What big layoffs in the 5–6% range mean for companies’ bottom lines

Since the beginning of 2023, dozens of large companies have cut a lot of jobs. Google laid off 12,000 people, Spotify cut an estimated 600 people, Amazon announced it would cut 18,000 jobs, and Microsoft let 10,000 people go.

While there are more companies that conducted layoffs in January and February, the companies above all have a weird figure in common: They cut between 5% and 7% of their employees. Spotify and Google’s layoffs were both around 6% of employees; for Microsoft and Amazon, the figure was right around 5%.

And it’s not just tech giants in this range: Vox Media laid off 7% of its workforce, electric vehicle maker Rivian cut 6% of its employees, and social media platform Pinterest cut just under 5%. Even some smaller, less well-known companies had layoffs in the neighborhood of 5–7%: Security software company Okta let go of 300 people (about 5%), and workplace SaaS firm Miro said it would cut 119 people, or around 7%.

As CFOs and CEOs make decisions about budgets and staffing for the rest of 2023, why did so many early layoffs land in this ~6% range?

Pacing themselves. Neil Dhar, vice chair and US consulting solutions co-leader at PwC, pointed to a survey his firm conducted in January that showed 60% of CEOs weren’t planning to reduce headcount. So layoffs weren’t necessarily the first thing companies considered, Dhar said, noting that he wasn’t speaking about any one company in particular. “They were hesitant to pull on that lever, and looked at other levers around getting after cost and cost mitigation,” Dhar told CFO Brew.

Russ Porter, CFO of the Institute of Management Accountants, told CFO Brew that large companies normally have regular turnover around 5%, where they might leave positions open after someone leaves. “[That] flow out might continue, but you hold off and you don’t hire as many people as you might have before,” he said.

Dhar said he suspects overhiring by a lot of large companies over the past few years is informing a lot of the decisions to reduce staff now. Indeed, Alphabet CFO Ruth Porat said on the company’s February 2 earnings call that the company would be “meaningfully” slowing the pace of hiring in 2023, and CEO Sundar Pichai said the company had “hired for a different economic reality than the one we face today” when he announced the layoffs last month.

“I had a tech executive in my office just a few days ago,” Dhar said. “And he made a very good point: The amount of people that have been hired in the back half of 2020, 2021, 2022 is astronomical.” The latest round of layoffs likely represent a “fraction” of what most companies hired, he added. “So the question then becomes: Are  [companies] simply not growing at the pace they thought they were gonna grow?”

Not keeping up with the Joneses. Despite reports suggesting that CFOs and CEOs are hovering in the 5–7% range for layoffs because they’re taking their cues from each other, Porter said that’s unlikely.

“In my experience, the time it takes to announce and implement a layoff requires a lot of planning,” he said. “I don’t think there are many cases where one competitor announces layoffs on Monday, and by Friday, another competitor is announcing theirs.” More likely, Porter said, is that all the companies were looking at the same market signals when they made the decisions to cut jobs near the end of 2022, then started implementing them in 2023.

“I also think there’s a couple of companies out there who are saying, ‘Hey, we wanted to expand into this area, or this product, or these services, and in an economic upcycle those look like great opportunities,” Porter added. But in an economic downcycle, companies decide what they could probably do without, he said; usually that’s an opportunity the company was chasing as opposed to an element of its existing business network.

Porter said a company laying off double-digit percentages of employees doesn’t necessarily equate to a problem, but might be a sign that the layoffs are happening because of an issue specific to that company, rather than the macroeconomic conditions. “It’s not something where it’s just trimming our sails and seeing which way the wind blows in six months.”

Philosophically speaking. Porter added that there are a lot of C-suite executives who still ascribe to the workforce strategy espoused by longtime GE CEO Jack Welch: A company should conduct regular layoffs of its so-called bottom performers. “That’s one of the management philosophies that may have been inculcated in today’s leaders,” Porter said.

Known as “rank and yank” among GE workers, Welch’s “vitality curve” doctrine called for managers to rank their employees’ performance and eliminate the bottom 10%. This practice led to thousands of layoffs at GE over Welch’s tenure, and became common practice at other large corporations.

Of course, as David Gelles of the New York Times wrote in his 2022 book, The Man Who Broke Capitalism, Welch’s focus on short-term gains rather than long-term growth is arguably what led to the company’s eventual decline. One of the first companies to be listed on the Dow, GE was removed from the index in 2018 after 100 years, and in 2021, it was broken into three separate entities.

The bottom line. Today’s companies also may look at regular layoffs as a way to bring more diversity of experience and innovation into their ranks, Porter added, but typically single-digit layoffs on a regular cadence will mollify investors. “That means predictability and stability in a company’s results.”

Dhar said some companies may be behaving as if we’re already in a recession, and making cost-cutting adjustments accordingly. He added that he thinks we’ll narrowly avoid a recession, at least in the US.

“We’ve been kind of teetering on the brink of recession,” he told CFO Brew. “So people are behaving a little bit in a muted way.”—KL