1. Identify three factors for each company that underpin its culture of success and innovation. (6 marks) 2. Identify 2 qualities that leadership must have for each company? (4 marks) 3. What role does the climate and culture play for each organization (2 marks) How Netflix Reinvented HR How Netflix Reinvented HR like crazy. Suddenly we had far more work to do, valuable their contributions had once been. Out of with 30% fewer employees. fairness to such people-and, frankly, to help us One day I was talking with one of our best engi- overcome our discomfort with discharging themneers, an employee I'll call John. Before the layoffs, we learned to offer rich severance packages. he'd managed three engineers, but now he was a With these two overarching principles in mind, one-man department working very long hours. I we shaped our approach to talent using the five tetold John I hoped to hire some help for him soon. nets below. His response surprised me. "There's no rush-I'm happier now," he said. It turned out that the engi- Hire, Reward, and Tolerate Only neers we'd laid off weren't spectacular-they were Fully Formed Adults merely adequate. John realized that he'd spent too Over the years we leamed that if we asked people to much time riding herd on them and fixing their mis- rely on logic and common sense instead of on fortakes. "I've learned that I'd rather work by myself mal policies, most of the time we would get better than with subpar performers," he said. His words results, and at lower cost. If you're careful to hire echo in my mind whenever I describe the most ba- people who will put the company's interests first, sic element of Netflix's talent philosophy: The best who understand and support the desire for a highthing you can do for employees-a perk better than performance workplace, 97% of your employees will foosball or free sushi-is hire only "A" players to do the right thing. Most companies spend endless work alongside them. Excellent colleagues trump time and money writing and enforcing HR policies everything else. to deal with problems the other 3% might cause. InThe second conversation took place in 2002 , a stead, we tried really hard to not hire those people, few months after our IPO. Laura, our bookkeeper, and we let them go if it turned out we'd made a hirwas bright, hardworking, and creative. She'd been ing mistake. very important to our early growth, having devised Adultlike behavior means talking openly about a system for accurately tracking movie rentals so issues with your boss, your colleagues, and your that we could pay the correct royalties. But now, as subordinates. It means recognizing that even in a public company, we needed CPAs and other fully companies with reams of HR policies, those policies credentialed, deeply experienced accounting profes- are frequently skirted as managers and their reports sionals-and Laura had only an associate's degree work out what makes sense on a case-by-case basis. from a community college. Despite her work ethic, Let me offer two examples. her track record, and the fact that we all really liked When Netflix launched, we had a standard her, her skills were no longer adequate. Some of us paid-time-off policy: People got 10 vacation days, talked about jury-rigging a new role for her, but we 10 holidays, and a few sick days. We used an honor decided that wouldn't be right. system-employees kept track of the days they took So I sat down with Laura and explained the situa- off and let their managers know when they'd be out. tion-and said that in light of her spectacular service, After we went public, our auditors freaked. They said we would give her a spectacular severance package. Sarbanes-Oxley mandated that we account for time I'd braced myself for tears or histrionics, but Laura off. We considered instituting a formal tracking sysreacted well: She was sad to be leaving but recog- tem. But then Reed asked, "Are companies required nized that the generous severance would let her re- to give time off? If not, can't we just handle it ingroup, retrain, and find a new career path. This inci- formally and skip the accounting rigmarole?" I did dent helped us create the other vital element of our some research and found that, indeed, no California talent management philosophy: If we wanted only law governed vacation time. "A" players on our team, we had to be willing to let go So instead of shifting to a formal system, we went of people whose skills no longer fit, no matter how in the opposite direction: Salaried employees were The company's expense policy is five words long: "Act in Netflix's best interests." January-February 2014 rized for use only by BRIAN CLAREY (CLAREY@GMAIL.COM). Copying or posting is an intringement of copyright. Please contact told to take whatever time they felt was appropri- if you create a clear expectation of responsible beate. Bosses and employees were asked to work it out havior, most employees will comply. with one another. (Hourly workers in call centers and warehouses were given a more structured pol- Tell the Truth About Performance icy.) We did provide some guidance. If you worked Many years ago we eliminated formal reviews. We in accounting or finance, you shouldn't plan to be had held them for a while but came to realize they out during the beginning or the end of a quarter, didn't make sense-they were too ritualistic and too because those were busy times. If you wanted 30 infrequent. So we asked managers and employees to days off in a row, you needed to meet with HR. Se- have conversations about performance as an organic nior leaders were urged to take vacations and to let part of their work. In many functions-sales, engipeople know about them-they were role models neering, product development-it's fairly obvious for the policy. (Most were happy to comply.) Some how well people are doing. (As companies develop people worried about whether the system would better analytics to measure performance, this bebe inconsistent-whether some bosses would allow comes even truer.) Building a bureaucracy and elabtons of time off while others would be stingy. In gen- orate rituals around measuring performance usually eral, I worried more about fairness than consistency, doesn't improve it. because the reality is that in any organization, the Traditional corporate performance reviews are highest-performing and most valuable employees driven largely by fear of litigation. The theory is that get more leeway. if you want to get rid of someone, you need a paper We also departed from a formal travel and ex- trail documenting a history of poor achievement. pense policy and decided to simply require adultlike At many companies, low performers are placed on behavior there, too. The company's expense policy "Performance Improvement Plans." I detest PIPs. I is five words long: "Act in Netflix's best interests." In think they're fundamentally dishonest: They never talking that through with employees, we said we ex- accomplish what their name implies. pected them to spend company money frugally, as One Netflix manager requested a PIP for a qualif it were their own. Eliminating a formal policy and ity assurance engineer named Maria, who had forgoing expense account police shifted responsibil- been hired to help develop our streaming service. ity to frontline managers, where it belongs. It also The technology was new, and it was evolving very reduced costs: Many large companies still use travel quickly. Maria's job was to find bugs. She was fast, agents (and pay their fees) to book trips, as a way to intuitive, and hardworking. But in time we figured enforce travel policies. They could save money by out how to automate the QA tests. Maria didn't like letting employees book their own trips online. Like automation and wasn't particularly good at it. Her most Netflix managers, I had to have conversations new boss (brought in to create a world-class autoperiodically with employees who ate at lavish res- mation tools team) told me he wanted to start a PIP taurants (meals that would have been fine for sales with her. or recruiting, but not for eating alone or with a Net- I replied, "Why bother? We know how this will flix colleague). We kept an eye on our IT guys, who play out. You'll write up objectives and deliverables were prone to buying a lot of gadgets. But overall we for her to achieve, which she can't, because she lacks found that expense accounts are another area where the skills. Every Wednesday you'll take time away HBR: Why did you write the Netflix Many of the ideas in it seem like culture deck? common sense, but they go against Hastings: It's our version of Letters to traditional HR practices. Why aren't a Young Poet for budding entrepre-_ companies more innovative when it neurs. It's what we wish we had un- comes to talent management? derstood when we started. More than As a society, we've had hundreds 100 people at Netflix have made major of years to work on managing contributions to the deck, and we have industrial firms, so a lot of accepted more improvements coming. HR practices are centered in that experience. We're just beginning to learn how to run creative firms, which is quite different. Industrial from your real work to discuss (and document) her Managers Own the Job of shortcomings. You won't sleep on Tuesday nights, Creating Great Teams because you'll know it will be an awful meeting, and Discussing the military's performance during the the same will be true for her. After a few weeks there Iraq War, Donald Rumsfeld, the former defense will be tears. This will go on for three months. The secretary, once famously said, "You go to war with entire team will know. And at the end you'll fire her. the army you have, not the army you might want or None of this will make any sense to her, because for wish to have at a later time." When I talk to managers five years she's been consistently rewarded for be- about creating great teams, I tell them to approach ing great at her job-a job that basically doesn't exist the process in exactly the opposite way. anymore. Tell me again how Netflix benefits? In my consulting work, I ask managers to imag"Instead, let's just tell the truth: Technology has ine a documentary about what their team is accomchanged, the company has changed, and Maria's plishing six months from now. What specific results skills no longer apply. This won't be a surprise to do they see? How is the work different from what her: She's been in the trenches, watching the work the team is doing today? Next I ask them to think around her shift. Give her a great severance pack- about the skills needed to make the images in the age-which, when she signs the documents, will movie become reality. Nowhere in the early stages dramatically reduce (if not eliminate) the chance of the process do I advise them to think about the of a lawsuit." In my experience, people can handle team they actually have. Only after they've done the anything as long as they're told the truth-and this work of envisioning the ideal outcome and the skill proved to be the case with Maria. _ set necessary to achieve it should they analyze how When we stopped doing formal performance re- well their existing team matches what they need. views, we instituted informal 360-degree reviews. If you're in a fast-changing business environWe kept them fairly simple: People were asked to ment, you're probably looking at a lot of mismatches. identify things that colleagues should stop, start, In that case, you need to have honest conversations or continue. In the beginning we used an anony- about letting some team members find a place where mous software system, but over time we shifted to their skills are a better fit. You also need to recruit signed feedback, and many teams held their 360 s people with the right skills. face-to-face. We faced the latter challenge at Netflix in a fairly HR people can't believe that a company the size dramatic way as we began to shift from DVDs by mail of Netflix doesn't hold annual reviews. "Are you to a streaming service. We had to store massive volmaking this up just to upset us?" they ask. I'm not. If umes of files in the cloud and figure out how huge you talk simply and honestly about performance on numbers of people could reliably access them. (By a regular basis, you can get good results-probably some estimates, up to a third of peak residential better ones than a company that grades everyone on internet traffic in the U.S. comes from customers a five-point scale. streaming Netflix movies.) So we needed to find people deeply experienced with cloud services and try to use options as "golden handcuffs" to aid who worked for companies that operate on a giant retention, but we never thought that made sense. If scale-companies like Amazon, eBay, Google, and you see a better opportunity elsewhere, you should Facebook, which aren't the easiest places to hire be allowed to take what you've earned and leave. If someone away from. you no longer want to work with us, we don't want Our compensation philosophy helped a lot. Most to hold you hostage. of its principles stem from ideals described earlier: We continually told managers that building a Be honest, and treat people like adults. For instance, great team was their most important task. We didn't during my tenure Netflix didn't pay performance measure them on whether they were excellent bonuses, because we believed that they're unneces- coaches or mentors or got their paperwork done on sary if you hire the right people. If your employees time. Great teams accomplish great work, and reare fully formed adults who put the company first, cruiting the right team was the top priority. an annual bonus won't make them work harder or smarter. We also believed in market-based pay and Leaders Own the Job of would tell employees that it was smart to interview Creating the Company Culture with competitors when they had the chance, in order After I left Netflix and began consulting, I visited a to get a good sense of the market rate for their talent. hot start-up in San Francisco. It had 60 employees Many HR people dislike it when employees talk to in an open loft-style office with a foosball table, two recruiters, but I always told employees to take the pool tables, and a kitchen, where a chef cooked call, ask how much, and send me the number-it's lunch for the entire staff. As the CEO showed me valuable information. around, he talked about creating a fun atmosphere. In addition, we used equity compensation much At one point I asked him what the most important differently from the way most companies do. In- value for his company was. He replied, "Efficiency." stead of larding stock options on top of a competitive "OK," I said. "Imagine that I work here, and it's salary, we let employees choose how much (if any) of 2:58 PM. I'm playing an intense game of pool, and I'm their compensation would be in the form of equity. If winning. I estimate that I can finish the game in five employees wanted stock options, we reduced their minutes. We have a meeting at 3:00. Should I stay salaries accordingly. We believed that they were and win the game or cut it short for the meeting?" sophisticated enough to understand the trade-offs, _ "You should finish the game," he insisted. I wasn't judge their personal tolerance for risk, and decide surprised; like many tech start-ups, this was a casual what was best for them and their families. We dis- place, where employees wore hoodies and brought tributed options every month, at a slight discount pets to work, and that kind of casualness often exfrom the market price. We had no vesting period - tends to punctuality. "Wait a second," I said. "You the options could be cashed in immediately. Most told me that efficiency is your most important cultech companies have a four-year vesting schedule tural value. It's not efficient to delay a meeting and keep coworkers waiting because of a pool game. to direct-deposit paychecks, and I had to point out Isn't there a mismatch between the values you're that some of our hourly workers didn't have bank talking up and the behaviors you're modeling and accounts. That's a small example, but it speaks to encouraging?" a larger point: As leaders build a company culture, When I advise leaders about molding a corporate they need to be aware of subcultures that might reculture, I tend to see three issues that need attention. quire different management. This type of mismatch is one. It's a particular problem at start-ups, where there's a premium on casual- Good Talent Managers Think Like ness that can run counter to the high-performance Businesspeople and Innovators First, ethos leaders want to create. I often sit in on com- and Like HR People Last pany meetings to get a sense of how people operate. Throughout most of my career I've belonged to I frequently see CEOs who are clearly winging it. professional associations of human resources exThey lack a real agenda. They're working from slides ecutives. Although I like the people in these groups that were obviously put together an hour before or personally, I often find myself disagreeing with them. were recycled from the previous round of VC meet- Too many devote time to morale improvement iniings. Workers notice these things, and if they see a tiatives. At some places entire teams focus on getting leader who's not fully prepared and who relies on their firm onto lists of "Best Places to Work" (which, charm, IQ, and improvisation, it affects how they when you dig into the methodologies, are really perform, too. It's a waste of time to articulate ideas based just on perks and benefits). At a recent conferabout values and culture if you don't model and re- ence I met someone from a company that had apward behavior that aligns with those goals. pointed a "chief happiness officer"-a concept that The second issue has to do with making sure makesme slightly sick. employees understand the levers that drive the During 30 years in business I've never seen an HR business. I recently visited a Texas start-up whose initiative that improved morale. HR departments employees were mostly engineers in their twen- might throw parties and hand out T-shirts, but if ties. "I bet half the people in this room have never the stock price is falling or the company's products read a P\&L," I said to the CFO. He replied, "It's true - aren't perceived as successful, the people at those they're not financially savvy or business savvy, and parties will quietly complain-and they'll use the our biggest challenge is teaching them how the T-shirts to wash their cars. business works." Even if you've hired people who Instead of cheerleading, people in my profeswant to perform well, you need to clearly commu- sion should think of themselves as businesspeople. nicate how the company makes money and what What's good for the company? How do we combehaviors will drive its success. At Netflix, for in- municate that to employees? How can we help stance, employees used to focus too heavily on sub- every worker understand what we mean by high scriber growth, without much awareness that our performance? expenses often ran ahead of it: We were spending Here's a simple test: If your company has a perhuge amounts buying DVDs, setting up distribution formance bonus plan, go up to a random employee centers, and ordering original programming, all be- and ask, "Do you know specifically what you should fore we'd collected a cent from our new subscribers. be doing right now to increase your bonus?" If he or Our employees needed to learn that even though she can't answer, the HR team isn't making things as revenue was growing, managing expenses really clear as they need to be. mattered. At Netflix I worked with colleagues who were The third issue is something I call the split per- changing the way people consume filmed entertainsonality start-up. At tech companies this usually ment, which is an incredibly innovative pursuit-yet manifests itself as a schism between the engineers when I started there, the expectation was that I and the sales team, but it can take other forms. At would default to mimicking other companies' best Netflix, for instance, I sometimes had to remind practices (many of them antiquated), which is how people that there were big differences between the almost everyone seems to approach HR. I rejected salaried professional staff at headquarters and the those constraints. There's no reason the HR team hourly workers in the call centers. At one point our can't be innovative too. finance team wanted to shift the whole company HBR Reprint R1401E January-February 2014 ized for use only by BRIAN CLAREY (CLAREY@GMAIL.COM). Copying or posting is an infringement of copyright. Please contact