Tech companies have been laying off workers in droves this year. One big reason is that they hired too many people in the first place when times were easier. Stewart Butterfield, the former CEO of Slack, shared some insights this week on how the over-hiring can happen, identifying a behavior among supervisors that he considers the “root of all the excess.”
Butterfield cofounded the messaging startup in 2009 and watched its valuation rise dramatically in the following years, with one massive funding round following another until its successful IPO in 2019. Salesforce then acquired the venture for $27 billion, and earlier this year Butterfield left the company, admitting that he “wasn’t very successful” at integrating the two cultures. The billionaire now buys luxury real estate with his wife, Away cofounder Jen Rubio.
So Butterfield knows what the Fed-induced easy money era was like for tech startups. “Even back then, it was apparent—we would say in interviews, this is just zero interest rate. This is what happens,” he told Bloomberg’s Odd Lots podcast this week.
He noted that when there’s no real constraint on hiring, “you hire someone, and the first thing that person wants to do is hire other people.” The reason, he explained, is that “it’s a very obvious signal, and it’s very true, that the more people who report to you, the higher your prestige, the more your power in the organization.”
He continued, “If you’re a manager, you want to become a senior manager. If you’re a senior manager, you want to become a director. It’s a very powerful incentive. So every budgeting process is, ‘I really want to hire,’ and that to me is the root of all the excess.”
Employees who “shouldn’t be here”
The phenomenon may well have occurred elsewhere. Certainly tech firms have been shedding employees, including Salesforce, which cut 10% of its workforce in January and is reportedly considering more layoffs. Others include Amazon, Dropbox, Microsoft, and Facebook parent Meta.
“Realistically, there are probably a bunch of people at the company who shouldn’t be here,” Meta CEO Mark Zuckerberg told employees last summer, as The Verge reported. Meta then laid off around 11,000 workers in November and another 10,000 in March, with Zuckerberg targeting middle managers and calling it the “year of efficiency.” (Meta’s shares have soared this year, helping Zuckerberg boost his net worth by more than $45 billion.)
Butterfield noted that over-hiring at other types of companies would be less likely. “If you don’t have the constraint of ‘We just don’t have the money,’ you know, if you’re manufacturing lysine or something like that, a 70-year-old industry where there’s a lot of competitors and all the margins have been taken out of it, you can’t do that.”
But if you have “infinite money, either from being a monopoly on search engines or having VCs give you lots of money,” he continued, “you can get rid of that constraint.”
And that, as he suggests, presents its own problems.
Fortune's CHRO Daily is the essential newsletter for HR professionals. Subscribe to receive it free in your inbox.
