"The absolute cheapest benefit you can offer an employee is their title, and if they have a rational reason for wanting a better title, why on earth would you refuse to give up some title to get a good candidate on board?"

If your role doesn't match your title, you may be in big trouble when/if your company gets acquired. Also it might seem like the cheapest in one sense but as the company grows you'll find yourself in an awkward situation when a manager makes more than a VP you just hired. It's a sensitive subject that should be approached more carefully than you'd expect.