No Rules Rules: Netflix and the Culture of Reinvention

by Reed Hastings

company values—as articulated—rarely match the way people behave in reality. The slick slogans on posters or in annual reports often turn out to be empty words.

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.

They violate the principle that Harvard Business School professor Amy Edmondson calls “psychological safety.” In her 2018 book, The Fearless Organization, she explains that if you want to encourage innovation, you should develop an environment where people feel safe to dream, speak up, and take risks. The safer the atmosphere, the more innovation you will have.

According to a survey conducted by Glassdoor in 2017, American workers took only about 54 percent of their entitled vacation days.

We humans hate to lose what we already have, even more than we like getting something new. Faced with losing something, we will do everything we can to avoid losing it. We take that vacation. If you’re not allotted vacation, you don’t fear losing it, and are less likely to take any at all. The “use it or lose it” rule built into many traditional policies sounds like a limitation, but it actually encourages people to take a break.

At most companies, policies and control processes are put in place to deal with employees who exhibit sloppy, unprofessional, or irresponsible behavior. But if you avoid or move out these people, you don’t need the rules. If you build an organization made up of high performers, you can eliminate most controls. The denser the talent, the greater the freedom you can offer.

No need for processes if you hire superior people

“Lead with context, not control,” and coaching your employees using such guidelines as, “Don’t seek to please your boss.”

Optimize do the company Individuals optimize for career succsss and organisation success which they understand go hand in hand. Do not optimize for the boss, especially if that boss is weak

The point is to encourage people to question how the dots are connected. In most organizations, people join the dots the same way that everyone else does and always has done. This preserves the status quo. But one day someone comes along and connects the dots in a different way, which leads to an entirely different understanding of the world.

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.

I understood that a team with one or two merely adequate performers brings down the performance of everyone on the team. If you have a team of five stunning employees and two adequate ones, the adequate ones will sap managers’ energy, so they have less time for the top performers, reduce the quality of group discussions, lowering the team’s overall IQ, force others to develop ways to work around them, reducing efficiency, drive staff who seek excellence to quit, and show the team you accept mediocrity, thus multiplying the problem.

For top performers, 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.

If you have adequate performers, it leads many who could be excellent to also perform adequately.

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.

Our number one goal, moving forward, would be to do everything we could to retain the post-layoff talent density and all the great things that came with it. We would hire the very best employees and pay at the top of the market. We would coach our managers to have the courage and discipline to get rid of any employees who were displaying undesirable behaviors or weren’t performing at exemplary levels. I became laser-focused on making sure Netflix was staffed, from the receptionist to the top executive team, with the highest-performing, most collaborative employees on the market.

But instead of talking with Aki, I went outside the company and struck a deal with another set of engineers to get the project going. When Aki learned what I’d done, he was furious. He came to me and said, “You’re upset with me, but you go around my back instead of just telling me how you feel?”

I saw that openly voicing opinions and feedback, instead of whispering behind one another’s backs, reduced the backstabbing and politics and allowed us to be faster. The more people heard what they could do better, the better everyone got at their jobs, the better we performed as a company.

“that the way you are facilitating the discussion from the stage is undermining your message about cultural diversity. When you ask for comments and call on the first person who raises a hand, you’re setting just the type of trap your book tells us to avoid—because only Americans raise their hands, so only Americans get the chance to speak.”

“The Emperor’s New Clothes,” about a foolish man in power so convinced he was wearing the finest costume ever made that he paraded naked in front of his subjects. No one dared point out the obvious—except for a child with no understanding of hierarchy, power, or consequences. 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.

Notice that he did not accuse me of being a jerk. Rather, he asked: (1) “Are you intending to hurt the company?” and (2) “Are you able to act decently?” There’s really only one right answer to those questions.

Well before Netflix, I believed that 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.

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.

About the same time, something else happened that provided a critical lesson. Patty and I both noticed people seemed to be taking more ownership around the office. Just little things, like someone started throwing out the milk in the refrigerator when it got sour. 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.”

ACT IN NETFLIX’S BEST INTEREST 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 redeye 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.

Before you spend any money imagine that you will be asked to stand up in front of me and your own boss and explain why you chose to purchase that specific flight, hotel, or telephone. If you can explain comfortably why that purchase is in the company’s best interest, then no need to ask, go ahead and buy it.

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.

But there’s a cap on how much value one ice-cream scooper or one driver can deliver. For operational roles, you can pay an average salary and your company will do very well.

We determined that for any type of operational role, where there was a clear cap on how good the work could be, we would pay middle of market rate. 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 love this 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.

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.

This time he said, “Your performance has been excellent, and I’m delighted to have you on this team. The market for your position hasn’t changed much, so I’m not planning on giving you a raise this year.” That seemed fair to me. Matias said if I didn’t think so, I should come to him with some data showing the current market for my position.

The answer to both of these questions is yes. Yet overall the investment pays off. 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.

“The market’s heating up and you are going to be getting calls from recruiters. You’ll likely get calls from Amazon, Apple, and Facebook. And if you’re not sure that you’re being paid top of market, you should take those calls and find out what those jobs are paying. If you find out they are paying more than we pay you, you need to let us know.” Larry was surprised: “Netflix is probably the only company where they encourage you to speak to and even interview with the competition.”

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.

On the other hand, when you share a secret, it floods the receiver with feelings of confidence and loyalty. If I tell you some huge mistake I made or share information that could sabotage my success, you think, Well, if she’d tell me that, she’d tell me anything. Your trust in me skyrockets. There is no better way to build trust quickly than to shine a light directly on a would-be secret.

That was when I began to understand the dangers of the standard decision-making pyramid. I’m the boss and I have strong opinions, which I share freely, but I am not the best person to decide how many movies to order or to make a slew of other critical daily decisions at Netflix. I told him: “Ted, your job is not to try to make me happy or to make the decision you think I’d most approve of. It’s to do what’s right for the business. You are not allowed to let me drive this company off a cliff!”

Yet Reed believes so deeply in dispersed decision-making that, by his model, only a CEO who is not busy is really doing his job.

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 thinking is exactly what we’ve heard from Paolo. 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!”

In Malcolm Gladwell’s book Outliers, we learn that a major plane crash was caused when Korean Air staff refrained from telling the lead pilot that there was a problem because they wanted to show respect for his authority.

Before one big leadership meeting, I passed around a memo outlining a proposed one-dollar increase in the price of a Netflix subscription along with a new tiered-pricing model. Many dozens of managers weighed in with their ratings and comments. Here are a few of them in abridged format:

We suggest instead a three-part response: Ask what learning came from the project. Don’t make a big deal about it. Ask her to “sunshine” the failure.

Ted was right. With our dispersed decision-making model, if you pick the very best people and they pick the very best people (and so on down the line) great things will happen. Ted calls this the “hierarchy of picking” and it’s what a workforce built on high talent density is all about.

professional sports team is a good metaphor for high talent density because athletes on professional teams: Demand excellence, counting on the manager to make sure every position is filled by the best person at any given time. Train to win, expecting to receive candid and continuous feedback about how to up their game from the coach and from one another. Know effort isn’t enough, recognizing that, if they put in a B performance despite an A for effort, they will be thanked and respectfully swapped out for another player.

we talk about the Keeper Test: IF A PERSON ON YOUR TEAM WERE TO QUIT TOMORROW, WOULD YOU TRY TO CHANGE THEIR MIND? OR WOULD YOU ACCEPT THEIR RESIGNATION, PERHAPS WITH A LITTLE RELIEF? IF THE LATTER, YOU SHOULD GIVE THEM A SEVERANCE PACKAGE NOW, AND LOOK FOR A STAR, SOMEONE YOU WOULD FIGHT TO KEEP.

The second is to protect the company from a lawsuit. We ask exiting employees, in order to receive the generous severance we are offering, to sign an agreement that they won’t sue us. Almost all accept the offer. They get a big chunk of money and can focus on the next step of their careers.

Afterward the guy running the station said to me, “Why not go again? I’ll give you a second jump for free?” That made me curious. “Why would you do that?” I asked. He responded, “Because I want all your colleagues gawking at you from the restaurant to see that you’re happy to do it again. If they see it’s not so scary, they’ll be ready to try it also.”

Introduction, thesis, antithesis, synthesis, that’s how we French learn to analyze over many years in school.

Americans learn things like, “Always give three positives with every negative” and “Catch employees doing things right.”