It's Time for Profitable Companies to Restore Perks

Recent government data suggest an economy in confusion. Growth and consumption are slowing, but savings are rising, up to 6.4 percent of personal income. The savings rate, in fact, has been climbing for three years, as Americans have been hoarding cash to protect themselves against the struggling economy.

While the rising savings rate is generally good news for the economy, it is the problem that's discouraging businesses from taking risks, investing, and hiring. In its June 2010 survey of its members, the National Federation of Independent Businesses found that the single most important problem, by a long shot, is "poor sales" (30 percent). Twice as many identified poor sales as the single most important problem as they did "government regulations and red tape."

But businesses aren't helping matters much. One of the reasons Americans are saving more of their salaries and wages is that in 2008 and 2009, employers stopped doing the things they have historically done to make their employees feel confident about spending—contributing to 401(k)s, paying for benefits, raising salaries in line with inflation. Corporate America's productivity and efficiency gains since the onset of the Great Recession have been impressive and an important contributor to the recovery. Businesses cut costs aggressively largely by cutting jobs, salaries, benefits, and perks.

Companies made these cutbacks out of desperation. The problem is that today, a year after the economy began to expand, and after several quarters of profit growth—Bloomberg reported that "profits among S&P 500 companies will rise 35 percent in 2010, the fastest pace in 22 years"—companies aren't restoring any of those cuts.

The Wall Street Journal on Tuesday reported that many of the hundreds of companies that cut or stopped 401(k) contributions during the crisis, and that had pledged to resume contributions once conditions improved, have yet to do so. Federal Express, which just hiked earnings expectations "said it is taking roughly two years to fully restore the employer matching contributions it cut in February 2009." "All told, almost one in five U.S. companies with at least 1,000 workers have reduced or suspended their matching contributions since September 2008. Roughly half have yet to restore those benefits, though many are considering reinstating at least a portion of the match within the next 12 months, according to a survey this spring by employee-benefits consulting firm Towers Watson." And, the Journal reports, there's more where that came from. "One in 10 employers as of February planned to reduce or eliminate matches within the next 12 months, according to a survey by the Society for Human Resource Management released in late June."

Meanwhile, as Steven Greenhouse reported in the New York Times on Wednesday, many employees—particularly those who work for indebted state and local governments—are being asked to take pay cuts. Some businesses are also cutting pay—mostly out of desperation, "although a few have seized on the slack labor market and workers' weak bargaining power to cut pay and thereby increase their profits and competitiveness."

Imagine your wages have been frozen or are being cut and that your employer has stopped making the matching contribution to your 401(k). You'll have less money to spend on goods and services in each paycheck. And in order to keep saving for retirement at the same rate you have been, you'll have to increase your own 401(k) contribution by 25 percent. That would sure inhibit consumer spending. It's understandable that companies treat their relationships with employees as a zero-sum game—every dollar spent on wages and benefits is one less dollar in profits. But when lots of corporations act that way at the same time, it can have a negative impact on employees' collective appetite for spending. And that's bad for business.

Clearly, companies that are in danger of defaulting on debt or going out of business shouldn't be doling out salaries and benefits recklessly. But corporate America is sitting on $1.8 trillion in cash, and the business sector's balance sheets are in rude health. Federal Express, UPS, and many of the other large corporations that are minting money can certainly afford to restore their 401(k) matches to pre-crisis levels. Imagine if some of America's large companies that are racking up huge profits were to publicly announce across-the-board wage increases. A move like that would embolden employees to spend a little more—and would probably be more effective than a new round of stimulus.