How we can retain the best employees and convince them to stay when the company is reducing the incentives and benefits due to the current economy?

It is very difficult. If you really want to retaining your best employees, then consider treating them individually. Some things to consider:

• Reduce the incentives and benefits for the lower-performer employees, but not the best employees
• Ask the best employees what other incentives (besides money) would they appreciate. This could be flexible hours, working from home, additional vacation days, Friday’s off or1/2day Fridays, paying for additional training so that they can advance to the next promotion level, access to technical seminars, conferences, etc - with the understanding that they will speak at those conferences or work the sales booth for a few hours, etc Move them into a better or window office, etc
• Find out what their career goals are. If they are interested in writing a book, getting published or pursuing a patent — help them with those goals.