No Rules Rules: Netflix and the Culture of Reinvention

by Reed Hastings

Netflix assumes that you have amazing judgment, . . . . And judgment is the solution for almost every ambiguous problem. Not process.

After the layoffs, with only the most talented eighty people, we had a smaller amount of talent overall, but the amount of talent per employee was greater. Our talent “density” had increased. We learned that a company with really dense talent is a company everyone wants to work for. High performers especially thrive in environments where the overall talent density is high.

We found that being surrounded by the best catapulted already good work to a whole new level. Most important, working with really talented colleagues was exciting, inspiring, and a lot of fun—something that remains as true today with the company at seven thousand employees as it was back then at eighty.

performance—both good and bad—is infectious. If you have adequate performers, it leads many who could be excellent to also perform adequately.

At Netflix, it is tantamount to being disloyal to the company if you fail to speak up when you disagree with a colleague or have feedback that could be helpful. After all, you could help the business—but you are choosing not to. When I first heard about the candor at Netflix, I was skeptical. Netflix promotes not just candid feedback but also frequent feedback, which, in my experience, just increases the chances that you will hear something hurtful.

If there is one thing we hate more than receiving criticism one-on-one, it is to receive that negative feedback in front of others.

receiving feedback in front of the group sends off danger alarms in the human brain. The brain is a survival machine, and one of our most successful survival techniques is the desire to find safety in numbers.

receiving positive feedback stimulates your brain to release oxytocin, the same feel-good hormone that makes a mother happy when she nurses her baby. It’s no wonder so many people prefer to dish out compliments rather than give honest, constructive feedback.

A feedback loop is one of the most effective tools for improving performance. We learn faster and accomplish more when we make giving and receiving feedback a continuous part of how we collaborate. Feedback helps us to avoid misunderstandings, creates a climate of co-accountability, and reduces the need for hierarchy and rules.

The goal at Netflix is to help each other succeed, even if that means feelings occasionally get hurt. More important, we’ve found that in the right environment, with the right approach, we can give the feedback without hurting feelings.

You might think the first step for cultivating candor would be to begin with what’s easiest: having the boss give copious feedback to her staff. I recommend instead focusing first on something much more difficult: getting employees to give candid feedback to the boss. This can be accompanied by boss-to-employee feedback. But it’s when employees begin providing truthful feedback to their leaders that the big benefits of candor really take off.

The higher you get in an organization, the less feedback you receive, and the more likely you are to “come to work naked” or make another error that’s obvious to everyone but you. This is not just dysfunctional but dangerous.

Don’t just ask for feedback but tell and show your employees it is expected (such as his instructions to Brian). Then when you receive the feedback, respond with belonging cues; in this case, the hand Ted put on that guy’s shoulder in the meeting.

the provider must understand that the decision to react to the feedback is entirely up to the recipient.

Most people, like Doug, find it especially difficult to give feedback in real time. Many have been deeply conditioned to wait for the right moment and the right conditions before telling the truth, so that the usefulness of the feedback often all but fades away. This brings us to the third priority for instilling a culture of candor on your team.

The only remaining question is when and where to give feedback—and the answer is anywhere and anytime. That might mean giving feedback in private, behind closed doors.

In most organizations, shouting criticism out in front of a group, while that person is in the middle of a presentation, would be considered inappropriate and unhelpful. But if you manage to inculcate an effective culture of candor, all involved would recognize that this feedback from Bianca was a gift.

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.

When Neil left on vacation, often he went to an isolated place. Each time he came back he had a fantastic new idea for how to move the business forward.

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.

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.

In the absence of written policy, every manager must spend time speaking to the team about what behaviors fall within the realm of the acceptable and appropriate.

vacation parameters, such as, “only one team member can be out at a time” and “make sure you’re not causing the rest of the group undue grief before booking your vacation.” The clearer the manager is when setting context, the better. That accounting director might say, “Please give at least three months’ advance warning for a month out of the office, but a month’s notice is usually fine for a five-day vacation.”

Giving employees more freedom led them to take more ownership and behave more responsibly. That’s when Patty and I coined the term “Freedom and Responsibility.” It’s not just that you need to have them both; it’s that one leads to the other. It began to dawn on me. Freedom is not the opposite of accountability, as I’d previously considered. Instead, it is a path toward it.

That works better. It is not in Netflix’s best interest that the entire content team fly business from L.A. to Mexico. But if you have to take the red-eye from L.A. to New York and give a presentation the next morning it would likely be in Netflix’s best interest that you fly business, so you don’t have bags under your eyes and slurred speech when the big moment arises.

This is what I mean by “context at the front end.” David’s instruction to imagine explaining your purchases to your bosses is not a simple exercise in make-believe. If you aren’t careful with your spending, you likely WILL have to explain your purchases. At Netflix you don’t have to complete a purchase order and wait for approval to buy something. You just buy it, take a photo of the receipt, and submit it directly for reimbursement. But that doesn’t mean no one pays attention to what you spend.

When employees realize their managers are keeping an eye on expenses, they aren’t likely to test the limits much. This is one way to curb spending,

For those managers who are ready to jump all in with F&R, there is another route, eliminating the administrative hassle of looking over receipts and leaving it to our internal auditing department to find abuse. But if they do find abuse, it’s all over for the employee.

If your people choose to abuse the freedom you give them, you need to fire them and fire them loudly, so others understand the ramifications. Without this, freedom doesn’t work.

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.

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

Processes provide management with a sense of control, but they slow everything way down.

we see how a simple expense guideline like “act in the company’s best interest” gives your employees both freedom of choice and the ability to move fast. But freedom and speed aren’t the only benefits. A third, and more surprising benefit, is that some employees actually spend less when the expense policy is lifted.

Claudio’s story demonstrates the curious impact of rules. When you set them, some people will look eagerly for a way to take advantage of them. If Viacom told employees, “Order one starter, one main course, and one bottle of wine for two people,” they might order caviar, lobster, and a bottle of champagne. That’s within the rules but very expensive. When you tell people to behave in the company’s best interest, they order Caesar salads, chicken breasts, and a couple of beers. The organization with the policy is not necessarily the one saving money.

If we were going to remove controls, we would need to make sure that our employees had all the information they needed to make good decisions without management oversight. This would require increasing organizational transparency and eliminating company secrets. If we wanted employees to make good decisions for themselves, they would have to understand as much about what was going on in the business as those at the top.

The success of Netflix is founded on these types of unlikely stories: small teams consisting exclusively of significantly above-average performers—what Reed refers to as dream teams—working on big hairy problems.

If you’re hiring someone for an operational position, say window washer, ice-cream scooper, or driver, the best employee might deliver double the value of the average.

In all creative roles, the best is easily ten times better than average. The best publicity expert can dream up a stunt that attracts millions more customers than the average one.

having a lean workforce has side advantages. Managing people well is hard and takes a lot of effort. Managing mediocre-performing employees is harder and more time consuming. By keeping our organization small and our teams lean, each manager has fewer people to manage and can therefore do a better job at

In 2003, we learned that bonuses are bad for business at about the same time that I came across the rock-star principle.

the entire bonus system is based on the premise that you can reliably predict the future, and that you can set an objective at any given moment that will continue to be important down the road. But at Netflix, where we have to be able to adapt direction quickly in response to rapid changes, the last thing we want is our employees rewarded in December for attaining some goal fixed the previous January. The risk is that employees will focus on a target instead of spot what’s best for the company in the present moment.

Big salaries, not merit bonuses, are good for innovation.

By avoiding pay-per-performance bonuses you can offer higher base salaries and retain your highly motivated employees. All this increases talent density.

The answer to this question is that when it comes to review time, instead of looking at what that employee is worth on the market, most companies use “raise pools” and “salary bands” to determine raises.

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.

The one thing we try to avoid doing when possible is adjusting salaries down if the market rate falls (although we might do this if someone moves from one location to another).

Figuring out top of market can take a lot of time, but not as much time as finding and training a replacement when your best people leave for more money at another company.

In order to fortify the talent density in your workforce, for all creative roles hire one exceptional employee instead of ten or more average ones. Hire this amazing person at the top of whatever range they are worth on the market. Adjust their salary at least annually in order to continue to offer them more than competitors would.