MASS LAYOFFS:
By now, you’ve probably heard about the mass layoffs at the high flying tech companies.
Stripe cut 1,100 jobs, Coinbase cut 1,100 jobs, Shopify cut 1,000 jobs, Snapchat cut 1,000 jobs,
Robinhood laid off a third of their staff, Tesla laid of a tenth of their salaried staff, and Meta
laid off a whopping 11,000 employees. And those are just the companies that have already resorted
to layoffs. While the remaining big tech companies haven’t started laying off many people yet,
they have pulled back on hiring substantially. Apple, Google, Microosft, Uber, Lyft, Nvidia,
Intel, and many more all have hiring freezes in place. Now, you can’t feel too bad for
these employees because it’s not the same as blue collar workers being laid off. Most of
these guy were earning high $200s if not more and were on track to becoming deca millionaires. So,
it’s not like they’ll be struggling to get by. What may be difficult, however, is to score
another job with the same compensation. With all of silicon valley pulling back, many of these
guys will be forced to find jobs at background companies like AT&T or Texas Instruments. While
these companies will still pay generously in relation to what the average American earns,
their total compensations will be nowhere near what silicon valley offered. For example,
the highest paid software engineers at AT&T earn $145,000 per year which is not a bad amount, but
the highest paid software engineers at Facebook earn $1.82 million per year. Even the entry level
at Facebook is $23,000 higher that the best level at AT&T. Also, these background companies will
probably be hesitant when it comes to extending job offers to these laid off FAANG employees,
not because they’re not qualified, but because they definitely wont be loyal. Everyone knows
that these guys will switch back to silicon valley as soon as its viable, so it doesn't
make a whole lot of sense to hire someone that you know will probably be gone in 2 years. And
the main reason for this is simply how absurd silicon valley compensations have gotten. So,
how did these compensations get so high and will we see FAANG ever return to paying these salaries.
THE MECHANICS OF TECH SALARIES: At first glance, it’s easy to write
off FAANG’s massive salaries as result of their profitability. These companies often have profit
margins of 30 or 40%, so they’re able to pay rather high salaries and still make a bunch
of money. And while this definitely does play a role in FAANG compensation, it’s by far the
smallest factor. The main factor allowing for such compensation is actually the exponential
growth of these companies. If you take a closer look at FAANG compensation, you’ll see that the
vast majority comes from stock based compensation, and that their base salaries aren’t actually all
that crazy. Take product managers at Facebook for example. Product directors get paid $1.34
million per year, but only $325,000 of that is actually base salary. Product directors at FAANG
are equivalent to vice presidents at non FAANG companies like Exxon. And you wouldn’t be that
surprised to hear that a Exxon VP is making $300 to $500,000 per year. So, if we’re just looking at
base salaries, FAANG companies aren’t actually all that different from non FAANG companies. The real
difference is that on top of this, you get paid $898,000 in stock at Facebook. Now, there’s a few
good reasons that FAANG does this. First of all, if your employees own stock, they’ll be far more
motivated to help the company make more money. And secondly, stock compensation generally comes with
vesting periods of 4 years meaning that employees have to stick around for at least 4 years to
redeem all of their stock. So, this kind of locks them in for a bit. Insiders like to call this the
golden handcuffs. But, the most important reason that so much of the compensation comes from stock
is because that’s the only way these companies can afford to pay out such salaries. While these
companies do make a bunch of money, even they wouldn’t want to pay these salaries in cash. But,
wait a minute, isn’t stock compensation the same thing? Don’t companies have to pay for the stock
they award their employees? Well, yes they do, but not in the way that you might think. Facebook
doesn’t go onto the stock market and buy $900,000 worth of stock so that they can pay a director.
Instead, they simply dilute existing shareholders and print new stock. Facebook, for example, had
87,000 employees before the layoffs. If we assume that the average Facebook employee
gets a $100,000 worth of stock every year, that works out to a total stock compensation of $8.7
billion per year. If Facebook paid this is cash, that would wipe out a third of their net income,
but when they were worth a trillion dollars, this compensation was equivalent to less than 1%
shareholder dilution. I think you can see why the latter is far preferred. The only caveat though is
that these companies have to continue growing exponentially. If these companies start to
stagnate or worse start to sell off, shareholders will no longer be ok with dilution. This is
why stagnant companies like Exxon and AT&T can’t compete with FAANG in terms of total compensation.
While they’re able to come close in terms of cash compensation, they simply can’t afford the
same dilution. And speaking of dilution, with how the stocks of high flying companies have
been performing, it’s not clear if silicon valley can afford such dilution moving forward either.
SHIFTING LANDSCAPES: It’s no secret that the
stock market has been getting destroyed, and most of this destruction has centered around
silicon valley. Affirm is down 90%, Robinhood is down 80%, Lyft is down 83%, Netflix is down 58%,
and even Facebook is down 75%. As these companies sell off, stock compensation related dilution
becomes more and more expensive especially for new hires. Remember the $8.7 billion that we
calculated for Facebook? At a trillion dollar valuation, that’s less that 1% dilution, but
at their current $300 billion valuation, that’s closer to 3% dilution. And where this becomes
really dangerous is if Facebook doesn’t grow for the next 10 years. From an outside perspective,
this wouldn’t be that bad. After all, $300 billion is still a ginormous valuation and Facebook would
probably still be making plenty of money. But, from a shareholder perspective, this would be
a disaster. Here’s the thing, 3% dilution for 10 years works out to 30% total dilution. This means
that if you had a $100,000 stake in Facebook, it would be worth $70,000 by the end of 10 years even
though the company itself stayed stable. Factor in inflation and you’re initial $100,000 stake is now
worth closer to just $50,000. I think you can see why investors aren’t exactly thrilled to pick up
these companies even though they’re down so much. And honestly, looking forward, it doesn’t look too
good for any of the silicon valley giants. Apple iPhone sales peaked years ago. This is why Apple
stopped reporting how many iPhones they sold and started increasing prices aggressively. They were
able to continue growing profits thanks to these price increase along with services revenue. But,
it looks like the upside from these are starting to run out, not because Apple is doing anything
wrong, but simply because they’ve reached market saturation. And it looks like it’s the same case
with all of their peers as well. Out of the 4.72 billion people who have access to the internet,
4.3 billion already use Google. Similarly, Instagram is about to reach 2.5 billion monthly
active users and WhatsApp is at 2.2 billion users. How many more people could realistically
use Google, YouTube, Netflix, iCloud, and Uber? The answer is not that many. All these companies
are essentially mega monopolies that have already captured the entire market. And with
advertisers pulling back due to the recession, these companies will make less money even with
a stable user count atleast until the end of the recession. And there’s no question that
this will result in these companies rethinking just how much they’re paying their employees.
A CROSSROADS: Alright, so here’s
what we’ve established. The only reason that tech companies are able to pay so much is because most
of the compensation is in the form of stock which is paid for by stock dilution. This, however,
only works when the companies’ stocks are booming. With these companies reaching market saturation
along with the economic uncertainty, it’s not clear how much longer these companies can pay
these insane salaries, and that brings us to the crossroads that we’re at today. These companies
really only have two options with the first being pivoting to a new industry with plenty of growth
left. The company that’s most iconic for trying to do this is of course Facebook. They changed
their company’s name to Meta and they’re betting it all on the Metaverse. They’re literally looking
to spend a $100 billion on this. And while they’ve received a lot of criticism for this,
there’s no question that if they are able to figure it out in the way that they’ve
envisioned as opposed to how it is right now, it would truly be huge. This would likely be enough
for Meta to grow to a multi trillion market cap if not over $10 trillion, allowing them to make
their stock compensation even more ludicrous. Another company who’s betting it all is Netflix.
Netflix is turning around and spending all of their earnings on in house productions,
hoping that this will make them more independent of production studios. They literally spent $270
million on the most recent season of Stranger Things. Investors are obviously scared of these
massive pivots and that’s why these stocks are the most beat down. On the other hand,
some other tech giants are choosing to play it safe and are slowly becoming dividend stocks.
Likely the two best examples of this are Apple and Microsoft. Unlike Google, Facebook, Netflix,
and Amazon, Apple and Microsoft already pay dividends. And it looks like they’re simply
going to lean more into this. These companies were already on the lower end of FAANG compensation. At
Apple, for example, even the top level software engineers were “only” getting paid $677,000 per
year which is almost 3 times less than the top engineers at Facebook. As these companies choose
different paths moving forward, it appears that this discrepancy will only grow larger.
THE FUTURE OF TECH COMPENSATIONS:
In the end, with all of these tech layoffs, it appears that the ball if finally shifting
from the employees’ side to the employers’ side. Thanks to the seemingly unlimited VC
funding and hypergrowth associated with these companies, employees have been able to negotiate
salaries as high as 7 figures. But, with the economic downturn and a bunch of newly laid of
tech workers looking for work, it doesn’t seem like these numbers will fly anymore,
atleast not for some time. In the meantime, these guys will probably have to take a substantial
paycut and join a background company or maybe even start their own company. On the brightside though,
I doubt that the recession is going to wipe out any of these big tech names. Eventually, they
will get to the otherside and start hiring again, but when they do, the compensations will probably
look a lot different. Companies that are choosing stability like Apple and Microsoft will likely
be far less generous when it comes to handing out stock. If they’re embracing dividends, they can’t
also embrace growth and dilution. On the other hand, companies like Facebook and startups like
Coinbase will likely hand out more stock compensation than ever, but that of course comes
along with a bunch of additional risk. You’re essentially betting that the metaverse or whatever
product the company is pivoting will actually pan out. So, it appears that the days of low risk
high compensation are quickly coming to an end, but that’s just what I think. Do you think the
Metaverse will pan out? Comment that down below. Also, drop a like if you wish FAANG salaries
would become the norm. And of course, consider checking out our discord community to suggest
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