Don't Toe the Layoff Line

When corporate leaders are dishonest about why a decision was made it isn’t merely patronizing

2023 was a rough year for tech workers. Well, as rough as it can be. At the end of the day this is a group of incredibly privileged people that have “made it”. 10’s of thousands of people were laid off as companies reeled from the latent effects of speculation and self evidently bad hiring policies driven by the pandemic’s economic distortions.

A lot of companies did over expand, did take unreasonable bets, and were absolutely feeling the financial weight of their expanded head count. Some companies grew by 2 or even 3x during this time period. It was clearly a mania. Moreover, when the bubble pops in one company it tends to cascade and domino throughout the industry starting with the weakest and slowly chewing through the weaker end of the spectrum. This can even cause an overcorrection, where the lost of investor confidence pushes companies that were fine, but on the edge, into the red.

However, there’s also plenty of room for a wise executive to exploit.

The Incentives to Layoff

Even when your business is doing well, there are still compelling reasons to do layoffs from the perspective of shareholders and executives. It’s unpopular to discuss, but people often forget or ignore that market forces act on both sides of every transaction. We often negatively moralize when the more powerful side of the transaction. After all, there is a power imbalance at play. I’m not here to weigh in on that complicated and subjective debate. No matter how you feel about these incentives and behaviors morally, it’s important to understand them.

Prices are set at wherever supply and demand are balanced. The price system doesn’t care or understand the nature of the exchange or who the parties are. It’s an impersonal, impartial mechanism. Winning therefor is a matter of coming out ahead or behind. In aggregate, the economy isn’t a zero sum game. At the scale of individual, recurring transactions that change over time it is. In these specific instances, you “win” when the price of what you want to buy decreases. But the mechanism, concepts, and incentives are the same no matter who “you” are. Examples:

The “little guy” wins when:

1. A new technology is discovered, making it easier and cheaper to produce.
2. Companies over estimate demand, and make too much of a product.
3. Unemployment is low, there are more jobs than workers available.

The “big guy” wins when:

1. Global conflict cuts supply of a resource, be it directly or indirectly via policy impacts.
2. Inflation is high (more on this later).
3. Other companies are struggling or failing, resulting in a sudden increase in the supply of available workers.

The last piece of complexity is you’re not a part of 1 exchange type. You’re a part of countless. Sometimes you’re simultaneously on both sides of that zero sum conflict! In those cases whether or you win or lose is a matter of your relative stakes on each side. If you want a rule of thumb, the richer you are or less diversely “invested” you are, the more likely the “big guy” stuff will net positive for you.

If you’re an executive for a company, this calculus is simple. Firstly, you have a fiduciary duty to represent the shareholders not yourself as well as the practical reality that if you don’t it’s extremely visible; you won’t be an executive for long. Secondly your compensation is designed in such a way that a benefit to the company enriches you far more than a benefit as an employee would, and that’s not a coincidence.

Relying on duty or honor or integrity is a bad strategy every time. You’re far better off incentivizing the person to do what you want. This is why executives are paid almost entirely in stock. In fact not just stock, but in highly leveraged forms of stock compensation like options instead of restricted stock units like you’re more likely to get at the lower rungs. Combine this form of compensation with the ability to replace people and you’ve all but ensured that they will act in your interests, not in the interests of their subordinates.

This concept is universal and continuous. There’s no clear cut line between executive and “employee” here. While the world is variable, you will see that the higher up in a company someone is or more specialized there work or more important their retention, the more their compensation will align with the interests of the company. This is why big tech pays engineers so heavily via RSUs. It ties your compensation to the company performance and creates an incentive for retention. Both are critical for abstract, high skilled knowledge work. The more you move up in the company, the more and more you compensation will come from stock and the less from cash.

The Opportunists

The point of all of this is that there’s a strong incentive to make your company more efficient. It isn’t a simple calculus though. The dynamics themselves are complex yes, but the bigger factor is the human element. Humans are not truth seeking animals. They also have different values. When we discuss the incentives here it’s under the paradigm that “personal benefit” is the value we’re pursuing and that “efficiency” is the mechanism by which we attain it.

However, optimizing for efficiency alone doesn’t work. If you’re too transparent, you lose out on two groups:

1. Those ignorant of how the game is played are now in play.
2. Displaying such openly callous, purely financial decision making will be morally condemned by some while eroding the trust and morale of all but the most cynical of employees (yo! what’s up?).

As an aside, my thinking here is definitely considered cynical. I think that’s a denotatively accurate statement, but disagree with the connotation. I’m not cynical in the bitter, hopeless, black pilled sense. I’m cynical in the “rational” sense of believing people are driven primarily through incentives mapped onto base urges. Our modern world economy is based on the truth that life isn’t a zero sum game. I think that grappling with that honestly by considering the good, bad, and ugly the system entails empowers us to make better choices and structure the game such that we get more of the good with less of the bad.

Example

Let’s consider the entirely hypothetical big tech firm Macrohard. They’ve seen record revenues lately because of the increased use of business software and cloud infrastructure that came along with the pandemic. Sure, some of this was temporary, but most of it wasn’t. When some workers went back to the office, others didn’t. So even the ones in office are still using remote communication tech. Consumer demand for entertainment may have dropped, but new habits / interests were formed so it’s still net positive. Arguably, it’s better there’s been some drop in specific areas, as that gives cover.

Now imagine that others in the market miscalculated demand worse than Microhard did and operate in product segments more exposed to the inevitable demand contraction. Imagine that inflation is raging, and 10’s of thousands of workers were laid off.

This is the perfect storm. You have general conditions to point to, the negotiating power of your employees has decreased due to the oversupply of workers, and the value of the currency is dropping considerably. You can do a generic efficiency layoff under the guise of it being necessary for the health of the company to prevent even more layoffs. For those that remain, you can cut their pay by simply doing nothing and letting inflation do it’s work.

You may even get news coverage describing how you’ve proven this can be done with compassion.

All the while, the deflated currency pumps the stock price. Some people don’t realize the gain isn’t real, but that doesn’t stop them from viewing you and your company positively. After all, your revenue is at new highs! You are growing. Moreover, your stock options aren’t inflation indexed. You’ve hit the targets that allow you to exercise them even if the buying power is lower.

All in all, it’s a pretty fortuitous position to find yourself in. Does this mean you’re twisting your mustache as you coldly calculate these factors? No. The same cognitive biases and cultural context that let you pull of this coup impact your thinking as well. Overall, you probably do believe in what you’re saying. The only lie is a lie by omission. Economic conditions may be bad, but you’re implying that your company is subject to them when the data clearly demonstrates you’ve survived unscathed.

My Ask of You: Don’t Feed the Narrative

I’m not asking that you take a particular moral position on any of these topics. My primary interest is that you’re aware of and understand them. Both to protect yourself and your colleagues. When you buy into the lies that you are fed by supposedly leaders, you’re empowering them to take advantage of you and everyone around you.

If I could go further, I would ask that you speak the language and play the game. Make it additive to any moral position you hold. I think that the idea that corporate leaders are driven by moral consideration is naive. I don’t think they’re evil or cold either, but I’m a firm believer in the ability of the human mind to convince itself that what’s best for it just so happens to be what’s best for others. Maybe I’m wrong. That’s why I won’t say don’t make the moral argument. Maybe some executives are swayed by that. At the very least it’s probably the optimal strategy for activating the most people to take action or care.

However, I see it as nothing but a disservice to ignore the other side of the coin. At a minimum because there are people that aren’t even aware of these incentives. Do you think your company is doing a bad thing by taking advantage of market conditions to implicitly cut your pay? Great! Say that. But add on that by doing so they are eroding trust and that will result in decreased retention. Remind them that it’s way more expensive to train new people than pay the 2% or whatever more it would take to retain them. Are they trying to avoid severance? Well that’s a stupid way to do it. The best are the most willing and able to leave. If you paid the cost of laying off the lower performances, you’d be better off.

Frame it in terms of not only is it wrong, it’s counter productive, and I believe you’ll go much farther. My theory is that the argument above is valid, but only in a world where people are acting “rationally” with full information. I believe that the reason they get away with this is that too many people don’t realize what’s happening to them.

Bonus Concepts

These aren’t critical to the focus of the post, but they’re adjacent to topics we covered above and good to be aware of.

Inelasticity of Wages

People really don’t like when things are taken away from them. In the case of small downturns, it’s often more efficient and better for everyone to cut pay. This will cause such outrage that employers often choose layoffs instead. This obviously is worse for those laid off, but also is for those who remain. The amount of work didn’t go down, but the number of people did. You’re now doing more for the same, which is just another way of saying the same for less. Your total comp didn’t get cut, but your effective hourly rate did. Is that better? Unless you’re living paycheck to paycheck I’d argue no.

I believe this is part of why Microsoft sets the “bonus” target at 10-20% depending on level. In part, it’s like a deposit. You miss out on a lot of your salary by leaving before then end of the fiscal year. However, it also psychologically primes you to accept a pay cut. Salaries weren’t decreased, we just weren’t able to give bonuses this year.

Understand Inflation

Repeat after me. If your pay isn’t increased proportionally to inflation, that was a pay cut of the same size. I know you’ve heard this, I know you’re aware at least vaguely of “real” vs “nominal” values. But let it really sink in. Fully embrace this reality. Don’t give into the fallacy underlying negativity bias like above. Your. pay. was. cut. Respond the way you normally would.

We didn’t decrease your wage, it just doesn’t go as far as it used to. This is indirect, delayed, harder to see. Moreover, you can blame it on external factors. “It’s X fault that inflation is high!”. That’s true, but also your employer is probably double dipping. Inflation is decreasing their debts and increasing their revenue (in nominal terms), but your wages are stagnant.

Structural Challenges

Some of the goofiness we see with layoffs stems from structural issues coordinating large groups of people.

Cost of “Infrastructure” and Evaluation

Ever wonder why employees often get laid off only to be rehired immediately in another part of the company? What gives? This causes so much stress, hostility, and disruption. During the transition they’re paid severance but not doing any work. If you’re willing to or even desire to keep employing them, why do this?

What’s the alternative? Well, we’d have to carefully evaluate each and every person only laying off the right ones. We also would have to find a suitable position for them. Maybe the employee is fine, but an appropriate role doesn’t exist.

Apart from the direct costs of this effort, it all but guarantees the impending layoff will leak. That leads to even more chaos, and much like in that episode of The Office people will be inclined to sit around. Why put in effort? You might be about to be laid off anyway.

Back to the problem at hand then, we need a way to evaluate the needs of the company against the availability of validated talent. This already exists, it’s the headcount and recruiting mechanisms of HR. The needs of the company, and therefor role opportunities, are expressed via job posting. Potential candidates apply and are vetted to see if they’re a good fit for the role.

Plus, while layoffs often hit recruiters first whoever is left is sitting idle. This is a sunk cost, you can’t just cut the org until you need to start hiring again. Why not have them do, you know, their jobs as our solution to the problem of knowing who to keep and where to reassign them?

Trimming the Fat

It’s almost always better to improve efficiency by iterating on what you have than by cutting people. There are massive one time costs for onboarding. Unless the employee is just performing poorly or you truly over hired to the point of idle workers or exponential communication path penalties, cutting X% of them is not the ideal way to get X% efficiency improvement.

However, once again what’s the alternative? How do I get people to actually improve? How do I get layers of managers to accurately communicate how much header count they need? There’s little reward for honesty here. As a manager, if I have more people I’m more important, get a larger budget, and keep my subordinates happier by having less work per employee. It’s the classic issue that you always need to spend all your allocated budget.

At the scale of thousands of people, cutting an arbitrary 10% across the board will promote efficiency if there’s efficiency to be had. Yeah it’s not the ideal way of getting it, but it’s better than not doing it.