Salesforce CEO profits from laying off 7000+ people [Finance Fridays]
How misaligned incentives create misfiring systems
What a crazy week,
I know the title is about Salesforce, but there is another crazy event that happened this week that I have to mention. 2023 is off to an exciting start.
Turns out that JP Morgan got scammed for 175 Million USD. They bought a startup, only to learn more that they had created millions of fake customers. I created a post about this situation here. I’ve been writing about how factors such as a company’s valuation, how much money they raised, and which investor is backing the firm are meaningless. This is another example of that. To learn more about why Smart Money consistently invests in startups that end up being just hype, overvalued, or straight-up frauds, read the article below.
For a more thorough understanding of the weird finances of the Tech Industry, check out the articles in the reading list. Find them here.
Back to the main point of today’s post, let’s get back to the Salesforce layoffs. To those of you that missed it, tech giant Salesforce is laying off about 10% of its workforce, more than 7,350 employees. This news has been met with a lot of movement in the stock price of Salesforce. And not in the way you’d expect. The news of these layoffs led to a notable increase in stock prices. Confused why this happened? And what you can do to protect yourself? Continue to read on.
Important Highlights
Why these layoffs happened- As I’ve covered before, our economy is cyclical. It goes through periods of growth (booms) and then contractions (busts). Recessions and layoffs are a feature, not a bug. This cycle is caused by the presence of debt in an economy. Tech is particularly susceptible to the cycle b/c tech startups rely heavily on debt and funding to grow. When times are good, this leads to great results. When times are bad, companies go bankrupt. For more information on the boom and bust cycle, read the post below-
The Public Company Trap- Public Companies refer to companies that are traded on the stock exchange, for everyone. The shares of these companies have a much larger pool of buyers, thus they have higher valuations. However, they are also scrutinized much more heavily and have lesser leeway in how they operate. As opposed to privately traded companies, publicly traded companies have a much stronger pressure to please their investors. Pleasing investors is one of the biggest reasons for mass layoffs.
Why Layoffs are good for the Stock- So why did the Salesforce stock price go up, during layoffs? In the long run, layoffs mean that Salesforce will not be able to expand as quickly. However, in the short term, layoffs represent a reduction in operational costs. Investors respond positively to this.
How the CEO of Salesforce benefits from layoffs- CEOs and upper-level management are compensated mainly with stock options. The layoffs increase the amount of money they gain. Therefore, even when the CEO claims that he takes all the responsibility, he doesn’t face any of the consequences.
What you should do- Noone can protect themselves from layoffs fully. However, there are some ways you can set yourself to be better protected. Generally speaking, private companies will be less susceptible to investor whims. Similarly, when talking to a firm, their profitability and job security will be correlated strongly. This might lead to lower compensation, but as the maxim states—> no pain, no gain. If your goal is job security, aim for places with low churn and more steady revenues.
If you want to learn more, YouTuber Josh Fluke made an in-depth video about the layoffs, how the CEO has offloaded his stocks, and a lot more. His channel is great because it often exposes the hypocrisy and double standards that some companies impose on their employees. I would suggest watching it, to help you identify red flags in your own work culture.
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