Could Salaries Be Cut? Treasury Question Startled Israel’s Tech Sector

Against the backdrop of the low dollar’s impact on Israel’s high-tech industry, senior officials from the Finance Ministry met last week with industry leaders to examine ways to address the challenge. According to Globes, during the discussion questions arose about the effect of the dollar’s weakening on salary costs and companies’ competitiveness, and among other things the Treasury representatives asked the tech executives whether they believed the situation could eventually lead to lower salaries as an alternative to layoffs.

Representing the ministry at the meeting were Accountant General Michal Abadi-Boiangiu, Budget Director Mahran Frouser, Chief Economist Shmuel Abramzon, and Tax Authority head Shay Aharonovitch. From the company side, the Zoom call included Meta Israel CEO Adi Sofer-Teani, Microsoft R&D CEO Michal Braverman-Blumenstyk, Hedva Bar, former Supervisor of Banks and now deputy CEO of capital markets platform eToro; Innovation Authority CEO Dror Bin, and several of the industry’s leading investors, Adam Fisher of Bessemer Venture Partners and Eric Kleiner of Glilot Capital. Also present were representatives of organizations that represent parts of the industry, such as the High-Tech Association in the Manufacturers Association, the Growth Companies Forum, and IATI. The meeting was initiated by Bat Sheva Moshe, who previously managed Wix’s Israel region and recently moved to Kaltura.

As mentioned, during the discussion between senior Finance Ministry officials and representatives of the tech sector, the tech executives were asked whether the weakening of the dollar could ultimately also lead to a drop in wages. The senior managers’ answer was immediate: “We are not in that era,” one senior executive explained. “There is no global slump here that everyone is suffering from, if we cut salaries, employees will go elsewhere where they are paid more. There is competition for good workers and it is not going away.”

A 30% higher salary burden

The erosion of the dollar’s exchange rate has led to a real increase of about 30% in the salary costs of high-tech workers in Israel since 2021, with about 20% of that increase occurring in the past two years. As a result, a company that raised $100 million at the peak of the 2021 fundraising boom is effectively operating as if it had raised only $70 million, while employee salaries continued to climb and reached NIS 38,500 a month last February. These figures come alongside Israel’s entry into a global wave of layoffs, influenced by the adoption of AI tools that are eliminating many roles, and against the backdrop of reputational damage the country suffered during the war. Accordingly, during the meeting representatives of foreign development centers expressed deep concern about Israel’s ability to remain relevant on the global technology map.

Meta Israel CEO Adi Sofer-Teani explained that as organizations reduce staff because of the arrival of AI, the weakening dollar creates an “extremely unfortunate” timing that makes it harder to retain employees. In the conversation, Sofer-Teani warned that Israel faces a risk of a decline in the share of Israeli workers in multinational corporations and growth companies. She also stressed that building infrastructure, such as development centers and server farms, has become 20% to 30% more expensive because of exchange-rate changes, which could lead companies to reconsider their activity. For example, since the announcement of Nvidia’s plan to establish a development center in Kiryat Tivon, the company has faced a theoretical 16% cost increase.

Microsoft R&D CEO Michal Braverman-Blumenstyk also spoke in the closed discussion. Braverman-Blumenstyk was invited to the meeting by IATI in order to present the picture emerging from her conversations with colleagues who run international development centers, and she emphasized that her remarks did not reflect what is happening inside Microsoft itself. She clarified that it is now more difficult for those executives to bring projects to Israel and that they have alternatives such as India. It should be noted that transferring teams between development centers is not usually a quick process, so the effect will not be seen immediately, but it could happen if the dollar continues to weaken, based on the understanding that a team that moves to another country generally does not return to Israel even after the dollar exchange rate stabilizes.

Money that does not reach Israel

Adam Fisher, one of Israel’s leading investors, argued in the closed discussion that “anyone who looks only at fundraising in Israeli high-tech is wrong.” He said this in response to the common claim that local startups raise billions of dollars each year, when last year total fundraising by private companies stood at about $11 billion, an increase of 15% from the previous year. According to Fisher, that figure “does not really reflect the industry,” because 90% of the sum does not reach Israel, but is invested in purchasing GPUs, servers and hardware, money that flows abroad. In addition, he noted that a large share of the capital raised is directed to offices and employees overseas, and therefore does not necessarily translate into jobs in Israel.

Fisher added that a 20% to 30% change in the currency exchange rate is an extreme shift that effectively wipes out company profitability, leaving them no choice. “Startups cannot reduce inventories, or cut salaries, or move to a cheaper office location,” he explained. “And when they move away from profitability, they have no choice but to lay off workers.”

Eric Kleiner, founding partner at Glilot Capital, which invests in young cyber and software companies, believes the damage to startups in their early growth stages is especially severe. According to him, these are the companies that may become the next unicorns or be sold to international giants, and right now they are having a very hard time. Kleiner noted that if Israeli high-tech raised $11 billion last year, then under current dollar conditions that amount is effectively only $8.8 billion. Against this backdrop, he is calling for the creation of an emergency grants fund at the Innovation Authority, in a format similar to what was used during the coronavirus pandemic and the beginning of the Swords of Iron war, and argued that a NIS 1 billion fund could provide a proper partial offset for a loss of more than $2 billion and allow companies to continue growing.

Notably absent from the meeting itself was Finance Minister Bezalel Smotrich, who sent his adviser Natan Nahorai. Globes learned that another meeting with the minister has been scheduled for about two weeks from now, but industry sources say last week’s discussion was one-sided, with the tech representatives presenting their arguments and Treasury officials listening with almost no response. However, Finance Ministry sources say the solutions raised in this meeting, along with additional ideas discussed in private conversations that were not published, are already being examined by the ministry’s professional staff.

It was learned that some proposals, such as tax credits or municipal tax discounts, have been taken off the table. The Treasury is reluctant to allow taxes to be paid broadly in dollars, but is examining a limited plan for a select group of companies, such as technology giants or Israeli growth companies, “unicorns.” The main solution under consideration is the establishment of a grant fund at the Innovation Authority to provide assistance to small and medium-sized companies facing cash-flow difficulties, with an emphasis on adopting AI tools.