The layoffs will continue until (investor) morale improves


Illustration with large scissors cutting strings attached to a group of employees to symbolize layoffs or job cuts.
Image Credits: mathisworks / Getty Images

Since the start of 2023, more than 150,000 people have been laid off at tech companies, large and small. That’s a staggering number of people who have been put out of work.

When you think about how Meta, Amazon and Salesforce have handled these layoffs, the situation becomes even more grim.

Salesforce announced in January that it was laying off 10% of its approximately 80,000 employee workforce. Since then, it has been letting people go in dribs and drabs. Amazon also announced in January that it was laying off 18,000 employees, then announced another 9,000 this week. Meta laid off 11,000 in November and let another 10,000 people go in a second round this week. In addition, the company shut down another 5,000 open recs.

This, some would say, cruel, rolling approach to layoffs leaves employees anxious and uncertain about their own positions, while grieving about the loss of valued colleagues who have been let go.

Investors, on the other hand, seem to like layoffs as a way to move companies toward greater operating efficiency. CEOs typically are less concerned about the well being of their employees as they are in keeping investors happy.

An argument could be made, of course, that these companies overhired during the recent tech boom, and now it’s time to right size to better fit a changing market. That argument would carry more weight if the companies in question weren’t profitable. However, large American tech companies are very often both profitable and incredibly wealthy, even if their market cap has fallen from record highs.

While there is some truth to the idea that companies grew too quickly in recent years and need to reset, layoffs feel like the worst kind of short-term thinking: sacrificing employees to please investors. Are companies at least getting what they want from investors out of this devil’s bargain?

Investor response

If companies are looking to impress investors with their cost-cutting measures, we can rate how effective their layoffs are by how investors have reacted to them.

One way to get a handle on how market sentiment is changing on tech’s financial prospects is to peek at analyst ratings. Analyst recommendations can move stocks, and their earnings expectations help form aggregated investor expectations for future results.

So, are we seeing analyst ratings change regarding Big Tech shares after companies slashed staff?

Meta’s recent cuts seem to have engendered precisely that response. After announcing its latest swing of the ax on March 14, it has received three analyst upgrades, one of which came with a higher per-share price target for its equity. The market’s grade for its layoffs is more than bullish.

Normally it’s that easy to find the market reaction to particular corporate moves. Alphabet’s late January cuts, for example, have been met with a slightly more muted analyst reaction. Since its layoffs were announced, the company has seen, by our count, seven share price target upgrades from analysts versus five cuts and one rating upgrade. This doesn’t count reaffirmed positive analyst ratings, for reference.

The analyst perspective then, while useful, provides only a partial view of market reaction to the company’s cuts. The tech-heavy Nasdaq Composite is up around 13.8% this year. In contrast, all of America’s largest tech companies are seeing their value appreciate more quickly than their peer pool. Meta’s stock is up around 65.2% thus far in 2023, Alphabet up a hair more than 18.2% over the same time period, whereas Amazon and Microsoft can claim 14.4% and 17.1% gains since the start of the year, respectively. (Data via Google Finance, accurate as of Friday afternoon.)

Microsoft joined the layoff parade. Did it really have to?

An argument against the direct efficacy of layoffs compared to share-price increases is Apple. Apple has become known lately for not cutting staff like many of its peers. Its stock is up more than 29% to date, implying that staff cuts are not a prerequisite for value appreciation; indeed, it has seen its value grow more than some of its peers that have cut staffing. On the other hand, the company has tightened up its spending lately, meaning that investors could still be partially cheering it on in light of new fiscal discipline.

It’s difficult to unpack precisely why any company’s share price changes over a given period of time that includes earnings reports, changes to central banking policy and geopolitical unrest. But we do know that sometime between 2021 and 2022, investor sentiment shifted dramatically from growth at the expense of profitability, to rewarding companies for greater near-term profitability. By that shifting standard, it’s not a shock that we can find some positive market response to the mass culling of workers by major tech companies.

The next question is whether the real human costs of these layoffs will yield anything more than a short-term, public-market boost for the companies busy slashing staff.

What cost the layoffs?

Investors certainly seem to be in favor of layoffs if the short-term share price growth is any indication. When it comes to cost cutting of any kind, investors seem to be on board, but it’s not always clear that the immediate gratification is worth the long-term economic and human cost.

Ray Wang, founder and principal analyst at Constellation Research, recognizes the human cost of these cuts, but he ultimately believes that sometimes you have to reduce the number of employees for the long-term health of the company. “While cuts now impact morale, they will help tech companies weather the storm ahead and will be positive in the long run, even though they are negative and painful today.”

While Wang’s view is consistent with modern business management theory, Peter Cappelli, Wharton management professor and director of the school’s Center for Human Resources, said in a 2016 Knowledge at Wharton article that the evidence suggests that layoffs don’t always produce their intended long-term financial results.

“The research evidence has not found any support for the overall idea that layoffs help firm performance. There is more support for the idea that where there is overcapacity, such as a market downturn, layoffs help firms. There is no evidence that cutting to improve profitability helps beyond the immediate, short-term accounting bump,” Cappelli said in the piece.

While layoffs keep coming, so far Apple has steered clear

A December 2022 article in the Harvard Business Review cited evidence that also found that these cuts could be mostly counterproductive from a financial standpoint:

The findings of two decades of profitability studies are equivocal: The majority of firms that conduct layoffs do not see improved profitability, whether measured by return on assets, return on equity, or return on sales. Layoffs are especially hard on the performance of companies with a high reliance on R&D, low capital intensity, and high growth. Market response to layoffs was also less positive than might be expected, with three-day share prices of firms conducting layoffs generally neutral. Higher valuations were given for layoffs perceived as helping firms in financial distress return to profitability as well as those that were strategic and forward-looking. Layoffs undertaken only for the purpose of reducing costs tended to lead to drops in share price.

The article went on to suggest that for employees, a layoff can be devastating personally, financially and professionally. What’s worse, companies break trust with employees when they lay people off.

“Eighty-five percent of respondents rated job loss as their top concern in Edelman’s 2022 Trust Barometer,” the authors wrote. “Layoffs break trust by severing the connection between effort and reward. The premise of a layoff is that if it weren’t for the economic conditions facing the firm, employees would keep their jobs as long as they perform them well.”

That has to be a pretty tough pill to swallow for both the folks being laid off and left behind. Regardless of their effort and performance, the decision will always come down to external economic factors beyond employees’ control. This could affect employee morale and loyalty; in turn, lower morale and less loyalty could have an impact on the preservation of critical institutional knowledge and discourage healthy product risk-taking.

So layoffs may give a company a short-term, but mostly unsustainable, boost in value and increase profits by lowering the overall cost of operating the company. But the cost of what could prove to be a short-term investor sugar high has a real human cost. Companies that undertake layoffs need to consider the action very carefully: Layoffs can have a profoundly negative impact on the employees left behind, and if it doesn’t result in positive long-term financial impact, what exactly is the point?

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