Layoffs to increase profit, in order to retain key staff?

In 2022 the focus of public market stock valuations went from revenue growth to profitability. This has impacted small and large technology companies, and layoffs started already last year (in Stockholm both Klara and Kry made cuts to their respective organizations). Now a second phase of layoffs are coming with Salesforce, Amazon and Vimeo announcing new layoffs in the last day.

An often used reason for layoffs have been something along the line of “we hired too many people due to the pandemic”. To some extent that is true (especially as the headcount growth from 2020 to 2022 has been 20 %+ at many companies), but the default mode for major tech companies for the last 10 years have been to hire additional staff if that can increase revenue growth.

As the trade off revenue growth/profit has changed, another part of the reason for the headcount cuts is that, for the time being, it is more important to increase profit margins than revenue growth to drive stock valuations. And stock valuations are important not only to shareholders, but to the companies themselves as they are paying staff in restricted stock units and/or options, and if that part of compensation gets cut 50-90 % it will likely impact retention of key employees.

Author: Henrik Torstensson

Partner at Alliance VC. Investing in Nordic early-stage tech startups.

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