Powerful: Building a Culture of Freedom and Responsibility

by Patty McCord

Most companies are clinging to the established command-and-control system of top-down decision making but trying to jazz it up by fostering “employee engagement” and by “empowering” people. Compelling but misguided ideas about “best practices” prevail: bonuses and pay tied to annual performance reviews; big HR initiatives like the recent craze for lifelong learning programs; celebrations to build camaraderie and make sure people have some fun; and, for employees who are struggling, performance improvement plans. These foster empowerment, and with that comes engagement, which leads to job satisfaction and employee happiness, and that leads to high performance, or so the thinking goes.

As I introduce the alternative management methods we developed at Netflix, I’m going to challenge all of the basic premises of management today: that it is about building loyalty and retention and career progression and implementing structures to ensure employee engagement and happiness. None of that is true. None of this is the job of management. Here is my radical proposition: a business leader’s job is to create great teams that do amazing work on time. That’s it. That’s the job of management.

I’ve often said that while I’ve removed the words “policy” and “procedure” from my vocabulary, I love discipline. My whole career I have gotten along well with engineers, because engineers are very, very disciplined. When engineers start to whine about a process you’re trying to implement, you want to really dig into what’s bothering them, because they hate senseless bureaucracy and stupid process. But they don’t mind discipline at all.

The most important thing to understand about transforming a culture, whether that of a team or a whole company, is that it isn’t a matter of simply professing a set of values and operating principles. It’s a matter of identifying the behaviors that you would like to see become consistent practices and then instilling the discipline of actually doing them.

The prevailing philosophy of management today is that if you want great productivity from people, you must first motivate them with incentives and then make sure they know you’re looking over their shoulders to keep them accountable. So many companies have department objectives and team objectives and individual objectives and a formal annual review process for measuring performance against them. That structure, that waterfall, is very logical, very reasonable. But it’s no longer remotely adequate. Saying to employees, “If you do X, you’ll be rewarded with Y,” assumes a static system. Yet no business today is static. More fundamentally, while rewards are great, there is no better reward than making a significant contribution to meeting a challenge. I’m a big fan of goals. Couldn’t be a bigger fan. It’s the usual management approach to achieving them that is so wrong. Typically, the time frames we set and the complexity of the structure created for leading teams and monitoring results make achieving goals harder than it needs to be.

But then Reed said, “Wouldn’t it be great if we created a company that we really both wanted to work at?” Now I was intrigued. At Pure I’d come in after the model had been fashioned. The opportunity to join in the invention this time was tantalizing. “If we did that,” I asked him, “how would you know it was great?” He said, “Oh, I’d want to come to work every day and solve these problems with these people.” I loved the spirit of that. I think Reed expressed in that statement exactly what people most want from work: to be able to come in and work with the right team of people— colleagues they trust and admire—and to focus like crazy on doing a great job together.

People need to see the view from the C suite in order to feel truly connected to the problem solving that must be done at all levels and on all teams, so that the company is spotting issues and opportunities in every corner of the business and effectively acting on them. The irony is that companies have invested so much in training programs of all sorts and spent so much time and effort to incentivize and measure performance, but they’ve failed to actually explain to all of their employees how their business runs.

Any company with a customer service organization wants those people to be highly engaged, and the first step is to teach them how to read the company’s P&L. Of course, generally they are the last people the P&L would be shown to. After all, most of them don’t stay long, right? They’re the lowest on the totem pole. Yet all business success is fundamentally driven by word-of-mouth marketing, and the people who are in direct contact with customers must understand that their every interaction with a customer leads to that person telling another person, for free, either to use the company’s product or service or not to. Everyone in customer service, from day one, should understand exactly how the experience they provide customers directly impacts the bottom line. Making that clear isn’t difficult. Every company has calculated its cost of customer acquisition, and each person who becomes a customer on another customer’s recommendation saves the company that amount of money. Every company can share that information with service representatives as part of bringing them on board.

It’s ironic how little information about strategy, operations, and results is generally shared with employees throughout companies. After all, public companies share that information with the whole world these days. Why should the investors on earnings calls know more about what’s happening in your business than most of the people working in it? I think it would be great if companies held the equivalent of an earnings call for all employees. In fact, why not have them listen to the actual earnings calls?

If your people aren’t informed by you, there’s a good chance they’ll be misinformed by others. If you don’t tell them about how the business is doing, what your strategy is, the challenges you’re facing, and what market analysts think of how you’re doing, then they will get that information elsewhere—either from colleagues, who will often be equally ill informed, or from the Web, which loves nothing so much as a rumor of doom or a juicy conspiracy theory.

How do you know when people are well enough informed? Here’s my measure. If you stop any employee, at any level of the company, in the break room or the elevator and ask what are the five most important things the company is working on for the next six months, that person should be able to tell you, rapid fire, one, two, three, four, five, ideally using the same words you’ve used in your communications to the staff and, if they’re really good, in the same order. If not, the heartbeat isn’t strong enough yet.

The job of communicating is never done. It’s not an annual or quarterly or even monthly or weekly function. A steady stream of communication is the lifeblood of competitive advantage.

Is everyone aware of difficult challenges your company faces? Have you asked them their thoughts about how to tackle these? Do you have a disciplined process for disseminating information and discussing challenges?

Openly sharing criticism was one of the hardest parts of the Netflix culture for new employees to get used to, but most quickly came to appreciate how valuable the openness was. When I talked about this with one of our great team leaders, Eric Colson, he told me the giving and taking of honest feedback was central to how well his teams worked, and his teams worked beautifully. That’s why Eric rose to the position of VP of data science and engineering in less than three years at the company, having begun as an individual contributor. He’d been managing a small data analytics team at Yahoo! before coming to Netflix, and he recalled that the culture there was to be super supportive of people and not to criticize them. He told me that when he started getting critical feedback from colleagues at Netflix, “It hurt. People told me, ‘Colson, you’re not good with communication; when you need to get a message out to a wide audience, you take too long to make the point and it’s unclear.’” His initial reaction was to think, Oh yeah? Well, I’ve got a lot of things to say about you too! But before long, he realized that “when you reflect on what they’ve said, you see it from their point of view, and you learn how to improve on those things. That directness was really helpful.” Again and again at Netflix I saw that people rebounded quickly from the initial shock of receiving negative feedback and learned not only to appreciate it but to deliver it themselves much more consistently and th...

Transparency also helps ensure that people take ownership of the positions they’ve advocated and don’t get hopelessly caught up in finger-pointing after the fact, or at least not as much. Let’s face it: it’s fun to say “I told you so.” But it’s toxic to productive problem solving.

My point was that if you rely on anonymous surveys and prescribed questions, you will not get quality information. If you want to know what people are thinking, there is no good replacement for simply asking them, best of all face to face.

People can handle being told the truth, about both the business and their performance. The truth is not only what they need but also what they intensely want. ▶ Telling the truth about perceived problems, in a timely fashion and face to face, is the single most effective way to solve problems. ▶ Practicing radical honesty diffuses tensions and discourages backstabbing; it builds understanding and respect. ▶ Radical honesty also leads to the sharing of opposing views, which are so often withheld and which can lead to vital insights. ▶ Failing to tell people the truth about problems in their performance leads to an undue burden being shouldered by managers and other team members. ▶ The style of delivery is important; leaders should practice giving critical feedback so that it is specific and constructive and comes across as well intentioned. ▶ Consider setting up a system for colleagues to offer one another critiques. We created a successful one at Netflix and instituted an annual feedback day for the whole company to share comments with anyone they had thoughts for. ▶ Model openly admitting when you are wrong. In addition, talk about what went into your decisions and where you went wrong. That encourages employees to share ideas and opposing views with you, even if they directly contradict your position.

• How open have you been with your team about the current prospects of your business and the most difficult problems the company and your team are dealing with? Do people at all levels know the challenges the company is facing in the next six months?

When was the last time you talked openly with your team about a mistake you made in addressing a business issue?

I cautioned earlier about the limited value of formal employee-development practices such as conflict-resolution and management classes. There is simply no comparison between the learning employees may take away from such courses and what they’ll gain from participating in debates about business decisions. Ask anyone at your company whether they’d rather spend a day in a negotiation seminar or be able to ask—with impunity—a tough but fair question of a high-level manager at a big company meeting or engage in a serious debate with their managers about the problem they’re being asked to solve. I promise you, nobody but nobody is going to choose the seminar.

We had not set up a rigid compensation system as so many companies do, with their bell curve distributions and 6 percent merit increase budgets and strict salary bands.

We also did not have a bonus system. If your employees are adults who put the company first, an annual bonus won’t make them work harder or smarter. We handled equity compensation in a completely different way than most companies do. We allowed employees to tell us what portion of their compensation they wanted in stock options, and rather than adding those onto their salary, the amount was in lieu of a portion their salary. In addition, rather than using stock options as “golden handcuffs,” we imposed no vesting period. Options would vest on a monthly basis. Those options were available to exercise for ten years, allowing for long-term increase in the stock price.

So now you want to set up a very complicated system that you have to explain to finance and you have to explain to the board and you have to explain to the stock committee. If they agree, then you have to set up software so you can track results versus goals, when you know that you don’t really know whether those goals are realistic.” He said, “But I want to reward them.” And I said, “Well, if you hit all your targets and everything works out, great; give them a ton of money. Throw stock at them. You don’t need a bonus system tied to goals. I know you and I know your team and I know that a bonus program is not going to incent them to do anything they’re not going to do anyway.”

One of the first things I did at Netflix was to decouple our pay system from the feedback process. I appreciate that it’s difficult to accept that this is possible, let alone advisable. The systems have become seemingly inextricably intertwined. Indeed, the tight bond between the performance review process and salary increase and bonus calculations is one of the main factors holding companies back from doing away with the review process. Which is one of the good reasons for decoupling the systems.

We also decided at Netflix that rather than offer new hires what would be widely deemed a reasonable increase over their pay at their former job, we would pay top of market and insist on high performance. Say a manager is interviewing two people with very similar backgrounds. The woman makes $130,000 and the man $150,000, a common discrepancy due to the long history of wage discrimination. They’re comparably good. Should the manager offer them both $160,000? The answer is emphatically yes. But when I offer this advice, I often get the reaction “That’s crazy! I mean, if we give her $140,000, she’s going to be over the moon!”

Companies tend to be adamant that salaries and other compensation should be kept confidential. One founder I consulted with told me that compensation information is like medical information. But really, it’s not. One of the craziest things about companies paying so much to get salary survey data is that they usually don’t share it with employees, which should be part of communicating to people why they’re being compensated as they are. Companies should not be reluctant to explain their compensation rationale. They withhold the information partially because so many are following some below-top-of-market percentile rule, and they think their employees will feel they should be getting compensated at a higher overall market level. They also feel that specific individuals will react badly if they learn they’re making less than colleagues they perceive to be doing work of comparable value. No question: pay is one of people’s favorite things to gripe and gossip about. But that’s actually a great reason to be more transparent about it. Being open allows you to explain to people why others are being paid as they are. Having a good rationale for the discrepancy reinforces that you’re a performance culture. If you don’t have a rationale you can share openly with people, then you probably ought to take a hard look at why.