SEVERANCE: Tech companies have
laid off tens of thousands of employees but they’ve also handed out hundreds of thousands
of dollars worth of severance to each and every employee that was laid off. Meta offered 16 weeks
of base pay plus another 2 weeks of base pay for every year of tenure. Google offered an identical
package but some companies even took it to the next level. Salesforce, for example, offered a
minimum of 5 months worth of base pay and that’s just base pay. Most severance packages also came
along with stock vesting through the current quarter or more, 6 months of health insurance,
the opportunity to cash out PTO, and compensation for the 60 day notification period. So,
most of the people who were laid off from big tech walked away with nearly 6 months worth of
full compensation. This is no doubt how severance should be handled if layoffs are required but
were these layoffs even worth it? I mean, these companies are basically committing to pay these
employees for the next 6 months. A director for example would walk away with $400 to $500 grand.
Not to mention, they never really stopped hiring either. Yes, we always see headlines about Google
or Meta implementing a scary indefinite hiring freeze but this isn’t actually true. While hiring
is definitely slower and more selective, Google literally has over 1900 job openings posted as we
speak. So, if these companies are just hiring back new people as they layoff their existing staff,
where exactly is the cost savings? Sure, they can pay the new people a marginally lower salary of
10 or 20%. But, for a company like Google or Microsoft, saving 10 or 20% on 10 or 20,000
employees is a rounding error. Not to mention all of the terrible PR. I mean just look at
Apple. They’re coming off as some sort of heroes for not doing layoffs while Meta is presented as
suffering from Typhoid fever or something. So, join me as we figure out just how much these
companies are actually saving from layoffs and the real reason they’re resorting to layoffs.
COST SAVINGS DEBUNKED: Let’s start off by taking a look at the
supposed benefit of layoffs: reduced operational expenses. Given how much these companies pay,
the apparent savings are actually quite large. Google for instance has a median compensation of
$295,000. Facebook comes in just under that at $292,000. These are already big numbers
but that’s just direct compensation of base salary, stock, and bonus. These companies
also hand out extremely generous insurance plans, 401k plans, retirement plans, free food,
smartphones, monitors, phone plans, software subscriptions, airplane tickets, hotel rooms,
and office space. They also have to pay social security and medicare tax on these salaries,
so the indirect compensation itself easily adds up to another $50 to 100k. Let’s call it $100k
to give these companies the benefit of the doubt. This means that the average employee is costing
Google and Facebook roughly $400,000. So, how much exactly are the layoffs saving? Well, Google has
thus far laid off 12,000 people and Facebook has laid off 21,000 people. At $400k a pop,
Google is saving $4.8 billion per year and Facebook is saving $8.4 billion per year. This
was the first time that I started thinking that maybe the layoffs were worth it. I mean, we’re
talking about billions of dollars every single year. That is until I faintly recalled that not
a single one of these companies are losing money. In fact, they’re not even remotely close to losing
money. Some of them are straight up posting record profits. And when you contextualize these savings
with how much these companies are pulling in, it just becomes even worse. In terms of revenue,
Google pulls in just under $300 billion per year and Facebook pulls in just over $100 billion per
year. So, the savings only equate to 6 days worth of revenue for Google and 26 days worth of revenue
for Facebook. Obviously, they haven’t hit the jackpot, but with that being said, savings are
savings. Why make less money when you can just make more money which brings us back to the idea
of maybe the tech companies were right for doing layoffs until you consider natural attrition.
Here’s a secret. These big tech companies are actually really bad at employee retention. And
it’s not because of bad pay or bad work culture maybe with the exception of Amazon. It’s actually
because most FAANG level tech bros are simply not dependent on the company. A lot of them
have enough money to retire by the time their 30, so it’s not like they’re held back by their job.
As such, they’re constantly looking for better opportunities and leave as soon as they find one.
This is why the average tenure at most tech companies is only 2 years. For Google, this
corresponds to an employee turnover rate of 13%. Let me put that in another way. Google has to hire
25,000 people every year just to maintain their headcount. Meta has to hire 11,000,
Microsoft has to hire 28,000, and Apple has to hire 21,000. And all of that is with just a 13%
turnover rate. Some of these companies have turnovers that’s are way worse which raises a
rather interesting question: could these companies have just stopped hiring and waited it out?
ALTERNATIVES TO LAYOFFS:
Well, let’s just say, the minute that the first big tech company announced mass layoffs, this
strategy became a lot harder. Suddenly, people are scared to join that new startup or even switch to
another big tech company. In fact, I bet natural attrition is the lowest its been since like 2008,
and it’s all thanks to Meta who kicked off the big tech layoff season back in November. But,
this isn’t to say that this strategy became impossible. I mean, Apple and Nvidia are
leveraging this strategy as we speak. But, if all the big tech companies weathered out the storm
together, the strategy would’ve simply been even more effective. In fact, it would’ve negated the
need for layoffs altogether for many companies. Take Google for instance. They have to hire
25,000 people every year just to keep up with turnover. This means that instead of laying of
12,000 people and giving them ridiculous severance for 6 months, Google could have just implemented
a real hiring freeze for 6 months and they would’ve ended up with the same head count and
the same cost savings. This idea is simply even truer at Microsoft. So far, they’ve laid off
10,000 people but they could’ve just frozen hiring for 4.5 months. In fact, for Microsoft,
it might’ve been cheaper to freeze hiring than to do layoffs. And don’t even get me started on
Amazon. Their attrition is so dang high that they straight up measure it on a weekly basis. They
lose 3% of their warehouse workers every single week, and to be honest, I don’t think their tech
turnover is all that much better. The reality is that for most companies, freezing hiring for
6 months would’ve accomplished the same goal as layoffs all with way better PR. The only notable
exception to this would be Meta who would have to freeze hiring for 2 years which just goes to show
how much they overhired. But for everyone else, the situation wasn’t that bad. Also, freezing
hiring isn’t the only alternative. There’s plenty of other solutions like just cutting bonuses. Out
of the average Googlers $300,000 salary, about $30,000 is just a bonus. So, if Google had
simply cut the bonus of all 190,000 employees, that itself would’ve saved $5.7 billion or $900
million more than the layoffs. Also, that’s not even considering that directors, and VPs, and
executives have exponentially larger bonuses. But, Google didn’t even reduce bonuses, they simply
delayed them. Another solution would’ve been to offer early retirement and voluntary resignations.
This is usually what Southwest Airlines leans into whenever they’re going through a turbulent period
like the pandemic. And news flash, Southwest has never had layoffs despite having low single digit
profit margins. So, if Southwest can get through without layoffs, tech companies definitely can
with their 30-40% net margins. The only argument against these alternative solutions would be
that companies give up control as to who leaves. With layoffs, companies can slash
certain departments and titles. But, this can simply be corrected for with strategic hiring.
If you want to get rid of recruiters, just stop hiring recruiters. With time, things will level
out how you want. But then, if the savings from layoffs are marginal at best and there’s little
strategic benefit to layoffs, what’s the real reason that everyone is doing layoffs?
THE REAL REASON:
To get to the root of why companies are doing layoffs, we have to first identify who exactly
wants layoffs. It’s obviously not the employees but it’s also the employers either. Do you really
think these companies want to be the bad guy? They already have a bunch of bad rep regarding invasion
of privacy, data collection, and monopolization. Reputation wise, one of the only factors that
are going in these companies’ favor nowadays is that they pay well and have happy employees. So,
it makes no sense to screw that up as well. Not to mention all of the damage layoffs cause to
company morale and ongoing projects. Tech CEOs more than understand this and that’s why most of
them don’t want to do layoffs. Take Tim Cook for example. He’s taken a pay cut from $265 million
in 2020 to $49 million this year. Similarly, Zoom CEO, Eric Yuan has taken a 98% paycut. Now,
I’m sure it’s hard to sympathize with these billionaire CEOs. Oh no, Tim is only making
$50 million this year boo hoo, but bear with me. The point is that these CEOs are doing their best
to prevent layoffs themselves. Hold on wait a minute. What do I mean they’re trying to prevent
layoffs. They’re literally the ones approving them. Well, as far as the public is concerned,
that’s true. The CEOs are the ones who take all the blame and bad rep for layoffs,
and they’re definitely by no means saints, but they’re not the ones behind layoffs.
The ones who are really behind the layoffs are people like this. You probably have no idea who
this guy is because people like this lurk in the shadows but they pull all the strings. This
is Christopher Hohn: the founder of TCI Fund Management. He’s a multi billionaire with a $6
billion stake in Google. And since last November, he has been constantly sending letters to Sundar
and calling out Google amongst investor circles. “We are writing to express our view that the cost
base of Alphabet is too high and management needs to take aggressive action.” “The company has too
many employees and the cost per employee is too high.” Within hours of this letter being sent,
Google shares were up 4.4% which doesn't sound like a lot but for a company as big as Google,
we’re talking about a market cap increase of over $50 billion making it crystal clear that this is
what rich investors want. The reality is that people like Christopher Hohn have no idea about
tech. They think it’s like some sort of factory where you have to maximize output and minimize
input. That’s not how tech works and tech CEOs obviously know that but that’s completely
irrelevant. You get a dozen Christopher Hohn’s together and boom, it’s Sundar or Tim that’s out
of a job. So, naturally, they do as they’re asked even though it’s not all that effective. Also,
I don’t want to understate the aggressiveness of these investors. After the first round of layoffs
at Google, the first thing Chris did was send in another letter asking for far more. He wanted
Google to cut a total of 40,000 jobs and reduce pay substantially. And Chris is just one example.
Most big investors do the same thing just behind closed doors. And that’s why everyone is suddenly
doing layoffs even though its effectiveness is questionable to say the least. Something
else that’s questionable is Goodwill’s Goodwill. Check out this video to learn more.