Over the past few years, there is no doubt that the technology sector has prioritised revenue growth over margin expansion. This was particularly apparent during COVID with incredibly strong top line revenue growth supported by the stimulus surge. To satisfy this demand the tech space went on a hiring spree. Amazon’s workforce nearly doubled to 1.6 million employees between 2020 and 2022 and now engulf more than 40 high rise buildings in Seattle. Over the same period, headcount at Facebook (Meta) increased 60% to over 77,800, Alphabet’s employee base swelled by a third and Tesla doubled heads to 99,300.
While unemployment rates across the US, Australia and NZ remain incredibly healthy and at multi-year lows, there is an increasing number of layoffs, hiring freezes and rescinded job offers. In June, cryptocurrency platform Coinbase announced a cutting a third of its workforce (1,100 employees) after having tripled its headcount between 2020 and 2022. In August, retail trading platform Robinhood cut 23% of their staff (713 employees) and even Microsoft recently “structurally adjusted” its workforce by 1,800 people. The below charts released by technology employment website “Trueup” captured just over 70,000 job loss announcements over the past three months, across just under 500 companies. This doesn’t even include the 100,000 staff reduction announced by Amazon last week.
One implication of the layoffs when coupled with the recent tech sell off is the impact on share-based compensation. It’s no secret that one of the perks of working at the hottest technology start-ups is that you get paid in stock. Popularised in the 1990s, it’s a mechanism where pre-profit start-ups incentivise the best and brightest talent to their business, promising future riches in lieu of higher pay. If all goes to plan, the employee gets a slice of the future wealth potential of the company, while the company can direct cash to support other growth initiatives. This works flawlessly during a bull market as share prices soar with smaller amounts of equity parcels required to fulfil payment. Not only does it motivate existing staff, but it also continues to attract key talent creating a flywheel effect.
However, right now, there are thousands of tech employees nursing losses following the Nasdaq’s recent entry into bear territory. While paper losses clearly hurt the pay-packet, there’s also the real issue of personal income tax. Say you have $5,000 of stock that has vested progressively over three years. The stock then halves in six months. You now have $2,500 of stock, but taxes need to paid on the price it was granted – i.e. on the $5,000. There are stories dating back to the dotcom boom bubble where employees faced higher tax bills than their net worth. Also, if companies wish to maintain total compensation packages they would need to issue more securities given their share prices have fallen, diluting common shareholders.
It is important to highlight that the numbers above are miniscule in the context of the current tight global labour markets. They’re also concentrated in fast-growing companies, many of the same ones which have been the most aggressive employers since 2020. That said, the technology sector does have recent form in being a leading indicator to the rest of the broader economy. As Mark Twain said, “History doesn’t repeat itself, but it often rhymes”.
