Microsoft ( (MSFT) - Get Microsoft Corporation Report) will hire few people than initially planned in the second half of 2022 as the economy contracts and customers cut back on spending, mirroring the trend of other tech companies.

The tech giant said it is focused on keeping key employees as the labor market remains tight. The amount of money that can be allocated for merit increases will grow, CEO Satya Nadella said in May.

Microsoft is facing challenges as interest rates rise, inflation rates remain high and economic growth dampens globally. During the first half of 2022, the company faced obstacles as Russia invaded Ukraine, employees sought more transparency on salaries as the labor market remains favorable for employees.

“Fundamentally, we have a business model and a product portfolio that is designed to build the digital infrastructure and the services that help other people succeed,” Microsoft President Brad Smith said in an interview with GeekWire last week at his office in Redmond, Washington. “And now we need to put that to work in a variety of ways that in some manner, are testing us anew.”

Employees have sought changes and Microsoft responded by increasing compensation by almost doubling its budget globally for merit-based increases in salary and by adding its range for stock-based compensation each year by a minimum of 25% for employees who are working at the senior director level and below. 

'The Economy Is Continuing to Change'

The company said it would also lower its use of non-compete agreements and plans to disclose salary ranges in job posts in the U.S. in 2023.

"The world’s continuing to change, employee expectations are continuing to change, the economy’s continuing to change," Smith said.

Among tech companies, Microsoft's stock has fared better. The company's shares fell by 17.24% during the past six months and 21.78% year-to-date compared to Google's ( (GOOGL) - Get Alphabet Inc. Report) stock that declined by 18.08% during the past six months and 22.15% year-to-date.

But Microsoft is hedging against a slowdown in the economy by cutting back on the number of employees it hires, following social media company Snap ( (SNAP) - Get Snap Inc. Class A Report) and Meta, who also said they also planned to hire fewer employees.

The tech behemoth's strategy has shifted and before new positions can be made available, employees need to request permission from the leadership team of Rajesh Jha, executive vice president in charge of Office and part of Windows, a source told CNBC. 

Will Profit Margins Be Affected?

Fewer employees that work on the Windows, Office and Teams chat and conferencing software groups will be hired, according to a Bloomberg. 

Microsoft declines to comment.

Businesses are likely to cut back on spending in the latter half of 2022 and that will impact Microsoft's profit margin. Sales of Microsoft Office depend on corporations spending money - nearly 88% of the company's $11 billion in quarterly Office revenue comes from business clients, according to estimates made by RBC Capital Markets. 

While Office and Windows are still increasing in sales, they lag behind the company's Azure public cloud business. The number one company in cloud infrastructure is Amazon Web Services.

The pace of growth of both Windows and Office will decline, Microsoft’s finance chief, Amy Hood, told analysts last month.

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