If you’ve been trying to switch jobs in 2023 and 2024, you’ve likely seen firsthand that salary offers have significantly reduced compared to the golden period of 2021 and 2022. Alongside, the tech industry has witnessed a series of layoffs.

Among all this, you might have heard from industry veterans that the era of ZIRP is over, and it’s time to realign your expectations in terms of career and salary growth. But what exactly does this shift mean? Why is this happening now? Let’s explore what ZIRP really means and how it’s directly impacting our careers and salaries in the tech industry

What exactly is ZIRP? And why is there such a big fuss about it?

  • ZIRP stands for Zero Interest Rate Policy.
    • What is interest rate?
      • It’s the rate that the central bank (read: government) charges other banks to give out loans.
    • But why do banks borrow from the government anyway?
      • Meeting Reserve Requirements: Just like we keep a little cash tucked away for emergencies, banks need to have certain reserves on hand. Sometimes they’re a bit short, so they borrow from the central bank.
      • Managing liquidity: Banks may need to borrow to ensure they have enough liquidity to cover customer withdrawals or to make new loans.
    • And where does the central bank get the money from?
      • Unlike us, central banks can actually create money. This is the basis of the banking system’s money supply. They create money through monetary policy operations, such as open market operations, where they buy and sell government securities to control the supply of money in the economy.
  • Okay, so why does the government lower interest rates to near-zero levels, essentially lending out money for free?
    • To make borrowing dirt cheap, encouraging businesses and people to spend more, thereby giving the economy a nice kickstart. The government usually does it in economic downturns, such as the 2008 financial crisis or the recent COVID-19 pandemic.

What is the impact of ZIRP on tech companies and my salary?

With easier access to capital, tech companies can expand, innovate, and hire more, often leading to higher salaries.

This sounds perfect. Why aren’t we always on ZIRP then?

Perpetual ZIRP can lead to inflation and discourage savings. It’s like having too much of a good thing; eventually, it can cause more harm than good.

Okay, that’s all cool. But why is ZIRP going away, taking my salary with it?

The cost of doing business has gone up. As a result, the margins for companies have shrunk, and hence, your salary isn’t growing too.

But I’m in India, working for an Indian company. How do US policies affect me?

  • Investment Flows: Imagine investors globally as travelers looking for the best weather. Higher interest rates in the US make it a sunny spot for those seeking returns on investments, like US treasuries and other assets. This shift can lead to a financial ‘weather change,’ pulling capital away from other countries, including India. For us, this means there could be less money going around for businesses to grow or start new projects.
  • Many Indian tech companies serve US markets or receive funding from US-based investors. When the US tightens its monetary belt, these investors might become more cautious, slowing down their investments. This, in turn, can affect how much these companies are willing to spend on expanding their teams or increasing salaries, directly impacting tech employment and salary trends right here in India.

But I work for a startup. My founders raise capital by selling equity to VCs, not by taking debt from the bank. So, why the impact?

  • VC Attractiveness: When global interest rates are low, VCs find startups more appealing due to the higher potential returns compared to safe, low-yield bonds. As interest rates rise, those safer options become more attractive, potentially diverting funds away from riskier investments like startups.
  • Valuations and Funding Rounds: Higher interest rates can lead to lower valuations for startups as investors demand higher returns to compensate for increased risk. This can affect the amount of money startups are able to raise, potentially leading to slower growth and reduced hiring.
  • Growth and Expansion Plans: If tech companies, especially startups, find it harder to raise capital, they scale back their growth and expansion plans. This can lead to slower hiring or more cautious salary offers, as companies look to conserve cash.

But I work in FAANG, not relying on VCs. Why is my salary plummeting?

  • Despite having substantial cash reserves, big tech companies might still tap into debt and equity markets to finance certain initiatives. For big tech companies that do borrow, higher interest rates increase the cost of new debt. While these companies have significant reserves and strong cash flows, making them resilient to rate changes, their financial strategies, including compensation policies, may still be subtly adjusted.
  • Even though it might affect FAANG less. But since the competitors (hot startups) in the market aren’t paying top salaries, FAANG companies have less pressure to raise salaries to stay competitive.

What Changes When We Exit the Era of ZIRP?

  • As interest rates rise, borrowing becomes more expensive. This slows down the tech sector’s growth, which could lead to tighter budgets and more cautious spending on expansion and hiring. Consequently, you might see slower salary growth, and job offers could become less generous.
  • With increased interest rates, the ROI on fixed income asset is not bad anymore.
    • Wait a minute.. Isn’t the average ROI on fixed income assets typically lower than what you’d expect from investing in startups? Why would investors even think about rebalancing their portfolio if these are completely different kinds of investments?
      • It’s About Safety: The risk-free rate is a baseline against which other investments are measured. When interest rates rise, the returns on risk-free or low-risk investments (like fixed income securities) increase, making them more attractive relative to their risk. This doesn’t mean they’re suddenly better than startups, but they start to look more appealing because they’re less risky.
      • Risk vs. Reward: Investors always balance the chance of making money against the risk of losing it. With higher returns on safer investments, some might decide to play it safe, especially if the economy looks shaky. This doesn’t mean they abandon higher-risk investments like VC entirely but might allocate a smaller portion of new or existing capital to them.

If raising interest rates is so bad, why is the government doing it?

It’s all about balance. Too much cheap money for too long can lead to inflation. Raising rates is a way to keep the economy from overheating, ensuring sustainable growth.

F*ck!! So, what can I do now?

In the grand scheme, these macroeconomic forces are beyond your control. What you can do is focus on enhancing your skills, staying adaptable, and being prepared for the economic waves.

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