[Book Notes] 25 insights: No Rules Rules


“No Rules rules” is a book on Netflix’s culture. The book was written by Reed Hastings (CEO and founder of Netflix) and Erin Meyer (INSEAD professor) and does a deep dive on how following less rules and processes has enabled Netflix to achieve the enormous success that it has over the last few decades.

Some of my favorite notes/passages from No Rules Rules are as follows:


#1:

Build up talent density

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. The denser the talent, the greater the freedom you can offer.


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.


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.


Professor Will Felps, of the University of New South Wales in Australia, conducted a fascinating study demonstrating contagious behavior in the work environment. He created several teams of four college students and asked each team to complete a management task in forty-five minutes. The teams who did the best work would receive a financial reward of one hundred dollars. Unbeknownst to the students, some teams included an actor, who played one of several roles: a “Slacker” who would disengage, put his feet up on the table, and send text messages; a “Jerk” who would speak sarcastically and say things like, “Are you kidding me?” and “Clearly, you’ve never taken a business class before”; or a “Depressive Pessimist” who would look like his cat had just died, complain the task was impossible, express doubt that the team could succeed, and sometimes put his head on the desk. The actor did so without tipping off the rest of the team that he was anything other than a regular student. Felps first found that, 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 under-performer did worse than other teams by a whopping 30 to 40 percent.

 

#2:

HIGH PERFORMANCE + SELFLESS CANDOR = EXTREMELY HIGH PERFORMANCE

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’s when we coined the expression “Only say about someone what you will say to their face.”


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.


 

#3:

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.


The brain is a survival machine, and one of our most successful survival techniques is the desire to find safety in numbers. Our brain is constantly on the watch for signals of group rejection, which back in more primitive times would have led to isolation and potentially death. If someone calls out a mistake you are making in front of your tribe, the amygdala, the most primitive part of the brain, which is on constant watch for danger, sets off a warning: “This group is about to reject you.”


In a 2014 study, the consulting firm Zenger Folkman collected data on feedback from almost one thousand people. They found that, despite the blissful benefits of praise, by a roughly three-to-one margin, people believe corrective feedback does more to improve their performance than positive feedback. The majority said they didn’t find positive feedback to have a significant impact on their success at all.


 

#4:


Tale of “The Emperor’s New Clothes”: A foolish man in power was 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.


Experience of a Netflix employee on his first day at work:

Monday morning, it’s my first day of this brand-new job, and I’m on hyper alert trying to find out what are the politics of the place. At eleven a.m. I attend my first meeting led by Ted (my boss’s boss, who is from my perspective a superstar), with about fifteen people at various levels in the company. Ted was talking about the release of The Blacklist season 2. A guy four levels below him hierarchically stopped him in the middle of his point: “Ted, I think you’ve missed something. You’re misunderstanding the licensing deal. That approach won’t work.” Ted stuck to his guns, but this guy didn’t back down. “It won’t work. You’re mixing up two separate reports, Ted. You’ve got it wrong. We need to meet with Sony directly.” I could not believe that this low-level guy would confront Ted Sarandos himself in front of a group of people.

When the meeting ended, Ted got up and put his hand on this guy’s shoulder. “Great meeting. Thanks for your input today,” he said with a smile.

Later I ran into Ted in the men’s washroom. He asked how my first day was going so I told him, “Wow Ted, I couldn’t believe the way that guy was going at you in the meeting.” Ted looked totally mystified. He said, “Brian, the day you find yourself sitting on your feedback because you’re worried you’ll be unpopular is the day you’ll need to leave Netflix. We hire you for your opinions. Every person in that room is responsible for telling me frankly what they think.”
 

#5:

The 4A approach to give feedback:

  1. 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.

  2. ACTIONABLE: Your feedback must focus on what the recipient can do differently.

  3. 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 and instead ask yourself, “How can I show appreciation for this feedback by listening carefully, considering the message with an open mind, and becoming neither defensive nor angry?”

  4. 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.

The only remaining question is when and where to give feedback—and the answer is anywhere and anytime.

 

#6:


Freedom is not the opposite of accountability, as I’d previously considered. Instead, it is a path toward it

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. 


We wrote our first expense guideline: SPEND COMPANY MONEY AS IF IT WERE YOUR OWN. But as it turned out, not everyone was as tightfisted, and the dramatically diverging styles of spending one’s own money created problems. Today the entirety of the travel and expense policy still consists of these five simple words: ACT IN NETFLIX’S BEST INTEREST


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

 

#7:

Rock-star principle: In all creative roles, the best is easily ten times better than average

The rock-star principle is rooted in a famous study that took place in a basement in Santa Monica. At 6:30 a.m., nine trainee programmers were led into a room with dozens of computers. Each of them was handed a manila envelope explaining a series of coding and debugging tasks they would need to complete to their best ability in the next 120 minutes. Millions of keystrokes have since been devoted to discussing the results on the internet. The researchers expected to find that the best of the nine programmers would outperform his average counterpart by a factor of two or three. But of the group of nine, all of whom were at least adequate programmers, the best far outperformed the worst. 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.


Patty McCord and I started to look at where exactly the rock-star principle might apply within Netflix. We divided jobs into operational and creative roles. 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. 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. At Netflix, we don’t have a lot of jobs like that. Most of our posts rely on the employee’s ability to innovate and execute creatively. 

 

#8:

Performance-related bonuses are almost universally deployed in the US, and frequently elsewhere. But Netflix doesn’t use them.


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.


I don’t buy the idea that if you dangle cash in front of your high-performing employees, they try harder. 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.


The big surprise when we decided not to pay bonuses on top of salary was how much more top talent we were able to attract. Many imagine you lose your competitive edge if you don’t offer a bonus. We have found the contrary: we gain a competitive edge in attracting the best because we just put all that money into salary.

 

#9:


To retain your top employees, it’s always better to give them the raise before they get the offers. The rule at Netflix when recruiters call is: “Before you say, ‘No thanks!’ ask, ‘How much?’”

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.


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. But clearly those conditions don’t apply anymore, given how fast people switch jobs today and the changing nature of our modern economy. 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). That would be a sure way to reduce talent density. If 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.


We told all our employees they should start taking those calls from recruiters and tell us what they learned. Patty developed a database where everyone could input the salary data points they received from calls and interviews. “Netflix is probably the only company where they encourage you to speak to and even interview with the competition.”

 

#10:


Remove the umbrella: I first learned about open-book management in 1998. Netflix was one year old, and I attended a leadership development course at Aspen Institute. There were executives from many companies and we discussed several provocative readings. One of them was a case study about a manager called Jack Stack. Jack, a manager in Springfield, Missouri, successfully revives a remanufacturing plant once owned by International Harvester. The plant is about to be closed but he raises money and stages a leveraged buyout. Then, in an effort to motivate his workforce, he sets himself two goals: Create a work culture of financial transparency, making every aspect of the business visible to every employee. Invest a substantial amount of time and effort training every staff member how to read and understand, in detail, the weekly operating and financial reports.


I don’t want my employees to feel like they’re working for Netflix; I want them to feel like they are part of Netflix.


We are perhaps the only public company that shares financial results internally in the weeks before the quarter is closed. We announce these numbers at a quarterly business review meeting with our top seven hundred or so managers. The financial world sees this as reckless. But the information has never been leaked. When it does one day leak (I imagine it will), we won’t overreact. We’ll just deal with that one case and continue with transparency.

 

#11:


Leave the spin in the gym: Spinning the truth is one of the most common ways leaders erode trust. I can’t say this clearly enough: don’t do this. Your people are not stupid. When you try to spin them, they see it, and it makes you look like a fraud. Speak plainly, without trying to make bad situations seem good, and your employees will learn you tell the truth.


When it comes to personal struggles, an individual’s right to privacy trumps an organization’s desire for transparency. Here we didn’t take the most transparent route. But we didn’t spin either. We told everyone that the guy had taken two weeks off for personal reasons. It was up to him to share more details if he chose. Generally, I believed that if the dilemma is linked to an incident at work, everyone should be informed. But if the dilemma is linked to an employee’s personal situation, it’s up to that person to share details if he chooses.

 

#12:

Whisper wins and shout mistakes

In her book, Daring Greatly: How the Courage to Be Vulnerable Transforms the Way We Live, Love, Parent, and Lead, Brené Brown explains, based on her own qualitative studies, that “we love seeing raw truth and openness in other people, but we are afraid to let them see it in us. . . . Vulnerability is courage in you and inadequacy in me.”


Anna Bruk and her team at the University of Mannheim in Germany wondered if they could replicate Brown’s findings quantitatively. They asked subjects to imagine themselves in a variety of vulnerable situations—such as being the first to apologize after a big fight and admitting that you made a serious mistake to your team at work. When people imagined themselves in those situations, they tended to believe that showing vulnerability would make them appear “weak” and “inadequate.” But when people imagined someone else in the same situations, they were more likely to describe showing vulnerability as “desirable” and “good.”


There is also research showing that if someone is already viewed as ineffective, they only deepen that opinion by highlighting their own mistakes. In 1966, psychologist Elliot Aronson ran an experiment. He asked students to listen to recordings of candidates interviewing to be part of a quiz-bowl team. Two of the candidates showed how smart they were by answering most of the questions correctly, while the other two answered only 30 percent right. Then, one group of students heard an explosion of clanging dishes, followed by one of the smart candidates saying, “Oh my goodness—I’ve spilled coffee all over my new suit.” Another group of students heard the same clamor, but then heard one of the mediocre candidates saying he spilled the coffee. Afterward, the students said they liked the smart candidate even more after he embarrassed himself. But the opposite was true of the mediocre candidate. The students said they liked him even less after seeing him in a vulnerable situation.


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. In one study conducted by Professor Lisa Rosh from Lehman College, a woman introduced herself, not by mentioning her credentials and education, but by talking about how she’d been awake the previous night caring for her sick baby. It took her months to reestablish her credibility. If this same woman was first presented as a Nobel Prize winner, the exact same words about being up all night with the baby would provoke reactions of warmth and connection from the audience.

A leader who has demonstrated competence and is liked by her team will build trust and prompt risk-taking when she widely sunshines her own mistakes. Her company benefits. The one exception is for a leader considered unproven or untrusted. In these cases you’ll want to build trust in your competency before shouting your mistakes.

 

#13:

DON’T SEEK TO PLEASE YOUR BOSS. SEEK TO DO WHAT IS BEST FOR THE COMPANY.

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!”


Reed believes so deeply in dispersed decision-making that, by his model, only a CEO who is not busy is really doing his job. Our mantra is that employees don’t need the boss’s approval to move forward (but they should let the boss know what’s going on).


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. Our risk is failing to come up with creative ideas for how to entertain our customers, and therefore becoming irrelevant.


In 1962, Frederick Smith wrote a paper for his economics class at Yale outlining the idea for an overnight delivery service. The idea was that you could put a package in the mail in Missouri on Tuesday and, if you paid enough, it would arrive in California on Wednesday. According to legend, Smith received a C on the paper and his professor told him that in order to get a better grade, the idea had to be feasible. If Smith’s professor had been Smith’s boss, he would certainly have put the kibosh on the whole innovation. Smith, however, was an entrepreneur, and that Yale paper became the basis for FedEx, which he founded in 1971. He was also a betting man: once, in the early days of FedEx, after a bank had refused to extend a crucial loan, he took the company’s last $5,000 to Las Vegas and won $27,000 playing blackjack to cover the company’s $24,000 fuel bill.


 

#14:

The Netflix Innovation Cycle: 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

The premise of farming for dissent came out of the Qwikster debacle, the biggest mistake in Netflix history. In early 2007, we offered one service for ten dollars that was a combination of mailing DVDs and streaming. But it was clear that streaming video would become of increasing importance while people would watch fewer and fewer DVDs. We wanted to be able to focus on streaming, without DVDs distracting us, so I had the idea to separate the two operations: Netflix would stream, while we created a new company, Qwikster, to handle the DVD market. With two separate companies, we would charge eight dollars for each service separately. For customers who wanted both DVDs and streaming, it meant a price hike to sixteen dollars. The new arrangement would allow Netflix to focus on building the company of the future without being weighed down by the logistics of DVD mailing, which was our past. Over the next few quarters, we lost millions of subscribers and our stock dropped more than 75 percent in value. Everything we’d built was crashing down because of my bad decision.

Netflix stock performance

We now say that it is disloyal to Netflix when you disagree with an idea and do not express that disagreement. By withholding your opinion, you are implicitly choosing to not help the company. If you are a Netflix employee with a proposal, you create a shared memo explaining the idea and inviting dozens of your colleagues for input. They will then leave comments electronically in the margin of your document, which everyone can view. Simply glancing through the comments can give you a feeling for a variety of dissenting and supporting viewpoints.


In some cases, an employee proposing an idea will distribute a shared spreadsheet asking people to rate the idea on a scale from –10 to +10, with their explanation and comments. This a great way to get clarity on how intense the dissent is and to begin the debate.


Case study:

In 2015, if you were taking an airplane and wanted to watch your favorite Netflix show during the trip, you were out of luck. There was no way to download the content onto your phone or any other device. Netflix was all live internet streaming. If you didn’t have the internet, you didn’t have Netflix. Amazon Prime did offer downloading, as did YouTube in some countries, so the topic was a hot one at Netflix. Neil Hunt, chief product officer at the time, was against offering downloads. It would be a big, time-consuming project and would distract from the core mission of making streaming work better, even on poor connections. Also, the internet would become faster and more ubiquitous, so the feature would become less useful every month. Neil is quoted in the British press explaining that downloading adds considerable complexity to your life: “You have to remember that you want to download this thing. It’s not going to be instant, you have to have the right storage on your device, you have to manage it, and I’m just not sure people are actually that compelled to do that, and that it’s worth providing that level of complexity.” Neil wasn’t the only one against downloading. Reed was frequently asked at employee gatherings why the feature was absent. Here are his replies to questions in a 2015 document accessible to all Netflix employees: Employee question: Now that other services are ramping up off-line downloads, do you think Netflix refusing to offer this service will have a negative impact on perceived brand quality? Reed’s response: No. Soon we’ll be announcing our first airline free Wi-Fi streaming deals with full Netflix. We are focused on streaming, and as the Internet expands (planes, etc.) the consumer desire for downloading will go away. Our competitors will be stuck with supporting a shrinking downloading use case for years. We’ll end up far ahead on brand quality sentiment on this issue.


The employee thought, “Neil and Reed are against this idea. Is it okay to test it out?” At any of my past employers, that would not have been a good move. But the lore at Netflix is all about lower-level employees accomplishing amazing things in the face of hierarchical opposition. With that in mind I went ahead. YouTube was not available for download in the US but it was in a few places like India and Southeast Asia. That was interesting because Netflix was getting ready for a massive international expansion in January 2016 and these countries would all be important to us. We decided to run interviews in India and Germany to find out what percentage of customers used the download feature. In India we would interview YouTube users, in Germany Watchever users (a similar type of German platform), and in the US we would interview Amazon Prime users (because Amazon Prime offered downloads). In the United States, 15 to 20 percent of Amazon Prime users used the downloading function according to our findings. That was a lot higher than the one percent Reed estimated, though clearly a minority of customers. In India, our research revealed that over 70 percent of YouTube consumers used the download function. That number was enormous! Common responses included: “I have a ninety-minute commute and I ride to work in a car pool so I spend an hour and a half in traffic each day. Cell phone streaming isn’t fast enough in Hyderabad, so I download everything I watch.” Another case, unheard of in the US: “The Internet at my office is fast enough for streaming but at my house it’s not. So I download all my shows at the office and watch them at home in the evening.” Germans have neither the traffic problems nor the commute distances of Indians. But the internet isn’t as ubiquitously reliable as in the US either. “When I watch a show in my kitchen it stops every few minutes to spool,” one German explained, “so I download it in the living room, where the Internet is faster, in order to watch while I’m cooking.” Germany came between the US and India.

 

#15:

Farm for dissent. Socialize the idea. Test it out. This sounds a lot like consensus building, but it’s not. With consensus building the group decides; at Netflix a person will reach out to relevant colleagues, but does not need to get anyone’s agreement before moving forward. Our four-step Innovation Cycle is individual decision-making with input.


In 2004, Chief Marketing Officer Leslie Kilgore introduced a practice to emphasize that the informed captain is solely responsible for the decision. At most companies all important contracts are signed by someone high up in the organization. With Leslie’s encouragement, one of her employees, Camille, had begun signing all of the media agreements for which she was the informed captain. One day our General Counsel went to Leslie and said: “You didn’t sign this huge contract with Disney! Why is Camille’s name on it?” Leslie responded: The person who is living and breathing the contract needs to be the person who owns and signs the contract, not a head of a function or a VP. That takes responsibility of the project away from the person who should be responsible. Obviously, I look at those contracts too. But Camille is proud of what she accomplished. This is her thing, not mine. She is psychologically invested, and I want to keep her that way. I’m not going to take ownership away from her by putting my name on the deal. Leslie was right, and we follow her example across Netflix today. At Netflix you don’t need management to sign off for anything. If you’re the informed captain, take ownership—sign the document yourself.

 

#16:

Once or twice a year, at our product meetings, I ask all of our managers to complete a simple form outlining their bets from the last few years, divided into three categories: bets that went well, bets that didn’t go well, and open bets

At Netflix, we try to shine a bright light on every failed bet. We encourage employees to write open memos explaining candidly what happened, followed by a description of the lessons learned. Here’s an abridged example of one such communication. By chance, it was also written by Chris Jaffe but several years later, in 2016, about another project that didn’t pay off called “Memento.” This document is often passed around Netflix as an example of how to sunshine a failed bet in writing.

Memento update – Product Management Team: Chris J

Around 18 months ago, I brought a memo to the product strategy meeting outlining an idea to include supplemental title-level metadata such as actor bios and related titles into our second screen playback experience. Following a vibrant debate, I decided to pursue the project. We moved forward building the Memento experience on Android mobile. This project took more than a year. Last September we had a release build that we launched in a small test. In February, I concluded that we should not move forward and ended the project. It is important to underscore that the decision to pursue Memento and continue investing in it throughout was solely mine. This outcome and the resulting cost are my complete responsibility. Having invested in this for over a year and then decided not to launch has wasted time and resources and also brought learning. Some of my takeaways: There was real opportunity cost in pursuing this project which, as a result, slowed us down on important mobile innovation. This was a big miss from me on leadership and focus. I should have more thoughtfully considered the limited ability to gain insight from the small second screen population. I assumed that it would grow larger, but I was wrong. I should have considered more deeply the suggestion from the initial strategy meeting that Darwin would be a better test platform for this idea. This reminds me to be open to challenging my own preconceived notions. When I decided to pursue this after the product strategy meeting, I should have come back with a memo to debate the notion of launching with a flat holdback. This was misaligned with how we approach product innovation—not how we do things here. As I got into the project I should have realized its declining value and shut it down months ago. The crash rates in September should have been a clear signal to me to halt our work on it. The end always seemed near, which was an illusion. As it often is.


When the embarrassing mistake is a big one, the temptation to distance yourself from it is great. This is not recommended at Netflix. To survive a big mistake, you must lean all the more into the sunshine. Talk openly about it and you will be forgiven, at least the first few times. But if you brush your mistakes under the rug or keep making them (which you’re more likely to do if you’re in denial about them), the end result will be much more serious.

 

#17:


WE ARE A TEAM, NOT A FAMILY

If you’re serious about talent density, you have to get in the habit of doing something a lot harder: firing a good employee when you think you can get a great one. One of the reasons this is so difficult in many companies is because business leaders are continually telling their employees, “We are a family.” But a high-talent-density work environment is not a family.


A FAMILY IS ABOUT STAYING TOGETHER REGARDLESS OF “PERFORMANCE”


For people who value job security over winning championships, Netflix is not the right choice, and we try to be clear and nonjudgmental about that. 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.


I tell my bosses, the board of directors, that I should be treated no differently. They shouldn’t have to wait for me to fail to replace me. They should replace me once they have a potential CEO who is likely to be more effective. I find it motivating that I have to play for my position every quarter, and I try to keep improving myself to stay ahead.

 

#18:

We pay our employees top of their personal market, so they are all paid very well. Part of that agreement is that they will play on the team as long as they are the best player for the spot. They understand that the needs of our company change quickly and that we expect outstanding performance. So, each employee who chooses to join the Netflix team opts in to our high-talent-density approach. We are transparent about our tactics and many employees are delighted to be surrounded by such high-quality colleagues and happy to put up with some job risk in return. Other people may prefer long-term job security and they choose not to join Netflix.


For example, until 2012, Microsoft managers were asked to rank their employees on a scale from top to bottom performers and encouraged to let go of those at the bottom. In a Vanity Fair article titled, “Microsoft’s Lost Decade,” journalist Kurt Eichenwald quoted a former employee: If you were on a team of ten people, you walked in the first day knowing that, no matter how good everyone was, two people were going to get a great review, seven were going to get mediocre reviews, and one was going to get a terrible review. It leads to employees focusing on competing with each other rather than competing with other companies.


The worst is so-called stack ranking, also known as the “vitality curve” or, more colloquially, as “rank-and-yank.”

Bell curve of employee performance distribution

Fortunately, there is no reason to choose between high talent density and strong collaboration. With the Keeper Test we can achieve both. That’s because there is one critical way we are not like a professional sports team. On the Netflix team there is no fixed number of slots. Our sport isn’t being played to a rule book and we don’t have limits on how many people we play with. One employee doesn’t have to lose for the other to win.


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?”

 

#19:


But Reed doesn’t pay much attention to turnover rate, believing that replacement costs are not as important as ensuring the right person is in every position.


According to the Society for Human Resource Management’s “Human Capital Benchmarking Report,” the average annual turnover rate for American companies the past few years has been around 12 percent voluntary turnover (people choosing to leave the company of their own accord) and 6 percent involuntary (people who were fired), which adds up to a total average annual turnover of 18 percent. For technology companies, the total average annual turnover is more like 13 percent, and in the media/entertainment business it’s 11 percent. Over the same period, voluntary turnover at Netflix has remained steady at 3–4 percent (considerably below the 12 percent average—meaning not many choose to leave) and 8 percent involuntary (meaning 2 percent more people get fired at Netflix than the 6 percent average), equaling a grand total of 11–12 percent annual turnover . . . or just around the average for the sector. It seems there aren’t actually that many people Netflix managers wouldn’t fight to keep.

Employee Turnover rate
 

#20:


“Only say about someone what you will say to their face.” The less we talk about people behind their backs, the more we eliminate the gossip that creates inefficiency and bad feelings—and


Candor is like going to the dentist. Even if you encourage everyone to brush daily, some won’t do it. Those who do may still miss the uncomfortable spots. I can’t ensure the candor we encourage is happening every day. But I can ensure that we have regular mechanisms in place so that the most critical feedback gets out.

 

#21:


We’ve been against performance reviews from the beginning. The first problem is that the feedback goes only one way—downward. The second difficulty is that with a performance review you get feedback from only one person—your boss. This is in direct opposition to our “don’t seek to please your boss” vibe. I want people to receive feedback not just from their direct managers but from anyone who has feedback to provide. The third issue is that companies usually base performance reviews on annual goals. But employees and their managers don’t set annual goals or KPIs (Key Performance Indicators) at Netflix. Likewise, many companies use performance reviews to determine pay raises, but at Netflix we base salaries on the market, not performance.


We now do the 360 written feedback every year, asking each person to sign their comments. We no longer have employees rate each other on a scale of 1 to 5, since we don’t link the process to raises, promotions, or firings. The goal is to help everyone get better, not to categorize them into boxes. The other big improvement is that each person can now give feedback to as many colleagues as they choose at any level in the organization—not just direct reports, line managers, or a few teammates who have invited input. Most people at Netflix provide feedback for at least ten colleagues, but thirty or forty is common. I received comments from seventy-one people on my 2018 report.


If you’d like to try the live 360 for yourself, here are a few tips: Length and location: A live 360 will take several hours. Do it over dinner (or at least include a meal) and keep the group small. We sometimes have sessions with ten or twelve people, but eight or fewer is more manageable. For a group of eight you’ll need about three hours. A group of twelve could run to five hours. Method: All feedback should be provided and received as an actionable gift following the 4A feedback guidelines outlined in chapter 2. The leader will need to explain this in advance and monitor it during the session. Positive actionable feedback (continue to . . .) is fine, but keep it in check. A good mix is 25 percent positive and 75 percent developmental (start doing . . . and stop doing . . .). Any nonactionable fluff (“I think you’re a great colleague” or “I love working with you”) should be discouraged and stamped out. Getting started: The first few feedback interactions will set the tone for the evening. Choose a feedback receiver who will receive tough feedback with openness and appreciation. Choose a feedback provider who will give the tough feedback, while following the 4A guidelines. Often the boss chooses to be the first to receive.

 

#22:

Lead with context, not control

At just about any other company, with this much money on the table, the senior guy would get involved and control the negotiations. But that’s not what leadership looks like at Netflix. As Adam explained: “Ted wasn’t about to make that decision for me, but he set broad context to help align my thinking with the company’s strategy. That context he set laid the foundation for my decision.”


Therefore, the first question you need to answer when choosing whether to lead with context or control is, “What is the level of talent density of my staff?” If your employees are struggling, you’ll need to monitor and check their work to ensure they are making the right decisions. If you’ve got a group of high performers, they’ll most likely crave freedom and thrive if you lead with context.


When considering whether to lead with context or control, the second key question to ask is whether your goal is error prevention or innovation.


If your focus is on eliminating mistakes, then control is best. ExxonMobil is in a safety-critical market. Its sites need hundreds of safety procedures to minimize the risk of people getting hurt. Control mechanisms are a necessity when you’re trying to run a dangerous operation profitably with as few accidents as possible. But if, like Target, your goal is innovation, making a mistake is not the primary risk. The big risk is becoming irrelevant because your employees aren’t coming up with great ideas to reinvent the business. Although many brick-and-mortar retailers have gone out of business as increasing numbers of people shop online, Target has made a priority of imagining fresh ways to get customers into the stores.


And that brings me to the third necessary condition you need to have in place in order for leading with context to work. In addition to high talent density (that’s the first condition) and a goal of innovation rather than error prevention (that’s the second), you also need to work (here comes the third) in a system that is “loosely coupled.” If you are already part of a tightly coupled system, you may have to work with the top leaders in the company in order to change the entire organizational approach before trying to lead with context at a lower level. Even with high talent density, and innovation as your goal, if you don’t sort this out, leading with context may be impossible.


It should be pretty clear by now that at Netflix, with our Informed Captain model, we have a loosely coupled system. Decision making is highly dispersed, and we have few centralized control processes, rules, or policies. This provides a high degree of freedom to individuals, gives each department greater flexibility, and speeds up decision making throughout the company.


All this said, tight coupling does have at least one important organizational benefit. In a tightly coupled system, strategic change is easily aligned throughout the organization. If the CEO wants all departments throughout the company to focus on sustainability and ethical sourcing, then she can control that through her centralized decision-making.


Loose coupling works only if there is a clear, shared context between the boss and the team. That alignment of context drives employees to make decisions that support the mission and strategy of the overall organization. This is why the mantra at Netflix is HIGHLY ALIGNED, LOOSELY COUPLED

 

#23:

Use a handful of methods for setting context across the company, but my primary platforms are our E-staff (Executive Staff) and our Quarterly Business Review (QBR) meetings. A few times a year we bring together all the leaders (top 10 to 15 percent of people) of the company from around the world.


The number one goal for these meetings is to make sure that all leaders across the company are highly aligned on what I call our North Star: the general direction we are running


Before and after QBR, we make available many dozens of pages of Google Docs memos to every employee, explaining all the context and content we shared at QBR. This information is read not just by QBR participants but also by people at all levels of the company, including administrative


Between QBRs, I hold ongoing one-on-one meetings to get a feel for how aligned we actually are and where context is lacking. I have one thirty-minute meeting with each director once a year. That makes about 250 hours of meetings with people who are three to five levels below me in the org chart. In addition, I meet with each vice president (two to three levels below me) for one hour every quarter. This results in another 500 hours of meetings annually. When Netflix was smaller, I met with each person more frequently, but I still spend about 25 percent of my annual time on all these meetings.

 

#24:

WHEN ONE OF YOUR PEOPLE DOES SOMETHING DUMB DON’T BLAME THEM. INSTEAD ASK YOURSELF WHAT CONTEXT YOU FAILED TO SET. ARE YOU ARTICULATE AND INSPIRING ENOUGH IN EXPRESSING YOUR GOALS AND STRATEGY? HAVE YOU CLEARLY EXPLAINED ALL THE ASSUMPTIONS AND RISKS THAT WILL HELP YOUR TEAM TO MAKE GOOD DECISIONS? ARE YOU AND YOUR EMPLOYEES HIGHLY ALIGNED ON VISION AND OBJECTIVES?


ALIGNMENT IS A TREE, NOT A PYRAMID


Decision making at every organization I’d worked at before Netflix was structured like a pyramid.


The pyramid decision-making structure Melissa experienced at her previous company is easily recognizable in the majority of organizations, regardless of industry or location. Either the boss makes the decision and pushes it down the pyramid for implementation, or those at lower levels make the smaller decisions but refer the bigger issues to the higher-ups. But at Netflix, as we’ve discussed, the informed captain is the decision maker, not the boss. The boss’s job is to set the context that leads the team to make the best decisions for the organization. If we follow this leadership system from the CEO all the way to the informed captain, we see that it works not so much like a pyramid but more like a tree, with the CEO sitting all the way down at the roots and the informed captain up at the top branches making decisions.

 

#25:

Some of the other parts of our culture quickly proved less easy to export. One early example was the Keeper Test. We soon learned that, although we can follow our mantra “Adequate Performance Gets a Generous Severance” in every country, what is considered generous in the US is often seen as stingy—if not illegal—in some European countries. In the Netherlands, for example, the amount of severance required by law depends on how long the employee has been with the company. So we had to adapt. Now in the Netherlands, if firing someone who’s been with us for a while, Adequate Performance Gets an Even More Generous Severance. The Keeper Test and all the elements that go with it can work internationally but require adaptation to the local employment practices and laws.


One of the reasons for the country placements on this scale has to do with the language people use when they provide criticism. More direct cultures tend to use what linguists call upgraders, words preceding or following negative feedback that make it feel stronger, such as “absolutely,” “totally,” or “strongly”: “This is absolutely inappropriate” or “This is totally unprofessional.” In contrast, more indirect cultures use more downgraders, when giving negative feedback. These are words that soften the criticism, such as “kind of,” “sort of,” “a little,” “a bit,” “maybe,” and “slightly”. Another type of downgrader is a deliberate understatement, such as, “We are not quite there yet,” when you really mean, “We are nowhere near our goal.”


Make ADAPTABILITY the fifth A of your candor model.

 

Others:

Employees are likely to take even less time off if you remove the vacation allotment altogether because of a well-documented human behavior, which psychologists refer to as “loss aversion.” 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.

 

City engineers tried another approach, putting up dynamic speed displays. In other words, “driver feedback.” Each included a speed limit sign, a radar sensor, and a readout announcing, “Your Speed.” Passing drivers got real-time data on their speed and a reminder of how fast they should be going. Experts were doubtful that this would help. Everyone has a speedometer on their dashboard. Furthermore, law enforcement doctrine has long held that people obey rules only when they face clear consequences for breaking them—why would the displays influence driving behavior? But they did. Studies showed that drivers slowed down 14 percent—at three schools, the average speed fell below the posted speed limit. Fourteen percent is a big improvement from something as simple and low-cost as feedback.

 

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.”

 

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.

 

In the absence of a policy, the amount of vacation people take largely reflects what they see their boss and colleagues taking. 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.

 

Ted had set a clear context. If Icarus wasn’t going to be a massive hit, Adam shouldn’t bet massive money on it. He’d already bid $2.5 million and all the usual suspects, from Amazon to Hulu, were also sniffing around. If $2.5 million wasn’t enough and this movie wasn’t “the one,” he should let it go. But if Adam believed Icarus was going to be a huge hit, then he should swing big—bet whatever it would take to get that movie on Netflix. Adam did believe Icarus was going to be a massive hit, so he took the bet. Netflix paid a historic $4.6 million to get it. In August 2017, Icarus was released on Netflix.


In the first few months Icarus struggled to get off the ground. No one was watching. Adam was crushed. Then one event changed everything. In December 2017, the International Olympic Committee issued a report that Russia had been banned from the games. In that IOC report, Icarus was cited as the key piece of evidence. Rodchenkov went on 60 Minutes, where he stated his belief that at least twenty countries were doping in the same way. Then Lance Armstrong came out publicly voicing his appreciation of Icarus. Suddenly everyone was talking about this movie and viewing figures skyrocketed. In March 2018 Icarus was nominated for best documentary at the Oscars.

 

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.