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Saturday, February 17, 2024

Rocky Times Ahead as Companies Continue Brace for “Performance”

The US has likely reached peak employment: The US has maintained some of the lowest unemployment rates in decades, consistently staying below 4%. This stability, coupled with corporate strength and investments in growth, has ushered in a period of economic boom. For those seeking employment, finding a job was easily achievable, and for those already employed, the opportunity to switch roles and ascend the career ladder appeared readily accessible. However, it’s now arguable that the US may have reached peak employment, and looking forward, it’s likely to become much more challenging for both frontline and white-collar workers to remain employed or find new jobs. Several factors within the economy are contributing to this shift away from peak employment.

A significant transformation has been observed in the technology sector, moving from what has been termed a ‘potential’ driven world to a ‘performance’ driven one. For the better part of two decades, the technology sector operated in ‘potential’ mode, focusing on the distant future—such as the colonization of Mars—with a company’s potential often gauged by its hiring rate. However, in the last eighteen months, there has been a marked shift towards a ‘performance’ driven approach, catching many technology CEOs off-guard. Billions in market capitalization have been lost by some of the most potential-oriented companies, while those earlier in their lifespan have struggled for survival, leading to what some have dubbed a ‘mass extinction’ among venture-backed startups. This shift to a performance-oriented world was sparked by Mark Zuckerberg declaring 2023 as ‘The Year of Efficiency,’ ↗during which Meta added $800 billion in market cap and announced its first dividend ↗, aligning with the performance-driven ethos. Behind this change is a widespread belief among technology CEOs—and many beyond—that companies can operate with significantly fewer employees while still aiming for high future growth. This has led to widespread job cuts, with more and more CEOs each week deciding to reduce their workforce, even while pursuing a growth agenda.

Mark Zuckerberg’s Year of Efficiency has paid off big for Meta

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What makes this situation unique is that it is not occurring during a recession. In fact, most companies are currently doing very well, yet they are rapidly moving to cut jobs and severely limit hiring, some even implementing a complete hiring freeze. CEOs are adopting a ‘higher density’ talent strategy, preferring fewer but more capable employees and using performance management to weed out those not meeting expectations. This year, companies are toughening their performance management, surprising employees with ‘meets expectations’ ratings when they anticipated ‘exceeds’ for their usual performance. Even McKinsey, the renowned management consulting firm, has placed more than three thousand of its employees on notice for unsatisfactory performance. ↗ This trend is expected to continue and spread across sectors in the coming months and years, including a push towards more in-office work to foster teamwork and efficiency. Those unable to adapt are likely to be let go over time.

Another significant trend is the emergence of Generative AI. Unlike past technologies, where companies would initially throw people at the new technology to understand and integrate it into their operations, Generative AI begins with the technology itself, adding human input only as necessary. This represents a fundamental shift towards using as few people as possible for as long as possible. As AI capabilities expand, the need for exceptional human talent becomes more acute, leaving no room for mediocrity.

Historically, hourly frontline workers have been relatively untouched by such trends. The US has always had a readily available pool of minimum wage or slightly above minimum wage frontline employees. However, with states like California moving to legislate a $20 per hour minimum wage for frontline hourly workers, the focus on innovation at the frontline is set to increase significantly. This innovation is aimed at applying technology and robotics to reduce the number of frontline employees as much as possible. For example, fast food restaurants in California are moving towards models with minimal or no employees, a trend likely to become more common. The recent formation of the California Fast Food Workers Union, which has aligned with the powerful Service Employees International Union, marks an attempt to protect these jobs against the backdrop of increasing automation and AI ↗.

As the country likely moves past peak employment, both hourly and white-collar ‘knowledge’ workers should prepare for unprecedented scrutiny of their performance. With the middle to lower tiers at risk of being cut, finding the next job is expected to become significantly more challenging.

Michael Maren
Michael Maren
Former marine biologist who likes to spend as much time in the tropics as possible, due to a horrible time I once had in Alaska. Brrrr.

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