5 ms·

I'm pretty sure a lot of this is connected to the bond market. Companies are running out of operating capitol. When they try and get an operating loan the terms

I'm pretty sure a lot of this is connected to the bond market. Companies are running out of operating capitol. When they try and get an operating loan the terms are onerous. Rather than refinance they are electing to perform layoffs to maintain solvency. It does not matter how good you are doing in contrast to previous years. If your loan comes due and you can't afford another one to keep that revolving credit going you need to free up the capitol to pay.

yladiz 3y ago
I mean, if companies like that didn’t run such a huge deficit, they might be able to get more favorable loan terms.
- lokar 3y ago
  It’s not about running a deficit (most are free cash flow positive), it’s about improving returns on capital with leverage.
  - sterlind 3y ago
    I'm financially illiterate, but what does this mean? Companies have the revenue to pay their employees, but they choose to terminate them instead, because... why?
    - WorkerBee28474 3y ago
      Hey, SWE who happens to have an MBA here. Theoretically, if a company has money to pay employees it keeps them if the present value of their project is positive, and terminate them if the present value of their projects is negative. Let's say an employee earns $100K this year. The project they're working on this year will generate 40K of revenue in 1 year, 2 years, and 3 years. Is the project worth doing? Let's assume the discount rate is 5%. A dollar now (which we call 'present value (PV)') is worth $1.05 a year from now ('future value (FV)'). And 1.05^2 in 2 years. And 1.05^n in n years. And a dollar in n years (FV) is worth 1/(1+discount)^n dollars today (PV). It's a mechanism similar to inflation, or paying interest. (IRL the discount rate is the WACC + some factor for riskiness, but that's too much to talk about.) Let's say the discount rate is 5%. Is the project worth doing? The present value (PV) is -100K + 40K/1.05 + 40K/1.05^2 + 40K/1.05^3. So if you approve the project, the future profits and expenses are as if you earned $8,930 today. You approve the project. Let's say interest rates go up, and you now need to use 10% as the discount rate. -100K + 40K/1.10 + 40K/1.10^2 + 40K/1.10^3 = $-526. If you approve the project, you will lose money. So you don't approve the project. Now you don't need the employee anymore, and you get rid of the them, by reassignment, reorganization, or layoff.
      - tsunamifury 3y ago
        It's a lot simpler than that, firing people was earning 30x return in stock price. Almost no one's actual revenue to the company was worth that. The market has created negative human incentives.
        gen220 3y ago
        The person you were replying to is explaining why firing people "raises the stock price". And yes, it really is that complicated. Firing people whose salaries have a dramatically positive ROIC for the company does not raise the stock price, it lowers the stock price. The mistake, in retrospect, is the executives': they should not have over-hired in 2020. I know it's a bizarre silver lining, but to the extent there is one, workers got capital (in the form of SBC and cash) that they otherwise "shouldn't" have. If those companies had been run more effectively, most would have never been hired in the first place. It's kind of a crap silver lining, because we psychologically feel loss [of a job] 10x more than gain, but the realistic "market-optimal" alternative was not "I have this cushy, high paying job forever", it was actually "I have never had a cushy, high paying job".
      - sterlind 3y ago
        But won't the projected value of the project go up with the discount rate? Why would the project still only make $40K on year 3, rather than now making $40K*1.10^3?
        gen220 3y ago
        In reality, the projected value of many such projects were either never accurately measured, or allowed to differ from the "measured" value for a very long time. The projections would go something like $0 two years ago, $5k last year, but then $100k next year, $5mm year after that. One day? $1B, easy. There'd be precious little evidence to support the exponential growth hypothesis, while having 10 assigned engineers earning as much as their peers in more predictable domains. It's easier to justify such ideas in a big, rich company when the risk free rate of return is near-zero and the profit center of the company is compounding (the growth in Ads justifies the negative ROIC everywhere else). But when your profit center is wavering and showing worrying signs of stalling out (as Google and Meta did in 2021/22), the calculus shifts dramatically. When you manage a company not for "growth" but for "value" (which is an inevitable part of the corporate cycle), these projects and the employees behind them are decreasingly seen as a potential source of future profits and more as a waste of increasingly valuable cash.
    - gen220 3y ago
      Basically, it's not about piles of cash. It's about the rate at which those piles are changing, and how you can allocate capital to min-max those rates of change. In an environment where the "risk-free rate of return" is secularly-higher, the floor of minimal necessary productivity goes up. Let's say the ROIC of investing $300k "into" an employee is $310k (3.33% rate of return). If the risk free rate of return is 1%, you take that employee. If it's 5%, you fire that employee. I think the reality is that the typical ROIC was above the typical salary, but that there was an inflection point that they crossed in the hiring spree of 2019-2021. If you're a capital allocator (CEO), your responsibility is to maximize ROIC for shareholders over the long run. In environments where you're not absolutely confident that your eventual, steady-state employee ROIC will trounce (i.e. 2-5x's) the risk free rate of return, you should generally favor returning capital to shareholders (with dividends or buybacks) instead of putting good money after bad.
leftcenterright 3y ago
but this is not true of the giants like Microsoft and Google right? They chose to fire thousands and yet have sufficient to invest further into markets all over the world. Burn and churn is just much easier and lax labor laws do not prohibit such tendencies!
- deleted 3y ago
  [deleted]
- tsunamifury 3y ago
  They elected to do that because the 1 billion dollar write down yield 300 billion in market value -- firing people literally raised their market cap more than what those people could earn doing a real job earning real revenue. To be clear, this is not people being fired for bullshit jobs. This is people being fired because their 1 billion in revenue is a fraction of the 300 billion in stock price opportunity. Ask me how I know...
  - aksss 3y ago
    I think both scenarios can be true. Let us not deny that there are worthless employees and worthless jobs, which tend to accumulate in large organizations organically, and warrant periodic correction.
  - frfl 3y ago
    ...how do you know
silverquiet 3y ago
I work for a company that does something that I guess is a bit unusual - they use the revenue from our customers to pay employee salaries. If you would have asked me, this would seem like the obvious way to do things, but I'm told that debt is very important for some reason or other. As Homer Simpson has been known to say, "I don't know how the economy works".
- deleted 3y ago
  [deleted]
- tnel77 3y ago
  You would think that this would be an acceptable approach, but MBAs have decided that this is not the case so I don’t know.
  - H8crilA 3y ago
    Except all tech giants do just that, yet they fire people. Google has an amount of cash in the bank comparable to all the help that has been sent to Ukraine (though there are also many things that Ukraine gets that are not really measurable in money). Sent, not "promised" or whatever else some states do to make themselves look better.
- glitchcrab 3y ago
  How very dare you suggest that organic growth is the way forward? Everyone here knows that unless you've hit your series c and are soaring for unicorn status then you might as well just not exist at all.
- rgrieselhuber 3y ago
  When interest rates are very low, companies are incentivized to borrow more as they can get better returns by investing their own cash flow into assets with predictable returns. When those interest rates go higher and these higher interest rates are coupled with harsher terms, then the ability to invest decreases, companies view reducing headcount as the way to survive to the next phase.
- 3y ago
toss1 3y ago
Yup. And this is why smart companies avoid that game. I know one regional company who sells nationally/internationally which has done that for decades. Decades ago, the owner asked the local bank for a growth loan for some equipment and was turned down. The next week, he found out that one of his employees, who depends 100% on his company for income, went to the same bank for a motorcycle loan and was approved. the business owner was so outraged at the bank's stupid decision-making (if the business isn't good for the money, how will the employee be good for it?) that he decided to never use bank debt for growth again. That was in the 1960s, and the company is doing great, focusing on product and service and not financial games, with very expansive and expanding facilities and workforce. The regional bank was absorbed long ago. Remember: no matter how much banks advertise being your partner and friend, they are not.
- floren 3y ago
  They're not your friend, because they're in the business of making money. Unless that business was the only employer in the area, the owner was basically just having a tantrum over the idea that different kinds of loans for different amounts of money might have different decision-making processes behind them. When my credit union decided to give me a car loan, they didn't look into the solvency of my employer, they just saw that I have good credit and a steady income and took a safe 5-digit gamble. It may have hurt the owner's feelings to essentially be told "we're pretty sure we can make our money back on this $1000 motorcycle loan which has a very easy-to-deal-with collateral, but we don't want to give you a $100000 for specialized equipment"
  - toss1 3y ago
    Even if you see it that way, the result of his decision was excellent, and likely superior. I've literally dealt with banks (US state/regional scale) as a technology business with a loan that was absolutely current and on-time every one of scores of months, and we were running profitably (small, but definitely positive). Yet, when the bank started having problems in their real-estate sector, they came and called in OUR loan. We had to seriously scramble to have it not put us out of business, cold. There were several other businesses in the area, also non-real-estate, that were caused to fail in this bank's BS moves and made the local papers. It is not just that bank's business is making money. They have a whole bunch of internal incentives that make it perfectly OK in their eyes to fck over anyone for no reason other than to make their personal numbers this month look good. And they don't hesitate to do it.
makerdiety 3y ago
Instead of minimizing costs by performing massive workforce reductions and while not earning profit, corporate officers could just... earn some profit to keep the momentum going. And to go beyond, beyond initial starting conditions. But that's asking for too much from the average corporate leadership. Efficiency and technology acquisition are too much for these agents of the entrenched hegemony. So, what we have right now is a form of nationalist socialist welfare that looks like our current financial-administrative system. There's some momentum and inertia, but it's all being wasted on keeping unproductive fat cats alive. And that's okay. Because smart people will be leaving this oppressive Egypt under a stubborn Pharaoh. For much better lands and pasture. And while that happens, profit will start to look like a heinous crime to these welfare recipients. Who naturally will not be invited to the awesome parties that's coming in the future. Something like Eloi and Morlocks, if you wanna get biological about it. Eloi and Morlocks, though, are just the starting point. H.G. Wells didn't have anime music videos to inspire him to think about the more accurate possibilities of a matrix of biological degradation and environmental niche adaptation.

yladiz 3y ago

I mean, if companies like that didn’t run such a huge deficit, they might be able to get more favorable loan terms.

lokar 3y ago
It’s not about running a deficit (most are free cash flow positive), it’s about improving returns on capital with leverage.
- sterlind 3y ago
  I'm financially illiterate, but what does this mean? Companies have the revenue to pay their employees, but they choose to terminate them instead, because... why?
  - WorkerBee28474 3y ago
    Hey, SWE who happens to have an MBA here. Theoretically, if a company has money to pay employees it keeps them if the present value of their project is positive, and terminate them if the present value of their projects is negative. Let's say an employee earns $100K this year. The project they're working on this year will generate 40K of revenue in 1 year, 2 years, and 3 years. Is the project worth doing? Let's assume the discount rate is 5%. A dollar now (which we call 'present value (PV)') is worth $1.05 a year from now ('future value (FV)'). And 1.05^2 in 2 years. And 1.05^n in n years. And a dollar in n years (FV) is worth 1/(1+discount)^n dollars today (PV). It's a mechanism similar to inflation, or paying interest. (IRL the discount rate is the WACC + some factor for riskiness, but that's too much to talk about.) Let's say the discount rate is 5%. Is the project worth doing? The present value (PV) is -100K + 40K/1.05 + 40K/1.05^2 + 40K/1.05^3. So if you approve the project, the future profits and expenses are as if you earned $8,930 today. You approve the project. Let's say interest rates go up, and you now need to use 10% as the discount rate. -100K + 40K/1.10 + 40K/1.10^2 + 40K/1.10^3 = $-526. If you approve the project, you will lose money. So you don't approve the project. Now you don't need the employee anymore, and you get rid of the them, by reassignment, reorganization, or layoff.
    - tsunamifury 3y ago
      It's a lot simpler than that, firing people was earning 30x return in stock price. Almost no one's actual revenue to the company was worth that. The market has created negative human incentives.
      - gen220 3y ago
        The person you were replying to is explaining why firing people "raises the stock price". And yes, it really is that complicated. Firing people whose salaries have a dramatically positive ROIC for the company does not raise the stock price, it lowers the stock price. The mistake, in retrospect, is the executives': they should not have over-hired in 2020. I know it's a bizarre silver lining, but to the extent there is one, workers got capital (in the form of SBC and cash) that they otherwise "shouldn't" have. If those companies had been run more effectively, most would have never been hired in the first place. It's kind of a crap silver lining, because we psychologically feel loss [of a job] 10x more than gain, but the realistic "market-optimal" alternative was not "I have this cushy, high paying job forever", it was actually "I have never had a cushy, high paying job".
    - sterlind 3y ago
      But won't the projected value of the project go up with the discount rate? Why would the project still only make $40K on year 3, rather than now making $40K*1.10^3?
      - gen220 3y ago
        In reality, the projected value of many such projects were either never accurately measured, or allowed to differ from the "measured" value for a very long time. The projections would go something like $0 two years ago, $5k last year, but then $100k next year, $5mm year after that. One day? $1B, easy. There'd be precious little evidence to support the exponential growth hypothesis, while having 10 assigned engineers earning as much as their peers in more predictable domains. It's easier to justify such ideas in a big, rich company when the risk free rate of return is near-zero and the profit center of the company is compounding (the growth in Ads justifies the negative ROIC everywhere else). But when your profit center is wavering and showing worrying signs of stalling out (as Google and Meta did in 2021/22), the calculus shifts dramatically. When you manage a company not for "growth" but for "value" (which is an inevitable part of the corporate cycle), these projects and the employees behind them are decreasingly seen as a potential source of future profits and more as a waste of increasingly valuable cash.
  - gen220 3y ago
    Basically, it's not about piles of cash. It's about the rate at which those piles are changing, and how you can allocate capital to min-max those rates of change. In an environment where the "risk-free rate of return" is secularly-higher, the floor of minimal necessary productivity goes up. Let's say the ROIC of investing $300k "into" an employee is $310k (3.33% rate of return). If the risk free rate of return is 1%, you take that employee. If it's 5%, you fire that employee. I think the reality is that the typical ROIC was above the typical salary, but that there was an inflection point that they crossed in the hiring spree of 2019-2021. If you're a capital allocator (CEO), your responsibility is to maximize ROIC for shareholders over the long run. In environments where you're not absolutely confident that your eventual, steady-state employee ROIC will trounce (i.e. 2-5x's) the risk free rate of return, you should generally favor returning capital to shareholders (with dividends or buybacks) instead of putting good money after bad.

leftcenterright 3y ago

but this is not true of the giants like Microsoft and Google right? They chose to fire thousands and yet have sufficient to invest further into markets all over the world. Burn and churn is just much easier and lax labor laws do not prohibit such tendencies!

deleted 3y ago
[deleted]
tsunamifury 3y ago
They elected to do that because the 1 billion dollar write down yield 300 billion in market value -- firing people literally raised their market cap more than what those people could earn doing a real job earning real revenue. To be clear, this is not people being fired for bullshit jobs. This is people being fired because their 1 billion in revenue is a fraction of the 300 billion in stock price opportunity. Ask me how I know...
- aksss 3y ago
  I think both scenarios can be true. Let us not deny that there are worthless employees and worthless jobs, which tend to accumulate in large organizations organically, and warrant periodic correction.
- frfl 3y ago
  ...how do you know

silverquiet 3y ago

I work for a company that does something that I guess is a bit unusual - they use the revenue from our customers to pay employee salaries. If you would have asked me, this would seem like the obvious way to do things, but I'm told that debt is very important for some reason or other. As Homer Simpson has been known to say, "I don't know how the economy works".

deleted 3y ago
[deleted]
tnel77 3y ago
You would think that this would be an acceptable approach, but MBAs have decided that this is not the case so I don’t know.
- H8crilA 3y ago
  Except all tech giants do just that, yet they fire people. Google has an amount of cash in the bank comparable to all the help that has been sent to Ukraine (though there are also many things that Ukraine gets that are not really measurable in money). Sent, not "promised" or whatever else some states do to make themselves look better.
glitchcrab 3y ago
How very dare you suggest that organic growth is the way forward? Everyone here knows that unless you've hit your series c and are soaring for unicorn status then you might as well just not exist at all.
rgrieselhuber 3y ago
When interest rates are very low, companies are incentivized to borrow more as they can get better returns by investing their own cash flow into assets with predictable returns. When those interest rates go higher and these higher interest rates are coupled with harsher terms, then the ability to invest decreases, companies view reducing headcount as the way to survive to the next phase.
3y ago

toss1 3y ago

Yup. And this is why smart companies avoid that game. I know one regional company who sells nationally/internationally which has done that for decades. Decades ago, the owner asked the local bank for a growth loan for some equipment and was turned down. The next week, he found out that one of his employees, who depends 100% on his company for income, went to the same bank for a motorcycle loan and was approved. the business owner was so outraged at the bank's stupid decision-making (if the business isn't good for the money, how will the employee be good for it?) that he decided to never use bank debt for growth again. That was in the 1960s, and the company is doing great, focusing on product and service and not financial games, with very expansive and expanding facilities and workforce. The regional bank was absorbed long ago. Remember: no matter how much banks advertise being your partner and friend, they are not.

floren 3y ago
They're not your friend, because they're in the business of making money. Unless that business was the only employer in the area, the owner was basically just having a tantrum over the idea that different kinds of loans for different amounts of money might have different decision-making processes behind them. When my credit union decided to give me a car loan, they didn't look into the solvency of my employer, they just saw that I have good credit and a steady income and took a safe 5-digit gamble. It may have hurt the owner's feelings to essentially be told "we're pretty sure we can make our money back on this $1000 motorcycle loan which has a very easy-to-deal-with collateral, but we don't want to give you a $100000 for specialized equipment"
- toss1 3y ago
  Even if you see it that way, the result of his decision was excellent, and likely superior. I've literally dealt with banks (US state/regional scale) as a technology business with a loan that was absolutely current and on-time every one of scores of months, and we were running profitably (small, but definitely positive). Yet, when the bank started having problems in their real-estate sector, they came and called in OUR loan. We had to seriously scramble to have it not put us out of business, cold. There were several other businesses in the area, also non-real-estate, that were caused to fail in this bank's BS moves and made the local papers. It is not just that bank's business is making money. They have a whole bunch of internal incentives that make it perfectly OK in their eyes to fck over anyone for no reason other than to make their personal numbers this month look good. And they don't hesitate to do it.

makerdiety 3y ago

Instead of minimizing costs by performing massive workforce reductions and while not earning profit, corporate officers could just... earn some profit to keep the momentum going. And to go beyond, beyond initial starting conditions. But that's asking for too much from the average corporate leadership. Efficiency and technology acquisition are too much for these agents of the entrenched hegemony. So, what we have right now is a form of nationalist socialist welfare that looks like our current financial-administrative system. There's some momentum and inertia, but it's all being wasted on keeping unproductive fat cats alive. And that's okay. Because smart people will be leaving this oppressive Egypt under a stubborn Pharaoh. For much better lands and pasture. And while that happens, profit will start to look like a heinous crime to these welfare recipients. Who naturally will not be invited to the awesome parties that's coming in the future. Something like Eloi and Morlocks, if you wanna get biological about it. Eloi and Morlocks, though, are just the starting point. H.G. Wells didn't have anime music videos to inspire him to think about the more accurate possibilities of a matrix of biological degradation and environmental niche adaptation.