'Too ambitious' | Spotify CEO accepts blame for financial woes, so why must staff take the hit?

Spotify CEO accepts blame for financial woes, so why must staff take the hit?

Spotify has announced it will cut 600 jobs in a bid to recoup some of its huge overspending in recent years.

The music streaming giant’s CEO Daniel Ek admitted the company had bitten off more than it could chew, and at times was spending twice as much money as it was making.

Ek, who also co-founded Spotify, told staff that the business had been “too ambitious” and consequently it was having to rein in spending – in this case by reducing the payroll.

“...to bring our costs more in line, we’ve made the difficult but necessary decision to reduce our number of employees” Ek wrote.

He revealed that in 2022, Spotify’s operating expenditure had grown at twice the speed of its revenue.

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Ek went on: “...over the last few months we’ve made a considerable effort to rein-in costs, but it simply hasn’t been enough. So while it is clear this path is the right one for Spotify, it doesn’t make it any easier—especially as we think about the many contributions these colleagues have made.

“Like many other leaders, I hoped to sustain the strong tailwinds from the pandemic and believed that our broad global business and lower risk to the impact of a slowdown in ads would insulate us. In hindsight, I was too ambitious in investing ahead of our revenue growth. And for this reason, today, we are reducing our employee base by about 6% across the company. I take full accountability for the moves that got us here today.”

Spotify confirmed that one-on-one conversations will take place with all impacted employees, with Ek also accepting that many employees would view the decision as a “shift in our culture.”

“For those of you who are leaving, I thank you for everything you’ve done for Spotify and wish you every future success,” Ek concluded.

Employees pay the price for firms’ overexpansion. Déjà vu?

So, Spotify’s CEO has taken “full accountability” for the situation the company currently finds itself in.

Sound familiar? Well, recent headlines have been filled with tech sector layoffs, hiring freezes and job offers being pulled.

Google's parent Alphabet announced last week that it is cutting about 12,000 jobs as it faces "a different economic reality", according to a staff memo seen by Reuters.

The move follows thousands of layoffs at tech giants including Amazon, (18,000 cuts announced) Microsoft (10,000) and Meta, (11,000) which is downsizing after a pandemic-led hiring spree left them flabby in a weak economy.

In an email to all staff explaining the redundancies, Satya Nadella, Microsoft’s CEO, revealed a situation like that being revealed at Spotify.

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“As we saw customers accelerate their digital spend during the pandemic, we’re now seeing them optimize their digital spend to do more with less,” said Nadella.

Amazon also admitted that its sweeping layoffs were the result of hiring too many employees during the pandemic, which naturally saw a boom period in online shopping.

But why are ordinary, hardworking employees bearing the brunt of the lack of foresight from their executives, particularly when industry rivals have tightened their belts in different ways?

For example, Apple revealed earlier this month that, in a bid to slash costs, CEO Tim Cook’s annual pay package was being cut by 40%. This followed a year in which the iPhone maker’s share price dropped by more than 20% over the last year, due to supply chain delays and the global economic turndown.

Try not to shed a tear for Cook – his net worth is still an estimated $1.7bn (app. £1.3bn). But having the decision makers take bear most of the brunt of their own mistakes, rather than making layoffs, makes sense from all angles - wellbeing, talent management, culture and employee brand being chief among them.

Keep employees informed

In the current economic climate coupled with the cost-of-living crisis, it’s hard not to expect history to repeat itself, so staying honest with your staff about company issues is the best way to avoid litigation further down the line.

Kevin Poulter, Employment Partner at national law firm Freeths, recently spoke to HR Grapevine about the staff cuts being witnessed across the tech sector. He believes such massive cuts should be a warning for employees and investors and business owners, besides the prospect of litigation.

“If employees sense trouble ahead, they will be more likely to take up other opportunities they might otherwise of passed up,” explains Poulter.

“As shareholders become more demanding, the freedom of innovation and access to investment which once attracted talent will reduce, encouraging longer serving employees on which the success of the company was built to reassess their own futures. And so the circle continues.”

How should HR move ahead with tough decisions?

Tina Hyland, Employment Law Adviser and Solicitor at WorkNest, recently told HR Grapevine: “2023 is going to be a challenging year.

“Unfortunately, this does mean employers will be looking to make some difficult decisions, such as making redundancies or restructuring the workforce, as staffing costs are usually a significant expense for a business. Suppose that’s an avenue they decide to take; in that case, employers must be prepared to negotiate with employees to ensure they receive a fair deal.

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“We highly recommend businesses reduce the chances of making any employees redundant by making alternative choices where possible, including implementing pay freezes or reducing benefits. However, each option comes with its own risk, so obtaining proper legal advice is critical in making the right decision for your business while minimising the negative impact on employees.

“Unfortunately, in the context of the recession, any cuts inflicted on employees due to employers’ decisions, such as restructuring or pay freezes, may be detrimental to employee’s mental health, especially with further worries to their financial wellbeing throughout this time. Supporting employees with additional benefits that might be available to them already, including Employee Assistance Programmes to retailer discounts, could help improve an employee’s bottom line in other ways.”

What should the redundancy process look like?

If a business reaches the conclusion that nothing other than job cuts can keep them afloat, it's important to start considering how a redundancy process should be managed. The redundancy process is one that is wrought with stress and anxiety, not just for employees, but also the HR teams overseeing the process. It’s crucial, therefore, that process is handled sensitively and professionally.

On its website, the Chartered Management Institute (CMI) offers insight from Paul Holcroft, Associate Director at Croner, who advises firms on their HR policies – part of which covers redundancy packages. He said that honesty and clarity are the critical components of successful support.

“Being made redundant can be an incredibly distressing time, so it is essential that employers maintain regular dialogue with affected staff,” Holcroft said.

“Given the complexity of a redundancy procedure, employers should provide individuals with a clear explanation of their rights and a timeframe for when decisions will be made. This reduces any unnecessary stress and ill feeling among the workforce. Employees with a minimum of two years’ service are eligible for a reasonable amount of time off to look for new work or to arrange training for future employment.”

Similarly, official guidance from the CIPD explained that ‘redundancy should be a last resort’.

“It can be one of the most distressing events an employee can experience. It requires sensitive handling by the employer to ensure fair treatment of redundant employees as well as the productivity and morale of the remaining workforce. Redundancy legislation and case law is complex, and employers must understand their obligations, including employees' rights and the correct procedures to follow,” the body’s official advice explained.

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