those that help support their financial wellbeing,” he tells HRD.

“However, the best thing an organization can likely do is to run a solid, fiscally disciplined company that enable them to retain jobs during even down cycles.”