The financial decay, coupled with Thompson's changes, could make it increasingly difficult to retain the best workers.
"You have to wonder why any employee that is any good would stay at this point," said BGC Financial analyst Colin Gillis. "Will Thompson have the horses he needs to reach his goals?"
Even before Thompson arrived, some of Yahoo's most talented employees were defecting to other jobs.
Meanwhile, Google and Facebook are hiring even more engineers and sales representative to develop new products and sell more ads. Google added 8,000 employees last year, and Facebook recently moved to sprawling headquarters in Menlo Park, Calif., in anticipation of tripling its current workforce of about 3,200 people within the next few years.
Besides employee morale issues, Thompson also will have to deal with a disgruntled shareholder during the next few months.
Activist investor manager Daniel Loeb, who controls a 5.8 percent stake in Yahoo through a hedge fund called Third Point LLC, thinks he can help the company bounce back if he and three of his allies are allowed on the board of directors. Thompson told Loeb he wasn't the best-qualified candidate for the board, although he says Yahoo was willing to work with Third Point to find two mutually acceptable directors.
Loeb is now attacking Thompson and the rest of Yahoo's board in a campaign to persuade the company's shareholders to elect him and three other alternative candidates as directors. If a truce isn't reached, the dispute will be revolved in a shareholder vote at Yahoo's annual meeting, which probably won't be held until June, at the earliest.
Loeb described the layoffs as "unfortunately necessary" but criticized Thompson for imposing them without explaining how he intends to revive Yahoo's revenue growth.
"Many of Yahoo's senior-level employees and investors have apparently seen enough and heard too little," Loeb said in a statement.
Thompson alienated much of Silicon Valley by suing Facebook as the social networking company is trying to raise $5 billion in an initial public offering of stock expected to be completed next month. The lawsuit accuses Facebook of infringing on 10 of Yahoo's Internet patents.
Facebook denied the allegations and retaliated with a patent-infringement lawsuit against Yahoo.
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