No Rules Rules: Netflix and the Culture of Reinvention

by Reed Hastings

we had one thing that Blockbuster did not: a culture that valued people over process, emphasized innovation over efficiency, and had very few controls. Our culture, which focused on achieving top performance with talent density and leading employees with context not control, has allowed us to continually grow and change as the world, and our members’ needs, have likewise morphed around us. Netflix is different. We have a culture where No Rules Rules.

For many years, one of America’s biggest corporations proudly exhibited the following list of values in the lobby of its headquarters: “Integrity. Communication. Respect. Excellence.” The company? Enron.

the Netflix Culture Deck struck me as hypermasculine, excessively confrontational, and downright aggressive—perhaps a reflection of the kind of company you might expect to be constructed by an engineer with a somewhat mechanistic, rationalist view of human nature. Yet despite all this, one fact cannot be denied . . . NETFLIX HAS BEEN REMARKABLY SUCCESSFUL

If you give employees more freedom instead of developing processes to prevent them from exercising their own judgment, they will make better decisions and it’s easier to hold them accountable. This also makes for a happier, more motivated workforce as well as a more nimble company.

When talented staff members get into the feedback habit, they all get better at what they do while becoming implicitly accountable to one another, further reducing the need for traditional controls.

a team with one or two merely adequate performers brings down the performance of everyone on the team.

a great workplace isn’t about a lavish office, a beautiful gym, or a free sushi lunch. It’s about the joy of being surrounded by people who are both talented and collaborative. People who can help you be better. When every member is excellent, performance spirals upward as employees learn from and motivate one another.

From the 2001 layoffs, Reed learned that performance—both good and bad—is infectious. If you have adequate performers, it leads many who could be excellent to also perform adequately. And if you have a team consisting entirely of high performers, each pushes the others to achieve more.

even when other team members were exceptionally talented and intelligent, one individual’s bad behavior brought down the effectiveness of the entire team. In dozens of trials, conducted over month-long periods, groups with one underperformer did worse than other teams by a whopping 30 to 40 percent.

Felps demonstrated what Patty and I had already learned in 2001. If you have a group with a few merely adequate performers, that performance is likely to spread, bringing down the performance of the entire organization.

A fast and innovative workplace is made up of what we call “stunning colleagues”—highly talented people, of diverse backgrounds and perspectives, who are exceptionally creative, accomplish significant amounts of important work, and collaborate effectively.

Jerks, slackers, sweet people with nonstellar performance, or pessimists left on the team will bring down the performance of everyone.

If you are promoting a culture of candor on your team, you have to get rid of the jerks. Many may think, “This guy is so brilliant, we can’t afford to lose him.” But it doesn’t matter how brilliant your jerk is, if you keep him on the team you can’t benefit from candor. The cost of jerkiness to effective teamwork is too high. Jerks are likely to rip your organization apart from the inside. And their favorite way to do that is often by stabbing their colleagues in the front and then offering, “I was just being candid.”

A culture of candor does not mean that you can speak your mind without concern for how it will impact others. On the contrary, it requires that everyone think carefully about the 4A guidelines. This requires reflection and sometimes preparation before you give feedback, as well as monitoring and coaching from those in charge.

Coach your employees to give and receive feedback effectively, following the 4A guidelines. As the leader, solicit feedback frequently and respond with belonging cues when you receive it. Get rid of jerks as you instill a culture of candor.

With a climate of candor, the boss is no longer the primary individual to correct an employee’s undesirable behavior. When the entire community speaks openly about which individual behaviors advance the company, and which don’t, the boss doesn’t have to get so involved in overseeing an employee’s work.

the value of creative work should not be measured by time. This is a relic of an industrial age when employees did tasks that are now done by machines.

He was living proof of why companies benefit when their employees take vacations. Time off provides mental bandwidth that allows you to think creatively and see your work in a different light. If you are working all the time, you don’t have the perspective to see your problem with fresh eyes.

LEADERS MUST MODEL BIG VACATION-TAKING

If the CEO is taking only two weeks’ vacation, of course his employees feel the unlimited plan doesn’t give them much freedom. They’re bound to take more time off with three allotted weeks than with an indefinite number and a boss who models just two. In the absence of a policy, the amount of vacation people take largely reflects what they see their boss and colleagues taking. Which is why, if you want to remove your vacation policy, start by getting all leaders to take significant amounts of vacation and talk a lot about it.

With the absence of a policy, most people look around their department to understand the “soft limits” of what’s acceptable.

If you want to remove the vacation policy in your organization, lead by example. Even at Netflix where I model taking off six weeks a year and encourage my leadership team to do the same,

As a company grows, the variety in how leaders set context and model behavior increases.

GIVE FREEDOM TO GET RESPONSIBILITY

David Wells, while CFO, estimated travel expenses are about 10 percent higher than if Netflix had a formal approval system. But, according to Reed, that 10 percent is a small price to pay for the significant gains that come with it.

even if your employees spend a little more when you give them freedom, the cost is still less than having a workplace where they can’t fly. If you limit their choices by making them check boxes and ask for permission, you won’t just frustrate your people, you’ll lose out on the speed and flexibility that comes from a low-rule environment.

freedom isn’t the only benefit of removing your expense policy. The second benefit is that the lack of process speeds everything up.

As companies grow from fast and flexible start-ups into mature businesses, they often create entire departments to monitor employee spending, which gives management a sense of control, but slows everything way down.

When you tell people you trust them, they will show you how trustworthy they are.

Performance-related bonuses are almost universally deployed in the US, and frequently elsewhere. But Netflix doesn’t use them. BONUSES ARE BAD FOR FLEXIBILITY In 2003, we learned that bonuses are bad for business

I don’t buy the idea that if you dangle cash in front of your high-performing employees, they try harder. High performers naturally want to succeed and will devote all resources toward doing so whether they have a bonus hanging in front of their nose or not.

quote from former chief executive of Deutsche Bank John Cryan: “I have no idea why I was offered a contract with a bonus in it because I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less.” Any executive worth her paycheck would say the same.

Research confirms Reed’s hunch. Contingent pay works for routine tasks but actually decreases performance for creative work.

Creative work requires that your mind feel a level of freedom. If part of what you focus on is whether or not your performance will get you that big check, you are not in that open cognitive space where the best ideas and most innovative possibilities reside. You do worse.

The big surprise when we decided not to pay bonuses on top of salary was how much more top talent we were able to attract. Many imagine you lose your competitive edge if you don’t offer a bonus. We have found the contrary: we gain a competitive edge in attracting the best because we just put all that money into salary.

Research confirms what João and Sugarplum already suspected. You’ll get more money if you change companies than if you stay put. In 2018, the average annual pay raise per employee in the US was about 3 percent (5 percent for top performers). For an employee quitting her job and joining a new company, the average raise was between 10 percent and 20 percent. Staying in the same job is bad for your pocketbook.

In a high-performance environment, paying top of market is most cost-effective in the long run. It is best to have salaries a little higher than necessary, to give a raise before an employee asks for it, to bump up a salary before that employee starts looking for another job, in order to attract and retain the best talent on the market year after year. It costs a lot more to lose people and to recruit replacements than to overpay a little in the first place.

managers at most companies make their employees feel like traitors for speaking to recruiters at other companies. Netflix doesn’t see it this way.

If you can’t afford to pay your best employees top of market, then let go of some of the less fabulous people in order to do so. That way, the talent will become even denser.

when one employee abuses your trust, deal with the individual case and double your commitment to continue transparency with the others. Do not punish the majority for the poor behavior of a few.

Netflix treats employees like adults who can handle difficult information and I love that. This creates enormous feelings of commitment and buy-in from employees.

At most companies, the boss is there to approve or block the decisions of employees. This is a surefire way to limit innovation and slow down growth. At Netflix, we emphasize that it’s fine to disagree with your manager and to implement an idea she dislikes. We don’t want people putting aside a great idea because the manager doesn’t see how great it is. That’s why we say at Netflix: DON’T SEEK TO PLEASE YOUR BOSS. SEEK TO DO WHAT IS BEST FOR THE COMPANY.

at most companies, even at those who have leaders who don’t micromanage, employees seek to make the decision the boss is most likely to support.

People desire and thrive on jobs that give them control over their own decisions. Since the 1980s, management literature has been filled with instructions for how to delegate more and “empower employees to empower themselves.”

The more people are given control over their own projects, the more ownership they feel, and the more motivated they are to do their best work. Telling employees what to do is so old-fashioned, it leads to screams of “micromanager!” “dictator!” and “autocrat!”

When the boss steps out of the role of “decision approver,” the entire business speeds up and innovation increases.

If your employees are excellent and you give them freedom to implement the bright ideas they believe in, innovation will happen.

If you hope for more innovation on your team, teach employees to seek ways to move the business forward, not ways to please their bosses. Coach your staff to challenge their managers

“We don’t expect employees to get approval from their boss before they make decisions. But we do know that good decisions require a solid grasp of the context, feedback from people with different perspectives, and awareness of all the options.” If someone uses the freedom Netflix gives them to make important decisions without soliciting others’ viewpoints, Netflix considers that a demonstration of poor judgment.

The Netflix Innovation Cycle If you have an idea you’re passionate about, do the following: “Farm for dissent,” or “socialize” the idea. For a big idea, test it out. As the informed captain, make your bet. If it succeeds, celebrate. If it fails, sunshine it.