Time for Changing Unless Unless People Group Had an Interest in His Art
Sheryl Sandberg has called it 1 of the well-nigh important documents e'er to come out of Silicon Valley. It's been viewed more than five million times on the web. Simply when Reed Hastings and I (forth with some colleagues) wrote a PowerPoint deck explaining how nosotros shaped the civilization and motivated performance at Netflix, where Hastings is CEO and I was chief talent officeholder from 1998 to 2012, we had no idea it would go viral. We realized that some of the talent management ideas we'd pioneered, such every bit the concept that workers should be allowed to take whatever holiday time they experience is appropriate, had been seen every bit a little crazy (at to the lowest degree until other companies started adopting them). Just we were surprised that an unadorned set of 127 slides—no music, no animation—would become then influential.
People find the Netflix approach to talent and culture compelling for a few reasons. The most obvious one is that Netflix has been really successful: During 2013 alone its stock more than tripled, it won 3 Emmy awards, and its U.S. subscriber base grew to nigh 29 million. All that aside, the arroyo is compelling considering it derives from mutual sense. In this commodity I'll go beyond the bullet points to draw five ideas that take defined the way Netflix attracts, retains, and manages talent. But first I'll share ii conversations I had with early on employees, both of which helped shape our overall philosophy.
The get-go took identify in late 2001. Netflix had been growing quickly: We'd reached about 120 employees and had been planning an IPO. Simply later on the dot-com bubble burst and the 9/xi attacks occurred, things changed. It became clear that we needed to put the IPO on hold and lay off a 3rd of our employees. It was brutal. Then, a bit unexpectedly, DVD players became the hot souvenir that Christmas. By early 2002 our DVD-by-mail subscription business was growing like crazy. Suddenly we had far more work to do, with xxx% fewer employees.
One 24-hour interval I was talking with one of our best engineers, an employee I'll call John. Before the layoffs, he'd managed three engineers, but at present he was a one-human department working very long hours. I told John I hoped to rent some aid for him soon. His response surprised me. "There'due south no rush—I'k happier now," he said. It turned out that the engineers nosotros'd laid off weren't spectacular—they were just adequate. John realized that he'd spent too much fourth dimension riding herd on them and fixing their mistakes. "I've learned that I'd rather work by myself than with subpar performers," he said. His words echo in my listen whenever I draw the most basic element of Netflix's talent philosophy: The best thing you can do for employees—a perk ameliorate than foosball or complimentary sushi—is hire merely "A" players to work aslope them. Excellent colleagues trump everything else.
The second conversation took place in 2002, a few months subsequently our IPO. Laura, our bookkeeper, was bright, hardworking, and creative. She'd been very important to our early growth, having devised a organization for accurately tracking pic rentals so that nosotros could pay the correct royalties. But now, as a public company, nosotros needed CPAs and other fully credentialed, deeply experienced accounting professionals—and Laura had only an associate's caste from a community college. Despite her work ethic, her rail tape, and the fact that nosotros all really liked her, her skills were no longer adequate. Some of us talked about jury-rigging a new role for her, only we decided that wouldn't be right.
So I sabbatum downwardly with Laura and explained the situation—and said that in low-cal of her spectacular service, we would give her a spectacular severance bundle. I'd braced myself for tears or histrionics, simply Laura reacted well: She was sad to be leaving but recognized that the generous severance would allow her regroup, retrain, and notice a new career path. This incident helped us create the other vital element of our talent direction philosophy: If we wanted only "A" players on our team, we had to be willing to let go of people whose skills no longer fit, no matter how valuable their contributions had once been. Out of fairness to such people—and, frankly, to aid us overcome our discomfort with discharging them—we learned to offer rich severance packages.
With these two overarching principles in heed, we shaped our approach to talent using the v tenets beneath.
Hire, Reward, and Tolerate Just Fully Formed Adults
Over the years we learned that if we asked people to rely on logic and common sense instead of on formal policies, near of the time we would get better results, and at lower cost. If you lot're careful to hire people who will put the company's interests outset, who understand and support the desire for a high-operation workplace, 97% of your employees will do the correct thing. Most companies spend endless fourth dimension and money writing and enforcing HR policies to deal with problems the other 3% might cause. Instead, nosotros tried actually hard to not hire those people, and nosotros permit them get if it turned out we'd made a hiring fault.
Adultlike behavior means talking openly about issues with your boss, your colleagues, and your subordinates. It means recognizing that even in companies with reams of HR policies, those policies are frequently skirted as managers and their reports piece of work out what makes sense on a instance-by-case basis.
Allow me offer two examples.
When Netflix launched, nosotros had a standard paid-fourth dimension-off policy: People got 10 holiday days, ten holidays, and a few sick days. We used an honor system—employees kept rails of the days they took off and let their managers know when they'd exist out. Afterwards we went public, our auditors freaked. They said Sarbanes-Oxley mandated that we account for time off. Nosotros considered instituting a formal tracking system. Only and so Reed asked, "Are companies required to give time off? If not, can't nosotros just handle it informally and skip the accounting rigmarole?" I did some research and found that, indeed, no California law governed vacation time.
And so instead of shifting to a formal system, we went in the reverse direction: Salaried employees were told to accept whatever time they felt was appropriate. Bosses and employees were asked to work it out with 1 some other. (Hourly workers in call centers and warehouses were given a more structured policy.) Nosotros did provide some guidance. If you worked in accounting or finance, you shouldn't plan to be out during the starting time or the end of a quarter, considering those were decorated times. If you wanted xxx days off in a row, yous needed to see with 60 minutes. Senior leaders were urged to take vacations and to let people know about them—they were role models for the policy. (Virtually were happy to comply.) Some people worried nearly whether the organization would be inconsistent—whether some bosses would allow tons of time off while others would be stingy. In full general, I worried more than about fairness than consistency, because the reality is that in any organization, the highest-performing and most valuable employees get more leeway.
The company'southward expense policy is 5 words long: "Act in Netflix's best interests."
We too departed from a formal travel and expense policy and decided to but crave adultlike behavior there, besides. The visitor's expense policy is 5 words long: "Human activity in Netflix'due south best interests." In talking that through with employees, nosotros said we expected them to spend company coin frugally, as if it were their own. Eliminating a formal policy and forgoing expense account police shifted responsibleness to frontline managers, where it belongs. Information technology also reduced costs: Many large companies still use travel agents (and pay their fees) to book trips, as a way to enforce travel policies. They could salve money by letting employees book their own trips online. Similar about Netflix managers, I had to have conversations periodically with employees who ate at lavish restaurants (meals that would have been fine for sales or recruiting, simply not for eating lonely or with a Netflix colleague). We kept an eye on our IT guys, who were decumbent to buying a lot of gadgets. Just overall we found that expense accounts are another area where if you create a clear expectation of responsible behavior, most employees volition comply.
Tell the Truth About Operation
Many years agone we eliminated formal reviews. We had held them for a while but came to realize they didn't make sense—they were likewise ritualistic and too exceptional. So we asked managers and employees to have conversations well-nigh performance equally an organic part of their piece of work. In many functions—sales, engineering, product development—it's fairly obvious how well people are doing. (As companies develop meliorate analytics to measure performance, this becomes even truer.) Building a hierarchy and elaborate rituals around measuring functioning usually doesn't meliorate it.
Traditional corporate performance reviews are driven largely by fearfulness of litigation. The theory is that if you desire to get rid of someone, y'all need a paper trail documenting a history of poor achievement. At many companies, low performers are placed on "Functioning Improvement Plans." I detest PIPs. I think they're fundamentally dishonest: They never accomplish what their name implies.
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One Netflix managing director requested a PIP for a quality assurance engineer named Maria, who had been hired to help develop our streaming service. The applied science was new, and it was evolving very quickly. Maria's task was to find bugs. She was fast, intuitive, and hardworking. But in fourth dimension nosotros figured out how to automate the QA tests. Maria didn't like automation and wasn't specially good at it. Her new dominate (brought in to create a world-class automation tools squad) told me he wanted to beginning a PIP with her.
I replied, "Why carp? We know how this will play out. You'll write up objectives and deliverables for her to reach, which she tin't, considering she lacks the skills. Every Wed y'all'll have time away from your existent piece of work to hash out (and document) her shortcomings. Yous won't sleep on Tuesday nights, because you lot'll know it will be an awful meeting, and the aforementioned will be true for her. After a few weeks in that location will be tears. This will go on for three months. The entire squad will know. And at the end you'll fire her. None of this volition brand any sense to her, because for five years she'south been consistently rewarded for being great at her task—a job that basically doesn't exist anymore. Tell me again how Netflix benefits?
"Instead, let's just tell the truth: Engineering has changed, the company has changed, and Maria's skills no longer apply. This won't exist a surprise to her: She's been in the trenches, watching the work around her shift. Give her a cracking severance bundle—which, when she signs the documents, will dramatically reduce (if non eliminate) the hazard of a lawsuit." In my feel, people can handle anything as long as they're told the truth—and this proved to exist the case with Maria.
When we stopped doing formal performance reviews, nosotros instituted informal 360-degree reviews. Nosotros kept them fairly simple: People were asked to place things that colleagues should stop, start, or continue. In the beginning we used an anonymous software arrangement, but over fourth dimension nosotros shifted to signed feedback, and many teams held their 360s contiguous.
60 minutes people can't believe that a company the size of Netflix doesn't hold almanac reviews. "Are you lot making this up simply to upset us?" they ask. I'm not. If yous talk only and honestly about functioning on a regular basis, you can get good results—probably ameliorate ones than a company that grades everyone on a 5-point scale.
Managers Ain the Task of Creating Great Teams
Discussing the military's performance during the Iraq State of war, Donald Rumsfeld, the former defense force secretary, one time famously said, "You go to state of war with the army y'all have, not the army you might want or wish to accept at a later on time." When I talk to managers about creating corking teams, I tell them to approach the process in exactly the opposite way.
In my consulting work, I inquire managers to imagine a documentary well-nigh what their team is accomplishing six months from now. What specific results do they see? How is the work different from what the squad is doing today? Next I ask them to think about the skills needed to make the images in the movie become reality. Nowhere in the early stages of the process do I advise them to recall about the team they actually accept. Merely afterward they've done the piece of work of envisioning the platonic outcome and the skill set necessary to achieve information technology should they clarify how well their existing squad matches what they need.
If you lot're in a fast-changing business organization environment, you're probably looking at a lot of mismatches. In that case, you need to have honest conversations most letting some team members discover a place where their skills are a better fit. You lot too need to recruit people with the right skills.
We faced the latter challenge at Netflix in a fairly dramatic way equally nosotros began to shift from DVDs past mail to a streaming service. We had to store massive volumes of files in the cloud and figure out how huge numbers of people could reliably access them. (Past some estimates, up to a third of peak residential cyberspace traffic in the U.S. comes from customers streaming Netflix movies.) And then we needed to discover people securely experienced with cloud services who worked for companies that operate on a behemothic scale—companies like Amazon, eBay, Google, and Facebook, which aren't the easiest places to rent someone away from.
Our compensation philosophy helped a lot. About of its principles stem from ideals described before: Be honest, and treat people similar adults. For instance, during my tenure Netflix didn't pay performance bonuses, because we believed that they're unnecessary if you hire the right people. If your employees are fully formed adults who put the company starting time, an annual bonus won't brand them work harder or smarter. We likewise believed in market-based pay and would tell employees that it was smart to interview with competitors when they had the take a chance, in order to get a good sense of the market rate for their talent. Many HR people dislike information technology when employees talk to recruiters, just I always told employees to take the call, ask how much, and ship me the number—it's valuable information.
In addition, we used equity bounty much differently from the way about companies practise. Instead of larding stock options on top of a competitive bacon, we let employees choose how much (if whatever) of their compensation would be in the form of equity. If employees wanted stock options, we reduced their salaries accordingly. Nosotros believed that they were sophisticated enough to sympathize the merchandise-offs, gauge their personal tolerance for risk, and decide what was all-time for them and their families. We distributed options every calendar month, at a slight discount from the marketplace price. We had no vesting menstruation—the options could exist cashed in immediately. Most tech companies have a four-year vesting schedule and try to use options as "gold handcuffs" to assistance retentivity, but we never thought that made sense. If you see a better opportunity elsewhere, you should be allowed to have what you lot've earned and leave. If y'all no longer want to work with us, we don't want to hold you earnest.
We continually told managers that building a great team was their near of import job. We didn't measure out them on whether they were fantabulous coaches or mentors or got their paperwork done on fourth dimension. Corking teams accomplish great work, and recruiting the correct team was the top priority.
Leaders Own the Task of Creating the Company Culture
After I left Netflix and began consulting, I visited a hot start-up in San Francisco. It had lx employees in an open loft-style part with a foosball tabular array, two pool tables, and a kitchen, where a chef cooked lunch for the entire staff. As the CEO showed me around, he talked about creating a fun atmosphere. At 1 point I asked him what the nigh important value for his visitor was. He replied, "Efficiency."
"OK," I said. "Imagine that I work here, and it'south two:58 PM. I'm playing an intense game of puddle, and I'm winning. I estimate that I can finish the game in five minutes. Nosotros have a meeting at 3:00. Should I stay and win the game or cut information technology short for the meeting?"
"You should terminate the game," he insisted. I wasn't surprised; similar many tech showtime-ups, this was a casual identify, where employees wore hoodies and brought pets to work, and that kind of casualness oftentimes extends to punctuality. "Wait a second," I said. "You lot told me that efficiency is your most important cultural value. It's not efficient to delay a meeting and keep coworkers waiting because of a pool game. Isn't there a mismatch between the values yous're talking upwards and the behaviors y'all're modeling and encouraging?"
When I advise leaders most molding a corporate culture, I tend to meet three bug that need attention. This type of mismatch is ane. Information technology's a particular problem at outset-ups, where in that location'south a premium on casualness that can run counter to the loftier-performance ethos leaders want to create. I often sit in on company meetings to get a sense of how people operate. I frequently see CEOs who are clearly winging information technology. They lack a real agenda. They're working from slides that were obviously put together an hour earlier or were recycled from the previous round of VC meetings. Workers notice these things, and if they see a leader who'due south not fully prepared and who relies on charm, IQ, and improvisation, it affects how they perform, besides. It's a waste of time to articulate ideas well-nigh values and culture if you don't model and advantage beliefs that aligns with those goals.
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The second effect has to practise with making sure employees sympathise the levers that drive the business. I recently visited a Texas beginning-upwards whose employees were mostly engineers in their twenties. "I bet half the people in this room have never read a P&L," I said to the CFO. He replied, "It'southward true—they're not financially savvy or business savvy, and our biggest claiming is educational activity them how the business concern works." Even if y'all've hired people who want to perform well, you need to conspicuously communicate how the company makes money and what behaviors will bulldoze its success. At Netflix, for instance, employees used to focus too heavily on subscriber growth, without much awareness that our expenses often ran ahead of it: We were spending huge amounts ownership DVDs, setting up distribution centers, and ordering original programming, all earlier nosotros'd nerveless a cent from our new subscribers. Our employees needed to learn that even though revenue was growing, managing expenses really mattered.
The 3rd effect is something I call the split up personality beginning-up. At tech companies this ordinarily manifests itself as a schism between the engineers and the sales squad, but it can take other forms. At Netflix, for example, I sometimes had to remind people that in that location were large differences between the salaried professional staff at headquarters and the hourly workers in the phone call centers. At one point our finance team wanted to shift the whole company to direct-deposit paychecks, and I had to betoken out that some of our hourly workers didn't take bank accounts. That's a small case, just information technology speaks to a larger point: As leaders build a company civilisation, they need to be aware of subcultures that might crave different management.
Good Talent Managers Call up Like Businesspeople and Innovators First, and Like Hr People Final
Throughout most of my career I've belonged to professional person associations of human resources executives. Although I like the people in these groups personally, I ofttimes discover myself disagreeing with them. Also many devote time to morale improvement initiatives. At some places unabridged teams focus on getting their firm onto lists of "Best Places to Work" (which, when you dig into the methodologies, are really based just on perks and benefits). At a contempo briefing I met someone from a company that had appointed a "main happiness officer"—a concept that makes me slightly sick.
During xxx years in business I've never seen an HR initiative that improved morale. Hour departments might throw parties and hand out T-shirts, but if the stock toll is falling or the company's products aren't perceived equally successful, the people at those parties will quietly complain—and they'll use the T-shirts to wash their cars.
Instead of cheerleading, people in my profession should recollect of themselves as businesspeople. What's good for the company? How exercise we communicate that to employees? How tin can we help every worker empathize what we hateful by high performance?
Here'due south a unproblematic test: If your company has a performance bonus programme, go upwards to a random employee and ask, "Do yous know specifically what you should be doing right at present to increase your bonus?" If he or she can't answer, the 60 minutes squad isn't making things as clear as they need to exist.
At Netflix I worked with colleagues who were changing the way people consume filmed entertainment, which is an incredibly innovative pursuit—withal when I started there, the expectation was that I would default to mimicking other companies' best practices (many of them antiquated), which is how almost anybody seems to arroyo HR. I rejected those constraints. There's no reason the Hr squad can't be innovative too.
A version of this article appeared in the January–February 2014 issue of Harvard Business organisation Review.
Source: https://hbr.org/2014/01/how-netflix-reinvented-hr
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