Spotify (SPOT) CEO Daniel Ek has just revealed that he was surprised by the consequences of the company’s layoffs in December. During a recent earnings call discussing Spotify’s first-quarter earnings for 2024, Ek claimed that the decision to lay off 17% of the company’s workforce negatively affected day-to-day operations more than expected.
“Another significant challenge was the impact of our December workforce reduction,” said Ek during the call. “Although there's no question that it was the right strategic decision, it did disrupt our day-to-day operations more than we anticipate. It took us some time to find our footing, but more than four months into this transition, I think we're back on track.”
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Spotify revealed in its first-quarter earnings report this year that its free cash flow of €207 million ($221 million) was “partially offset” by the severance payments the company had to make to employees following its December layoffs.
The company also reported that it garnered $3.63 billion in revenue during the first quarter of this year, which is a slight decrease from the $3.67 billion it brought in during the previous quarter.
When Ek sent a memo to Spotify employees in December announcing the decision to shrink the company’s workforce, he claimed that economic headwinds were the reason for the company’s layoffs.
“Economic growth has slowed dramatically and capital has become more expensive. Spotify is not an exception to these realities.” wrote Ek in the memo. “This brings me to a decision that will mean a significant step change for our company. To align Spotify with our future goals and ensure we are right-sized for the challenges ahead, I have made the difficult decision to reduce our total headcount by approximately 17% across the company.”
Spotify currently has 7,721 full-time employees globally, before the layoffs, it reportedly had 9,123 employees.
Ek is not the first CEO to flag the high price of workforce reductions. Microsoft CEO Satya Nadella warned employees in December the company will take a $1.2 billion hit due to severance costs and other restructuring efforts as a result of its plan to lay off 10,000 employees by March.
Also, Wells Fargo CEO Charlie Scharf warned investors in December that the company will report a large severance expense in its fourth-quarter earnings for 2023 as it is planning to conduct an unknown amount of layoffs in 2024.
“We’re looking at something like $750 million to a little less than a billion dollars of severance in the fourth quarter that we weren’t anticipating, just because we want to continue to focus on efficiency,” said Scharf at a Goldman Sachs conference in New York.
It is no surprise that severance pay could be a high cost for companies as the most common formula employers use to decide severance is one week of pay per year of service, according to a recent survey the American Society of Employers.
About 57% of employers in the survey revealed one week of pay per year of service as their go-to formula, and only 24% of employers said that they provide two weeks’ pay per year of service.
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