Cherished workplace benefits are being lost in the battle to control costs and save jobs. But employers need to be creative when cutting perks or face a damaging loss of staff morale

Imagine a world where company budgets are so tight, chief executives discover this year's Christmas hamper from the firm is full of Lambrini and Scotch eggs instead of caviar and champagne. Meanwhile, senior managers try to explain to their best-performing staff that although the last team lunch was at The Ivy, the next will be in the office meeting room, where an Iceland buffet will be provided.

Although this may sound far fetched, a need for thriftiness during a recession is an inescapable reality for both small and large companies. Businesses that have ensured the high costs associated with core benefits, such as pensions and private medical insurance (PMI), have been minimised will be looking to make further savings by slashing fringe benefits. Even the humble biscuit has fallen victim to cost-cutting as companies take precautions to ensure they have the funds in place to weather the economic storm.

Of the 892 respondents to the Chartered Institute of Personnel and Development's (CIPD) Labour Market Outlook Survey, 20 per cent noticed reductions in free drinks and biscuits during meetings. The survey, conducted between December 4, 2008 and January 2, 2009, also showed that the use of first-class travel has been reduced by 65 per cent.

Katharine Turner, a principal at HR consultancy firm Towers Perrin, urges employers not to underestimate the resonance some fringe benefits have with employees. In order to ensure cuts made to perks don't have an adverse impact on morale, surveys should be conducted to identify those that employees really appreciate. Benefits cherished by employees, suggests Turner, can differ considerably from the corporate view of what is valuable.

"It's possible, and we know this from our consulting work, for companies to be spending an awful lot of money on people in a way that they don't value. This is the problem about cancelling biscuits, it's the small things sometimes that employees really value," she says.

Clear communication is one way to minimise resistance to cuts. This was the case for professional financial services firm Towry Law, which has stopped providing lunch vouchers for staff on internal training courses—a move it estimates will save several thousand pounds a year. "It hasn't created a big wave of upset because we have communicated it well and have been clear why we are doing it," says Richard Higginson, reward manager at Towry Law.

Larger companies such as law firm Shoosmiths, which employs around 1,500 people, have also trimmed fringe benefits. The firm has stopped providing free fruit in the office and paid its Christmas bonus through the payroll instead of vouchers, which were taxed. On their birthdays staff are still given the day off, but the £50 cash payment they were given in addition to this has been scrapped. The firm's HR and facilities management director, Louise Hadland, says: "Not only do our people understand that we have had to cut some benefits, they have actively suggested ways in which we can save money."

Sharon Ellis, head of HR at Denplan, says she would consider cutting fringe benefits only as a last resort because they are an important part of the total reward package the company offers its 341 employees. "As fringe benefits form part of the overall employment package, it is important not to take away the small things such as tea and coffee that do not cost that much but are appreciated by employees," she explains. "Unless the cost saving is big, it will be seen as petty by employees, particularly if they perceive that a management team is still spending money on things that the employee sees, rightly or wrongly, as wasteful."

Charles Cotton, reward adviser at the CIPD, also says employers should be careful about differentiating between higher- and lower-level staff when making cuts to benefits. "It's important that senior managers share the pain as well. If the ordinary staff have seen their biscuits disappear, but the senior staff are munching on their chocolate HobNobs during meetings, obviously this may lead to cynicism," he says.

Companies will also be keen to reduce costs associated with bonuses. As it emerges that some financial institutions receiving money from the taxpayer to stay afloat have been paying out millions of pounds in bonuses, there is increasing pressure that the payouts are justified.

A review conducted by Financial Services Authority chairman Lord Turner highlighted that in the banking sector pay policies and forms of remuneration such as bonuses will be more heavily scrutinised, to ensure they reflect a company's performance and discourage risky behaviour. This will underline the need for employers in all sectors to make sure bonuses are linked to the firm's financial performance.

Since the start of the banking crisis several firms have changed the structure of their bonus arrangements. For example, UBS introduced a new compensation model for senior staff after axeing 2008 bonuses for its group executive board. From 2009, the board, selected senior traders and lead business risk-takers will receive compensation held in reserve, which will be paid only if the firm's financial results merit it.

Many smaller firms have always had to operate clear-cut bonus arrangements that are linked to annual profits. For instance, private equity and fund management firm Hotbed operates a bonus scheme that is pegged to the financial performance of the company. When the profits drop, so do bonus payments. In a good year staff can earn a bonus ranging from 10-20 per cent of salary. This year, employees will not receive a bonus because profits are not high enough.

Cotton says that if companies cut big-ticket bonuses they could redress the balance by making sure they find money in the budget for the annual staff party to recognise employees' efforts. Reviewing bonus and commission payments is another way to make savings, and some companies will recalibrate their incentives and set tougher targets to ensure staff do what's required to overcome the challenges ahead.

In an unusual move, IT firm Peer1 announced it will be paying £1,000 to get new recruits at its European headquarters in Southampton to leave within two weeks if they don't meet the grade. What has been dubbed the "Foxtrot Oscar" bonus is designed to ensure that Peer1 employs only people who are fully committed to delivering outstanding customer service, and will be paid to any employee who wants to give up their job in the first two weeks.

There is nothing like a global recession to get employers to take creative and innovative approaches to reward.