Key takeaways

  • A report from tech-focused news site The Information suggests that Google layoffs could top 6%, or 10,000 employees, in early 2023
  • The report comes amid ongoing macroeconomic challenges, deflated tech stock prices and a letter from an activist investor
  • If Google commits to downsizing, it will follow Big Tech peers like Meta and Amazon that have already slashed head counts this year

As the global financial situation weighs on wallets and portfolios, big names like Meta, Twitter and Amazon have all initiated layoffs in 2022. November tech layoffs alone have surpassed 45,000 heads, with the largest firms trimming the fat by 10,000+ heads each.

But Google has largely managed to shy away from talks of downsizing…until now.

According to a report from tech news site The Information, Google parent Alphabet is now feeling the pressure. Adverse market conditions continue to bash profit margins and stock prices. The company is also facing calls from at least one wealthy activist investor to reduce “excessive” headcounts and per-employee costs.

And with the aid of a new “performance improvement plan,” Google’s layoffs could total 6% of its workforce (around 10,000 employees) in early 2023.

Here’s what else to know.

Google layoffs led by improved performance evaluations

According to The Information, Google has requested that team managers evaluate employees using a new “ranking and performance improvement plan.”

Under previous systems, managers were generally expected to slash around 2% of the company’s total workforce to weed out the lowest performers. But the new plan requires nearly three times that many workers – some 10,000 – to be cut loose.

In broad strokes, the system allows management to rate employees based on performance and their impact on the business. Updated guidelines limit the number of employees who can score the highest ratings. Roughly the bottom 6% could be eliminated from the company entirely.

The Information further reports that, “Managers could also use the ratings to avoid paying [employees] bonuses and stock grants” to further reduce costs.

Will Google’s layoffs actually go through?

Google, like many others in big tech, enjoyed substantial growth – and hiring – during and post-pandemic. The spike was led by surging technologies use, as well as companies fighting back against the “Great Resignation” by finding (or poaching) top talent wherever possible.

But as inflation and interest rate hikes rampage on, advertisers slash spending and experts squawk about a potential recession, many firms have realized they way over-hired. That’s left many with no choice but to choose between deflated bottom lines or deflated headcounts.

So far, Google itself hasn’t confirmed any layoffs (yet). But its hiring and growth patterns mimic many of the trends in the broader tech industry over the last two years. The company recently froze all new hiring while telling some teams to “shape up or ship out” if they can’t meet new expectations.

CEO Sundar Pichai has also hinted at coming changes. In particular, Pichai stated that Google could grow 20% more efficient, hinting at job cuts and productivity improvements. Though Google continues to make long-term investments, his stance is that the firm must “[be] smart, [be] frugal, [be] scrappy, [be] more efficient.”

Outside pressures weigh in

As if macroeconomic pressures weren’t enough, Google also faces calls from at least one notable activist investor to make major changes.

Recently, hedge fund billionaire Christopher Hohn argued in a letter from TCI Fund Management to Alphabet that Google’s employee costs have gotten out of control. The letter states that Alphabet’s management “needs to take aggressive action” to curb costs and improve its profit margins.

It recalls that executives have stated Google “should be 20% more efficient.” TCI Fund Management contends that Google doubling its headcount since 2017 is “excessive” and that employee ranks should be reduced to come in line with the present business environment. (Currently, Alphabet employs around 187,000 individuals.”

Not only that, but TCI Fund Management believes that Google’s per-employee costs are too high, too. Hohn points out that Google’s median salary in 2021 totaled $295,884, sitting “67% higher than at Microsoft
MSFT
and 153% higher than the 20 largest listed technology companies in the U.S.”

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TCI Fund Management believes that these bloated figures, alongside declining ad spend, helped reduced Google’s YOY profits by 27% in Q3.

On one hand, TCI has a point – Google’s profits did decline on a YOY basis (though it still netted nearly $14 billion). However, while TCI’s letter may have provided impetus, it’s unlikely the hedge fund was solely responsible for Google’s new firing practices. Simply put, the fund’s $6 billion stake is a mere drop in Google’s $1.27 trillion bucket.

There’s also an argument to be made that the reason for Google’s massive success is because it retains top-tier talent. Paying above-market rates allows the internet giant to collect – and keep – the best and brightest, prevent costly attrition and keep production and creativity flowing.

What Google layoffs mean for investors

Of course, Google is far from the only Big Tech firm to implement layoffs this year.

Already, Meta has started slashing the first of 11,000 employees.

Amazon is considering cuts in a nearly equal amount.

And Twitter is being sued after reducing its workforce by half. Several hundred more employees have reportedly walked out following mercurial Elon Musk’s controversial takeover.

With so many layoffs in the works and on the horizon, it’s natural to be concerned for your portfolio. Investors large and small have spent the last decade relying on high-growth tech firms to drive profits to greater heights. Now that bottom lines (and stock prices) are slowing their roll, it may be time to reevaluate your strategy.

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