Are Tech Salaries Headed Lower as Layoffs Continue At Start-Ups?

A year back, companies had been offering several hikes in remuneration to attract the best technical talent into their workforce.

Some resorted to offering various perks, employee stock option plans, and increased salaries; others went a few notches further. An Indian payments unicorn even offered superbikes as joining bonuses and trips to the ICC cricket world cup to attract superior technological talent.

The competition for employees led to high attrition levels even among well-established software majors, as employees jumped ship for better pay elsewhere.

Infosys had reported a 27.7 per cent attrition rate in the fourth quarter of the financial year 2022, an unprecedented attrition rate. And it wasn’t only India which had an ongoing war for talent – tech companies across the globe saw their employee costs rise as they struggled to attract and retain talent.

However, there has been a sharp reversal in hiring trends over the last few months.

Technology companies across the globe have slowed down on hiring, with several companies even firing employees to reduce costs.

Central banks across the world have begun increasing their interest rates to rein in inflation. The era of focusing on growth over profitability is quickly ending as the cost of capital continues rising and capital becomes scarce.

The first five months of 2022 saw Indian start-ups draw $ 16 billion in funding, with the creation of new unicorns. But April saw about half the funding seen in the previous year at $ 1.6 billion, and without the creation of new unicorns. Even the 1.6 billion figure is skewed by the $ 805 million fund-raise by Verse Innovations which runs Dailyhunt and Josh.

While the funding tap hasn’t been closed off completely, founders and investors expect funding to decline considerably going further. The current round of layoffs is based on future projections of a funding winter, given that most of these start-ups are well-capitalised and have raised significant sums of money over the last year.

As funding declines, becoming profitable is the only way to keep going. For technology companies, employee costs can form a significant part of the total costs; hence, layoffs are a relatively easier route to reducing costs.

According to reports, Ed-tech and E-commerce seem to have initiated the largest layoffs, with 8,100 employees being laid off in the current calendar year. These include prominent start-ups like Ola, Blinkit, Unacademy, Vedantu, and Whitehat Jr, among several others.

As funding declines, the intense competition for talent is likely to decline as well, possibly resulting in salaries correcting back to relatively lower levels.

As the supply-demand situation for talent is restored slowly, the sharp growth in salaries over the last two years might be a blip and not a continuing trend. Ed-tech is heavily dependent on sales and marketing personnel, and these teams that had seen aggressive hiring are now being rationalised.

But the problems are not limited to employees who are laid off. The ones who are retained by the company might have to undertake pay cuts while seeing the value of their ESOPs decline precipitously.

Publicly listed technology companies have seen their valuations significantly across the globe within a short time frame, and private market valuations will decline slowly but surely. Employees watching a significant component of their wealth decline by 60 per cent within a short time frame could be left demoralised.

Aggressive hiring and high growth expectations are finally catching up with start-ups, and the figures above do not include third-party workers or contract workers.

In a global slowdown, some experts expect lower IT spending, which could lower the demand for talent as well. In addition, the current layoffs might disincentivise employees to jump ship during the turbulent phase.

As the frenzy dies down, employees are left with pay cuts, job losses, and worthless stock options. In case the current trends continue, we could see lower attrition at tech firms and rationalisation of remuneration as the market recovers from the hangover of excess funding.