No Rules Rules: Netflix and the Culture of Reinvention

by Reed Hastings

It was not obvious at the time, even to me, but 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.

With my next company, Netflix, I hoped to promote flexibility, employee freedom, and innovation, instead of error prevention and rule adherence. At the same time, I understood that as a company grows, if you don’t manage it with policies or control processes, the organization is likely to descend into chaos. Through a gradual evolution, over many years of trial and error, we found an approach for making this work. 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.

Best of all, once you start developing this type of culture, a virtuous cycle kicks in. Removing controls creates a culture of “Freedom and Responsibility” (a term Netflix employees use so much that they now just say “F&R”), which attracts top talent and makes possible even fewer controls. All this takes you to a level of speed and innovation that most companies can’t match. But you can’t reach this level in one go.

When I took the movie back to the store, the woman told me the fee: $40! I felt so stupid. Later, that got me thinking. Blockbuster made most of its margin from late fees. If your business model depends on inducing feelings of stupidity in your customer base, you can hardly expect to build much loyalty. Was there another model to provide the pleasure of watching movies in your own living room without inflicting the pain of paying a lot when you forgot to return them?

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 a group with a few merely adequate performers, that performance is likely to spread, bringing down the performance of the entire organization.

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.

“Only say about someone what you will say to their face.” I modeled this behavior as best I could, and whenever someone came to me to complain about another employee, I would ask, “What did that person say when you spoke to him about this directly?” This is pretty radical. In most situations, both social and professional, people who consistently say what they really think are quickly isolated, even banished. But at Netflix, we embrace them. We work hard to get people to give each other constructive feedback—up, down, and across the organization—on a continual basis.

It’s stressful and unpleasant to hear what we are doing poorly, but after the initial stress, that feedback really helps. Most people intuitively understand that a simple feedback loop can help them get better at their jobs.

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.

AIM TO ASSIST: Feedback must be given with positive intent. Giving feedback in order to get frustration off your chest, intentionally hurting the other person, or furthering your political agenda is not tolerated.

ACTIONABLE: Your feedback must focus on what the recipient can do differently. Wrong feedback to me in Cuba would have been to stop at the comment, “Your presentation is undermining its own messages.” Right feedback was, “The way you ask the audience for input is resulting in only Americans participating.” Even better would have been: “If you can find a way to solicit contributions from other nationalities in the room your presentation will be more powerful.”

APPRECIATE: Natural human inclination is to provide a defense or excuse when receiving criticism; we all reflexively seek to protect our egos and reputation. When you receive feedback, you need to fight this natural reaction

ACCEPT OR DISCARD: You will receive lots of feedback from lots of people while at Netflix. You are required to listen and consider all feedback provided. You are not required to follow it. Say “thank you” with sincerity. But both you and the provider must understand that the decision to react to the feedback is entirely up to the recipient.

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.

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,

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

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. But if you’d feel a little uncomfortable explaining your choice, skip the purchase, check in with your boss, or buy something cheaper.

But this is the most important message of this chapter: 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.

With no expense controls, you’ll need your finance department to audit a portion of receipts annually.

When you find people abusing the system, fire them and speak about the abuse openly—even when they are star performers in other ways.

Without the time and administrative costs associated with purchase orders and procurement

Stranger Things season 1 took just over a year to finish. It aired on July 15, 2016. A few months later, it was nominated for best drama series at the Golden Globes. 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.

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. Bill Gates, whom I worked with while on the Microsoft board, purportedly went further. He is often quoted as saying: “A great lathe operator commands several times the wages of an average lathe operator, but a great writer of software code is worth ten thousand times the price of an average software writer.” In the software industry, this is a known principle (although still much debated).

I learned from that exchange with Leslie that 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.

If this year the target is to increase operating profit by 5 percent, the way to get your bonus—often a quarter of annual pay—is to focus doggedly on increasing operational profit. 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. The stock price might go down with it. What executive would do that? That’s why a company like WarnerMedia or NBC may not be able to change dramatically with the times, the way we’ve often done at Netflix.

I’ve certainly found this to be true at Netflix. People are most creative when they have a big enough salary to remove some of the stress from home. But people are less creative when they don’t know whether or not they’ll get paid extra. 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. But nothing increases talent density more than paying people high salaries and increasing them over time to assure they remain top of market.

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.

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. 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.

Teach employees to develop their networks and to invest time in getting to know their own—and their teams’—market value on an ongoing basis. This might mean taking calls from recruiters or even going to interviews at other companies. Adjust salaries accordingly.

guy! And I realized: oh, it’s just normal human behavior to feel more trusting of someone who is open about mistakes. Since then, every time I feel I’ve made a mistake, I talk about it fully, publicly, and frequently. I quickly came to see the biggest advantage of sunshining a leader’s errors is to encourage everyone to think of making mistakes as normal. This in turn encourages employees to take risks when success is uncertain … which leads to greater innovation across the company. Self-disclosure builds trust, seeking help boosts learning, admitting mistakes fosters forgiveness, and broadcasting failures encourages your people to act courageously.

This tendency has a name: the pratfall effect. The pratfall effect is the tendency for someone’s appeal to increase or decrease after making a mistake, depending on his or her perceived ability to perform well in general.

To instigate a culture of transparency, consider what symbolic messages you send. Get rid of closed offices, assistants who act as guards, and locked spaces. Open up the books to your employees. Teach them how to read the P& L. Share sensitive financial and strategic information with everyone in the company. When making decisions that will impact your employees’ well-being, like reorganizations or layoffs, open up to the workforce early, before things are solidified.

As long as you’ve already shown yourself to be competent, talking openly and extensively about your own mistakes—and encouraging all your leaders to do the same—will increase trust,

Awhile back, Sheryl Sandberg of Facebook spent a day shadowing me at work. She attended all of my meetings and one-on-ones. It’s something I do occasionally with other Silicon Valley executives, so we can learn from watching one another in action. Afterward, when Sheryl and I debriefed, she said, “The amazing thing was to sit with you all day long and see that you didn’t make one decision!” I felt great—because that’s exactly what we are going for. Our dispersed decision-making model has become a foundation of our culture and one of the main reasons we have grown and innovated so quickly.

as that guy from the fashion retail business. The difference is the decision-making freedom we provide. If your employees are excellent and you give them freedom to implement the bright ideas they believe in, innovation will happen. Netflix does not operate in a safety-critical market, like medicine or nuclear power. In some industries, preventing error is essential. We are in a creative market. Our big threat in the long run is not making a mistake, it’s lack of innovation.

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 exactly like Sheila did: “I know you disagree, but I’m going to follow this new idea because I think it will lead to greater gains. Let me know if you want to specifically override my decision.” At the same time, teach your leaders not to override decisions like Sheila’s, even in the face of their own skepticism and long experience of what has worked in the past. Sometimes the employee will fail, and the boss will feel like saying, “I told you so” (but, she won’t!). Sometimes the employee will succeed despite the boss’s reservations.

In order to encourage our employees like Kari and their managers like Jack to shift their mind-set in the direction of experimentation, we use the image of placing bets. This motivates employees to think of themselves as entrepreneurs—who typically don’t succeed without some failures. The examples of Kari and (from a few pages back) Paolo reflect everyday life at Netflix. We want all employees taking bets they believe in and trying new things, even when the boss or others think the ideas are dumb. When some of those bets don’t pay off, we just fix the problems that arise as quickly as possible and discuss what we’ve learned. In our creative business, rapid recovery is the best model.

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.

If you make a bet and it fails, it’s important to speak openly and frequently about what happened. If you’re the boss, make it clear you expect all failed bets to be detailed out in the open.

When new employees join the company, tell them they have a handful of metaphorical chips that they can make bets with. Some gambles will succeed, and some will fail. A worker’s performance will be judged on the collective outcome of his bets, not on the results from one single instance.

To help your workforce make good bets, encourage them to farm for dissent, socialize the idea, and for big bets, test it out.

At Netflix, I want each manager to run her department like the best professional teams, working to create strong feelings of commitment, cohesion, and camaraderie, while continually making tough decisions to ensure the best player is manning each post. A 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 also encourage all managers to consider each of their employees regularly and make sure they’ve got the best person in every spot. To help managers on the judgment calls, 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.

PIPs are of course expensive. If you put someone on a four-month PIP, that’s four months you have to pay an underperformer and countless hours spent by the line manager and HR enforcing and documenting the process. Instead of pouring that capital into a prolonged PIP, give it to the employee in a nice, big, up-front severance package, tell him you’re sorry it didn’t work out, and wish him well in his next adventure.

During your next one-to-one with your boss ask the following question: “IF I WERE THINKING OF LEAVING, HOW HARD WOULD YOU WORK TO CHANGE MY MIND?” When you get the answer, you’ll know exactly where you stand.

There is nothing more ominous than people on your team disappearing from the roster with no word about how the decision was made or how much warning that person received. The biggest worry people have when they learn a colleague has been let go is whether that person had feedback or whether the termination came out of the blue.

Avoid stack-ranking systems, as they create internal competition and discourage collaboration.