Too Cheap with Your Valued Staff? Know the Risks
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Knowledger@Wharton
January 21, 2012

As economic malaise bleeds into another New Year, employers are making hard-nosed decisions about benefits and compensation. That means for many in the nation's workforce, compensation remains flat, health care premiums are up, the 401(k) match has disappeared and bonuses are smaller or nonexistent. The result is not hard to guess. When workers feel that "the company is doing fine, but somehow I'm doing worse, at some point there has to be some dissatisfaction with that. It's not sustainable," suggests Wharton management professor Adam Cobb, who studies labor, worker benefits and income inequality. "I think there's a general feeling of: This system is rigged and not in my favor."

A recent survey of 2,500 workers by career website Glassdoor.com found that 17 percent of workers said employers had cut or eliminated bonuses and 15 percent had slashed perks such as commuter subsidies. About one quarter said their companies were in a hiring freeze, and about half reported that employers had cut pay or laid off staff in the last six months. January, once warmly anticipated for a year-end bonus, may be remembered in 2012 as the month that year-end gifts – along with other perks, pay and benefits – disappeared.

Going into 2102, employers have little incentive to loosen the purse strings. After three years of recession, company shareholders are clamoring for profits. Economic activity has increased, and economists speak tentatively of a turnaround, but the possibility of a financial crisis in Europe threatens recovery. In the U.S., the upcoming presidential election and the uncertain future of health care reform throw question marks into employers' pay and benefits calculations. And with unemployment at 8.5 percent and competition for jobs fierce, most workers are staying put.

"Employees can be really disgruntled, [but] that doesn't mean they're going to leave," Cobb points out. "Where are they going to go?"

Firms may pay a price for frugality when the economy turns around, says Cobb and other human resource experts. Companies are meeting short-term targets now, but it is not clear what the long-term impacts of cost cutting will be. Some note that slashing labor costs too severely – especially if a firm is healthy – could do long-term damage to a company's reputation and morale.

"Worker productivity is going up, companies are sitting on mountains of cash and they are still cutting benefits," Cobb says. He wonders what that might do to a company's ability to attract talent long term, especially in an age of free-flowing online complaints. Could online posts by frustrated staff haunt companies down the road? The last recession came before the age of Twitter, Facebook, blogs and social media, Cobb notes. Workers today are able to vent frustrations online, and can find out more about companies by reading employee posts. If a frustrated worker "writes an angry blog about company X cutting health care benefits, that isn't ever going away," he says. "These are things firms might not be thinking about."

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