Sky High Tech Salaries Are A Barrier To Entry For Incumbents

It’s another way to increase start up costs for new entrants

Lots of people are getting laid off right now, especially in tech. The broader labor market might not feel it yet. But in Silicon Valley, which over-hired coming out of the pandemic, the mood feels very recessionary at the moment.

Tech workers, including engineers are being let go in droves. In just the first two weeks of 2023 alone according to layoffs.fyi, over 20 thousand tech employees have already been let go. Amazon and Salesforce led the way, both laying off thousands of workers. The obvious angle is that investor (both public markets and venture capital) patience for losses year after year has run out. And now investors want higher margins and positive cashflow.

But a less appreciated angle is that with every layoff, the companies that can afford to keep their workers and keep investing in longer term projects with high optionality but uncertain payoffs widen their advantage over their competitors.

I’m not sure they planned it this way — after all, a decade ago Apple, Google, and others infamously colluded to not poach each other’s employees in order to keep compensation lower. But nowadays, engineers are expensive! Even amidst all these layoffs, the going rate in terms of total compensation (base salary plus bonus plus stock) for a modestly experienced software engineer is somewhere between $170K to $250K. Not many companies can comfortably afford such high pay. Add in the perks that tech workers can’t work without these days (free breakfast/lunch/dinner, gym, massage chairs, buses for commuting, baristas, etc.), and you’re looking at tens of thousands of dollars of additional overhead per employee (for younger firms) on top of their already high compensation.

This means two things:

1. It’s much more costly for a startup to build out its early team than it was 15 years ago. Ironically while the prevalence of cloud computing has made infrastructure, computing, and software much cheaper for young companies, those same companies that dominate the cloud (Google, Microsoft, Amazon) have made hiring so much more expensive. So one hand gives, the other hand takes away.
2. During difficult economic times when external funding dries up, the easiest way for unprofitable companies to quickly and significantly reduce costs is by firing people (even after eating the severance cost). Which like I observed above, allows stronger companies with the flexibility to retain their employees to earn a big advantage over their already weaker peers that are forced to further downsize.

So at the same time that Google, Meta, etc. were raising the bar on tech employee compensation, they were also boxing out potential competitors by making it much more expensive for young firms to scale (in terms of labor). For a time, venture capital and frothy valuations allowed startups to fight back using the inflated value of their shares, but that time is past. At least for the next year or two, it will be very hard for younger companies to recruit against their giant competitors.

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