Recently, Meta Platforms Inc (NASDAQ: META) announced that it would cut around 5% of its global workforce. I was discussing this with a friend of mine, who is also currently working for Meta and we talked about some of the pros and cons of job cuts from the perspective of shareholders.
Let’s start with some of the pros.
Canceling unvested RSUs
When Meta cuts jobs, it also cancels all unvested restricted stock units (RSUs) that would have vested over time had the employee stayed on. The cancellation of unvested RSUs reduces the dilution from stock-based compensation.
Bear in mind, the number of RSUs granted is based on the stock price back when the RSUs were granted, and not when they vest. Back in 2022, Meta granted a huge number of RSUs as refreshers because of its lower stock price. For context, Meta granted 59 million RSUs in 2021 (when its stock price was high) but because of the refreshers and low stock prices in 2022 and 2023, Meta granted 107 million and 109 million RSUs in 2022 and 2023, respectively.
Cancelling some of these unvested RSUs will reduce dilution. In addition, hiring new employees and granting new RSUs will not result in as much dilution because Meta’s stock price is now around 7 times higher from the lows seen in 2022.
Getting better talent/ motivate existing employees
Meta cut jobs based on performance. By cutting low performers and hiring new employees, Meta could potentially improve the quality of its talent.
It also keeps current employees on their guard and creates an environment where employees work hard to ensure that performance reviews are good. This prevents employees from simply coasting through work and collecting wages without adding much value to the company.
Reducing the wage bill
Wages are one of the largest expenses for a company such as Meta. Although it is likely that Meta will eventually replace the employees that were removed, the company seems intent on keeping the team lean.
In 2022, Meta cut 11,000 employees, or 13% of its workforce and in 2023, the company cut an additional 10,000 employees as it strived for a “year of efficiency”.
For perspective, Meta’s head count declined from 86,482 in 2022 to 74,067 in 2024, despite revenue climbing 41% in two years from US$116.6 billion to US$164.5 billion. This, together with operational leverage, resulted in net profit margins rising from 20% in 2022 to 38% in 2024.
But, employee cuts could potentially end up with undesirable side effects. Here are the cons.
Lower risk taking
Cutting staff based on performance can lead to less risk-taking and innovation. This is because if the employee embarks on a more innovative but risky project that ends up failing, his or her performance may be considered poor.
This may lead employees to be less innovative or to take a safe approach when it comes to projects, creating an environment of lower innovation.
Internal competition
Another potential side effect is employees may start competing with each other. This may result in less collaboration and senior staff may be less willing to train new employees as they view them as competitors to their job.
This can create a toxic work environment.
Final thoughts
Job cuts are difficult for those impacted. However, it may also be a necessary way for companies to reduce expenses and to ensure that the company remains competitive.
Looking from the lens of a shareholder, I believe job cuts can be a good thing if done correctly and can also lead to more efficiency, more profits and eventually more dividends.
However, my discussion with my friend has also opened my eyes to some of the negative impacts of workforce reduction. Companies that do layoffs need to consider these factors and try to ensure that some of these potential negative side effects do not have a huge impact on the company.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in Meta Platforms Inc. Holdings are subject to change at any time.