The state of the VC-backed market and its implication for HR leaders
It’s been a wild ride for HR leaders over the past few years. From an abrupt COVID-shaped change in work culture, to some of the most aggressive rounds of funding we’ve seen by VCs, to a global economic downturn in 2022, it is fair to say, the challenges keep on coming.
In the VC-backed world, 2021 brought with it record levels of VC funding of $330B, doubling the total invested capital of 2020. After a bright start to 2022, changes in the global economic landscape and the continued threat of a recession has driven VC-backed investment down to $37B in Q3 2022, down 37% from the same quarter of last year. Although a significant drop from 2021, it isn’t all doom and gloom. VCs are still on track to invest a total of $200B in 2022, which would make it the second largest year on record. In addition, VCs have raised a healthy $151B in the year to date, signaling continued interest in private market investments.
But, as a friend of mine once sagely pointed out, none of us has a crystal ball. The response to market uncertainty generally means a reduced appetite for risk and greater scrutiny on investments. From large public companies like Meta, to Coinbase, a former a golden child of the IPO market, we have seen a number of high-profile layoffs as they respond to changing market realities and reevaluate their growth plans.
In the private market, we are likely to see greater investor scrutiny. The “mega deal” that became so common in 2021 is unlikely to be quite so forthcoming, and companies that demonstrate a path to profitability may find themselves higher on the list of VC favorites. As such, we are already seeing CEOs consolidate their growth plans by focusing on profitable products and markets.
Given the current economic climate, recent changes to pay transparency legislation, and the continual evolution of hybrid work models, the role of HR leaders is arguably more important than it has ever been.
So, what, practically speaking, can HR leaders focus on in 2023 to support their business and firmly establish the strategic importance of HR leadership at the leadership table? With profitability the likely area of focus, the emphasis on hiring new talent and quick hires may soon be replaced by discussions around cost control and leaner hiring plans. Here are a handful of areas (but not all) that we believe should be a priority:
Job leveling, architecture, and salary structures: Too predictable? I don’t care. This should be top of the list if it isn’t already. Clear, concise leveling charts and job architecture frameworks not only save money, by ensuring individuals are paid fairly based on their roles, but promote career opportunities, help with pay equity, empower managers, and support with many other systems, initiatives, and programs. A review of employee alignment to job architecture often highlights misleveled individuals and has the potential to reduce the need for layoffs through cost savings.
A review of the compensation philosophy (both cash and equity): Many private companies were very happy with 75th percentile pay philosophies while the dollars were rolling in but with so much uncertainty, and potentially longer timelines to rounds of funding and/or an IPO, perhaps it is time for a rethink. For context, a 75th percentile cash philosophy, all things being equal, means a wage bill that is more expensive than three quarters of the competition. Just think about that for a moment − is that still worthwhile if it means going through layoffs in 2023? In terms of equity, with downward valuations either happening or potentially on the horizon, all things being equal, employees will expect a greater number of shares to compensate. Greater demands on the equity pool, coupled with funding pressures, may mandate a rethink of how we deploy equity.
Rethinking location-agnostic pay: During and after the pandemic, some companies adopted nationally consistent pay ranges with the view that pay should be based purely on what people do, not where they do it. While this approach may seem ideologically fair, it results in vast differences in take-home pay across locations and subtly encourages a fully remote workforce since individuals, not unreasonably, seek to maximize their net income. Establishing market-aligned geographic tiers may be a way to save money while paying fairly, and encourage (but please don’t force!) some degree of in-office collaboration that many companies are currently looking for.
Promote transparency: It isn’t just about what you do as a company; it is about how you do it. Some companies make negative headlines for laying people off; other companies make comparatively positive headlines for the same thing. The difference is the level of transparency and honesty with employees in the process. Employees understand what is going on in the market right now, and a culture of transparency cultivates trust, even in the utterly horrible worst-case scenario of layoffs. HR leaders should take this opportunity to remind CEOs of the importance of open and honest ongoing dialogue with employees, particularly in difficult times, and help formulate a strategy.
No peanut butter (except the good kind): With merit budgets constrained and inflation high, it is more important than ever to allocate dollars to the people who deserve it. Whether it is Price’s Law, or the Vitality Curve championed by Jack Welch, most people agree that a select few deliver a disproportionately high amount of value to the business. The challenge is figuring out who that is. I may get an eye roll for this but there is a reason Peter Drucker’s Management by Objectives model is still being used by companies across the world more than 70 years since its unveiling. It is still the best way to manage performance in a fair and balanced way. MBO remains highly effective and helps companies to identify which employees to invest in. The challenges are often not with the model itself, but with how it is deployed. To be effective, people managers need to be well-trained in order to evaluate their direct reports in a fair and balanced way. One of the many benefits to robust performance management is to help identify candidates who may be able to solve talent shortages elsewhere in the company. By leveraging internal solutions, rather than hiring externally, we may be able to reduce costs, promote engagement, and demonstrate a culture of career opportunities. Just please don’t say “an MBO”.
Don’t forget about the salespeople: I know, I know, they all had huge paychecks in 2021. Even so, tough times are when you need your best sellers to stick around. Reevaluating the Go-To-Market approach means potentially restating quotas, updating territory alignments, and modifying market segmentation models, impacting roles and − you’ve guessed it − sales incentive plan design. Although not the panacea that it is often positioned as, sales plan design will likely rear its familiar face with finance putting pressure on payouts in low-performing scenarios, and sales leaders insisting that market forces are holding good sellers back and that they should still be rewarded. Neither is necessarily wrong and HR can help mediate these discussions.
These are just a few examples of the areas of focus that we expect in 2023, but if we have learned anything from the last three years, it is how unpredictable the world is. Companies that can stay nimble, be fiscally responsible, and keep their best talent, will be able to weather external forces and emerge stronger. Easier said than done? Perhaps, but as Peter Drucker said, “The best way to predict your future is to create it.”