More Company Benefits Come Under the Knife

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When the ax isn't enough, out comes the scalpel. Having laid off tens of thousands of workers, corporations and small businesses are looking for new fat to trim. In September, 2,269 companies had mass layoffs, according to Sirota Survey Intelligence, each affecting 50 or more employees. But many companies are still bleeding cash and desperately searching for novel ways to eke out savings.

That's why benefits are the next big target. For every employee who makes $75,000, a company typically spends $30,000 more in benefits. So for employees who still have jobs after cost-cutting layoffs, the potential for more pain lies ahead. Health insurance is traditionally the revenue drain that budget hawks focus on, with costs averaging $10,000 per employee (about $6,000 for singles and $14,000 for those supporting a family). "I expect that by January, the number of people without health insurance will rise above 50 million as companies scale back," says Bruce Raynor, president of Unite Here, a labor union that represents half a million workers in a variety of industries. (Read "Putting Health Care on an Energy Diet.")

Beyond slashing health-care costs by cutting employees loose, companies have steadily boosted the share of premiums borne by workers. Twenty years ago, 60% to 70% of companies paid health-insurance costs in full, says Jim Edholm, president of Business Benefits Insurance Inc., a benefits-consulting firm based in Andover, Mass. Today costs are fully covered by less than 10% of companies. Having already passed those bills along to staff, employers are looking for other benefits to slash.

For new savings, many businesses are looking hard at 401(k) plans. Companies typically match 50% to 100% of an employee's 401(k) contribution, up to 6% of his or her annual salary. That translates into a cost of $1,500 to $3,000 for each employee who earns $50,000. For those who are single and earn more than $100,000, matching 401(k) contributions can cost a company $6,000, as much as health insurance might. And employees are less likely to object when 401(k) contributions get trimmed. "The pain is further away," says Edholm. "A 45-year-old isn't going to see any retirement money until he's 65, so he figures he's got 20 years for his investment results to make up for any cuts."

Corporate 401(k) stinginess has already set in. GM is suspending 401(k) matching and tuition reimbursement, as is Frontier Airlines. And in a recent survey conducted by Watson Wyatt, a human-resources consulting firm, 6% of companies said they either had already cut 401(k) contributions or planned to over the next 12 months. "Do people notice their retirement benefits as much as their health care? No, they don't," says Maureen Tarantello, a Watson Wyatt senior consultant. "They deal with health benefits every time they see a doctor, but retirement is something that comes into play much later in someone's career."

Such cuts may help the short-term bottom line but can haunt companies down the road. "Stopping those payments can be a violation of an implicit contract, and that can affect people's sense of loyalty," says Stacey Kole, an expert on human-resources management at the University of Chicago Booth School of Business. "It's a natural trigger for people to look outside for alternative jobs." And employees remember such slights. "If you cheat me today," Kole says, "I'll remember that when I have options to go elsewhere."

Benefit cuts can also affect productivity, says Christine Porath, an expert on organizational behavior at the University of Southern California Marshall School of Business. "Performance declines, people are not as creative or innovative, and if they don't have a say in the decisions, they don't feel a sense of procedural justice."

But given widespread corporate turmoil, perk-slashing isn't likely to stop at 401(k) plans. In the Watson Wyatt survey, a fifth of companies said they planned to eliminate or reduce training, cancel holiday parties and tighten travel policies. "These are all things about which companies say, 'Could we live without this for another year?' " says Tarantello. "But you don't want people retiring on the job. You want their hearts and minds."

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