No Rules Rules: Netflix and the Culture of Reinvention

by Reed Hastings

When employees realize their managers are keeping an eye on expenses, they aren’t likely to test the limits much.

leaving it to our internal auditing department to find abuse. But if they do find abuse, it’s all over for the employee.

This is the nub of F& R. 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.

When this happens, don’t overreact and create more rules. Just deal with the individual situation and move forward.

I was floored. Two and a half thousand dollars! Imagine, a junior engineer feeling so empowered that he spends that much without approval because he thinks it’s the right decision. I felt a wave of relief. Due to all the sign-off policies this could never have happened at Microsoft, HP, or any other company I have worked for.”

The second benefit is that the lack of process speeds everything up.

“Steve, how do I get the approval process started for this million-dollar expense?” I asked, braced for the worst. “You just sign it and fax it back to the vendor,” he told me. I kid you not. I nearly hit the floor.

A third, and more surprising benefit, is that some employees actually spend less when the expense policy is lifted.

At the end of the meal, when I saw the clients were getting ready for a round of drinking I made an excuse, paid the bill, and said good night. No way was I going to pay for their party.

Is it the best?

I realized during those long runs with Tristan that at Pure Software we had, without much thought, dummy-proofed the work environment. The result was that only dummies wanted to work there (well, not really dummies—but you get what I mean).

The company was getting big, and it was increasingly difficult for our leaders to keep track of what everyone was up to. This would normally be the time to introduce more policies and control processes in order to deal with the complexity that comes with growth.

Instead of increasing employee control as we grew, could we increase employee freedom?

SECTION TWO NEXT STEPS TO A CULTURE OF FREEDOM AND RESPONSIBILITY Fortify

By spring 2015, the script was purchased, and the deadline was looming. But Netflix didn’t have a studio yet. Hits like House of Cards and Orange Is the New Black had been made by other studios and then licensed exclusively to Netflix.

Netflix hadn’t produced content itself. Now Netflix was entering a new phase. “Ted had made it clear, future original shows we would produce ourselves.”

Laurence and Rob did the work of about twenty people.

small teams consisting exclusively of significantly above-average performers

But, as an engineer, I was familiar with a concept that has been understood in software since 1968, referred to as the “rock-star principle.” The rock-star principle is rooted in a famous study that took place in a basement in Santa Monica. At

The best guy was twenty times faster at coding, twenty-five times faster at debugging, and ten times faster at program execution than the programmer with the lowest marks.

Since then I have come to see that the best programmer doesn’t add ten times the value. She adds more like a hundred times.

The great software engineer is incredibly creative and can see conceptual patterns that others can’t.

We divided jobs into operational and creative roles.

For operational roles, you can pay an average salary and your company will do very well.

all creative roles, the best is easily ten times better than average.

But for all creative jobs we would pay one incredible employee at the top of her personal market, instead of using that same money to hire a dozen or more adequate performers.

I’ve also found 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.

Some 44 percent of respondents, well over any other category, stated they would leave their current job for one that pays more.

Patty suggested we link the bonus of our chief marketing officer, Leslie Kilgore, to the number of new customers we signed on.

been the most important goal last quarter, it was now the customer retention rate that really mattered. As

But what if, in order to be competitive five years down the line, a division needs to change course? Changing course involves investment and risk that may reduce this year’s profit margin.

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.

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

We found that as long as the task involved only mechanical skill, bonuses worked as would be expected: the higher the pay, the better the performance.

the outcome was the same as in the India study: the offer of a higher bonus led to poorer performance.

Creative work requires that your mind feel a level of freedom.

People are most creative when they have a big enough salary to remove some of the stress from home.

We have found the contrary: we gain a competitive edge in attracting the best because we just put all that money into salary.

Of course, you’ll choose the bird in the hand over the bird in the bush: $230,000. You know your compensation up front—no games.

The company uses your ignorance to hire you at the lowest salary possible.

This is a great way to get an employee for less than she’s worth, only to have her spirited away to another company at a higher price point a few months later. Following this logic,

it’s paradoxical that when it comes to adjusting salaries, just about every company on earth follows a system that’s likely to decrease talent density by encouraging people to find a job elsewhere.

Matias said if I didn’t think so, I should come to him with some data showing the current market for my position.

Reed’s theory is that the raise pools and salary bands used at most companies worked well when employment was often for life and an individual’s market value wasn’t likely to skyrocket in a matter of months.

How is any manager supposed to know, on an ongoing basis, what top of market IS for each of her employees?

had underpaid her the year before because the data I had was not a good reflection of the actual range.

costs a lot more to lose people and to recruit replacements than to overpay a little in the first place.

The salaries of other employees may be flat year to year, despite their doing great work.

we couldn’t afford our payroll expenses for some reason, we would need to increase talent density by letting go of some employees, thereby lowering our costs without lowering any individual salaries.

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.

was happy in my job, but this offer solved all my problems.