Freedom Responsibility Culture

8/9/2019 Freedom Responsibility Culture

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Reference Guide on our

Freedom & Responsibility

These slides are meant for

reading,rather than presenting



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Freedom & Responsibility

Applies to our Our hourly employees are

important, but have morestructured job roles



3

Culture: what gives Netflix

the best chance of



5

Lots of companies have

nice sounding



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Enron Had A Nice-SoundingValue Statement with 4 Values

• Integrity

• Communicatio

n• Respect

• Excellence

Enron

Their 4 values werechiseled in marble in themain lobby, but had littleto do with the real values



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The real company values,

as opposed to the



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Real company values are the

behaviors and skills



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We Particularly Value

in our Colleagues



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You make wise decisions

(people, technical,business, and creative)despite ambiguity

You identify root causes,udgme



11

Communicat

You listen well, instead of reacting fast, so you canbetter understand

You are concise andarticulate in speech and



12

Impa

You accomplish amazingamounts of importantwork

You demonstrateconsistently strong



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Curiosi

You learn rapidly andeagerly

You seek to understandour strategy, market,subscribers, and suppliers



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Innovati

You re-conceptualizeissues to discoverpractical solutions to hardproblems

You challenge prevailing



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Coura

You say what you thinkeven if it is controversial

You make tough decisionswithout excessiveagonizing



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Passi

You inspire others withyour thirst for excellence

You care intensely aboutNetflix' success



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Hones

You are known for candorand directness

You are non-political whenyou disagree with others



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Selflessn

You seek what is best forNetflix, rather than bestfor yourself or your group

You are ego-less whensearching for the best



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Judgment You make wise decisions (people,technical,business, and creative) despiteambiguity

You identify root causes, and getbeyond treating symptoms

You think strategically, and canarticulate what you are, and are not ,trying to do

Innovation You re-conceptualize issues to discoverpractical solutions to hard problems

You challenge prevailing assumptionswhen warranted, and suggest better

approaches

You create new ideas that prove useful

You keep us nimble by minimizingcomplexity and finding time to simplify

Impact You accomplish amazing amounts of important work

You demonstrate consistently strongperformance so colleagues can relyupon you

You focus on great results rather than

on process

You exhibit bias-to-action, and avoid

Curiosity You learn rapidly and eagerly

You seek to understand our strategy,market, subscribers, and suppliers

You are broadly knowledgeable aboutbusiness, technology andentertainment

You contribute effectively outside of your specialty

Communication You listen well, instead of reacting fast,so you can better understand

You are concise and articulate in speechand writing

You treat people with respectindependent of their status or

disagreement with you

You maintain calm poise in stressful

Courage You say what you think even if it iscontroversial

You make tough decisions withoutexcessive agonizing

You take smart risks

You question actions inconsistent withour values

Honesty You are known for candor anddirectness

You are non-political when you disagreewith others

You only say things about fellowemployees you will say to their face

You are quick to admit mistakes

Selflessness You seek what is best for Netflix, ratherthan best for yourself or your group

You are ego-less when searching for thebest ideas

You make time to help colleagues

You share information openly andproactively

Passion You inspire others with your thirst forexcellence

You care intensely about Netflix'success

You celebrate wins

You are tenacious

We Want to Work with People Who Embody



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“You question actions

inconsistent with ourPart of the Courage value

Akin to the honor code pledge:“I will not lie, nor cheat, nor steal, nor tolerate those

who do”



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Values reinforced in hiring,

in 360 reviews, at comp



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Seven Aspects of our

• Values are what we Value

• High Performance

•

Freedom & Responsibility• Context, not Control

• Highly Aligned, Loosely Coupled

•

Pay Top of Market• Promotions & Development



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Imagine if every person at

Netflix



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Great Workplace is

Stunning Colleagues

Great workplace is not day-care,

espresso, health benefits, sushi lunches,nice offices,

or big compensation,



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Like every company,

we try to hire well



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But, unlike many companies,

we practice “adequate



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We’re a team, not a family



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The Keeper Test

Managers Use:“Which of my people,

if they told methey were leaving in two months

for a similar job at a peer company,would I fight hard to keep at Netflix?



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The Keeper Test

Managers Use:“Which of my people,

if they told methey were leaving in two months

for a similar job at a peer company,would I fight hard to keep at Netflix?

The other people should get a generous

severance now,



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Honesty Always

To avoid surprises, you shouldperiodically ask your manager: “If I

told you I were leaving, how hardwould you work to change my mind



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Isn’t Loyalty Good?

What About Hard Workers?



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Loyalty is Good

• Loyalty is good as a stabilizer

• People who have been stars for us, andhit a bad patch, get a near term pass

because we think they are likely tobecome stars for us again

• We want the same: if Netflix hits a

temporary bad patch, we want peopleto stick with us

• But unlimited loyalty to a shrinking firm,



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Hard Work – Not Directly

• It’s about effectiveness – not effort –even though effectiveness is harderto assess than effort

• We don’t measure people by howmany evenings or weekends they arein their cube

• We do try to measure people by howmuch, how quickly and how well theyet work done – es eciall under



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Brilliant Jerks

• Some companies tolerate them

• For us, the cost to teamwork is toohigh

• Diverse styles are fine – as long asperson embodies the 9 values



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Why are we so manic on

high performance?In procedural work, the best are 2x

better than the average.

In creative work, the best are 10xbetter than the average, so huge



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Why are we so manic on

high performance?Great Workplace is

Stunning Colleagues



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• Freedom & Responsibility

• Context, not Control


•




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The Rare Responsible

• Self motivating• Self aware• Self disciplined•

Self improving• Acts like a leader• Doesn’t wait to be told what to do• Never feels “that’s not my job”• Picks up the trash lying on the floor• Behaves like an owner



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Responsible People

Thrive on Freedom,



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Our model is to increase

employee freedom as we



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Most Companiesrt il Fr m th t

Bigger

Employee



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Most Companies Curtail

Freedom



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Desire for Bigger Positive ImpactCreates Growth

Growth



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Growth Increases

Complexity



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Growth Shrinks Talent Densityin Most Firms

% High Performance Employees

Complexity



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Chaos Emerges


Chaos and errors spikes here –businesshas become too complex to run

Complexity



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Process Emerges to Stop the

ProcedureNo one loves process,butfeels good compared to



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Process-focus Drives More T l nt t




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Strong Near-Term Outcome

• A highly-successful process-drivencompany – With leading share in its market

–

Minimal thinking required – Few mistakes made – very efficient

– Few curious innovator-mavericks remain

– Very optimized processes for its existing

market



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Then the Market Shifts…

• Market shifts due to new technologyor new competitors or new businessmodels

•Company is unable to adapt quickly,because the employees areextremely good at following theexisting processes, and process

adherence is the value system• Company generally grinds painfully

into irrelevance due to inabilit to

ik h d



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Seems Like Three Bad

1. Stay creative by staying small

2. Try to avoid rules as you grow, sufferchaos

3. Use process as you grow to driveefficient execution of current model,but cripple creativity, innovation,

flexibility, and ability to thrive whenmarket inevitably shifts



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A Fourth Option

• Avoid Chaos as you grow with EverMore High Performance People – notwith Rules

• Then you can continue to runinformally with self-discipline andavoid chaos

• The run informally part is whatenables and attracts creativity

Th K I T l t



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The Key: Increase TalentD n it f t r th n m l xit

% H i g h P e r f o r

m a n c e E

m p l o y e

e s

B u s i n e s s

C o m p l e x i t y



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Increase Talent Density

• Top of market compensation

• Attract hi-value peoplethrough freedom to make

impact• Be demanding about high

performance culture

% H i g h P e r f o r

m a n c e E

m p l o y e

e s



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Minimize Complexity Growth

B u s i n e s s

C o m p l e x i t y

• Few big products vs many small ones

• Eliminate distracting complexity(barnacles)

• Value simplicity



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With the Right People,



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Is Freedom Absolute?

Are all rules & processes bad?



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Freedom is not absolute.

T T f N



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Two Types of Necessary

1. Prevent irrevocable disaster – E.g. Financials produced are wrong

– E.g. Hackers steal our customers’ credit cardinfo

2. Moral, ethical, legal issues – E.g. Dishonesty, harassment are intolerable

M tl Th h R id



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Mostly, Though, RapidR v r i

• Just fix problems quickly – High performers make very few

errors

•

We’re in a creative-inventive market,not a safety-critical market likemedicine or nuclear power

• You may have heard preventing erroris cheaper than fixing it – Yes, in manufacturing or medicine, but…

–



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“Good” vs “Bad” Processes

• “Good” processes help talented people getmore done – Web site push every two weeks rather than

random

– Spend within budget each quarter so don’thave to coordinate every spending decisionacross departments

– Regularly scheduled strategy and contextmeetings

• “Bad” processes try to prevent recoverablemistakes – Get re-a rovals for $5k s endin



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Rule Creep

• “Bad” processes tend to creep in – Preventing errors just sounds so good

• We try to get rid of rules when we

can, to reinforce the point



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Example: Netflix Vacation

PolicyUntil 2004 we had the

standard model of N days peryear



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Meanwhile…

We’re all working online somenights and weekends,

responding to emails at odd



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An employee pointed

out…We don’t track hours workedper day or per week, so why

are we tracking days of



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We realized…

We should focus on what peopleget done, not how many hours or

days worked. Just as we don’thave an 9-5 day policy, we don’t



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Netflix Vacation Policy

and Tracking“there is no policy or tracking”



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Netflix Vacation Policy

and Tracking“there is no policy or tracking”

“There is also no clothing policy at Netflix, butno one has come to work naked lately.” – PattyMcCord, 2004



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Another Example of

Freedom and



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Most companies havecomplex policies around what



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Netflix Policiesfor Expensing, Entertainment,

“Act in Netflix’s BestInterests”

“Act in Netflix’s Best Interests”



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Act in Netflix s Best Interestsn r ll M n …

1. Expense only what you wouldotherwise not spend, and is worthwhilefor work.

2. Travel as you would if it were your ownmoney.

3. Disclose non-trivial vendor gifts.

4. Take from Netflix only when it isinefficient to not take, andinconsequential.



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Freedom and Responsibility

• Many people say one can’t do it atscale

• But since going public in 2002, which

is traditionally the beginning of theend for freedom, we’ve increased talent density and employee freedom

substantially.



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Summary of Freedom & Responsibility:




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•




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The best managers figure outhow to get great outcomes



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•Context•Strategy

•Metrics

•Assumptions

•Objectives

•Clearly-defined roles

•

Knowledge of the stakes• Transparency arounddecision-making

•

•Control• Top-down decision-making

•Management approval•Committees

•Planning and processvalued more than results

•

Provide the insight and understanding to enable sound

decisions

E ti



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Exceptions

• Control can be important inemergency

– No time to take long-term capacity-

building view• Control can be important when

someone is still learning their area –

Takes time to pick up the necessarycontext

• Control can be important when you



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Managers: When one of yourtalented people



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Managers: When you aretempted to “control” your

Are you articulate and

inspiring enough about goalsand strategies?

G d C t t



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Good Context

• Link to company/functional goals• Relative priority (how important/how time

sensitive) – Critical (needs to happen now), or…

– Nice to have (when you can get to it)

• Level of precision & refinement – No errors (credit cards handling, etc…), or…

– Pretty good / can correct errors (website), or…

– Rough (experimental)

• Key stakeholders

•



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Why Managing Through

Context?High performance people will

do better work if they

understand the context



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Investing in Context

This is why we do newemployee college, and why we

are so open internally about




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• Pay Top of Market

• Promotions & Development

Three Models of Corporate



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Three Models of Corporate T mw rk

1. Tightly-Coupled Monolith

2. Independent Silos

3. Highly Aligned, Loosely Coupled

Tightl Co pled Monolith



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Tightly-Coupled Monolith

• Senior management reviews andapproves nearly all tactics

• Lots of x-departmental buy-in

meetings• Keeping other groups in agreement

has equal precedence with pleasing

customers• Mavericks get exhausted trying to

Independent Silos



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Independent Silos

• Each group executes on theirobjectives with little coordination

• Work that requires coordination

suffers• Alienation and suspicion between

departments

• Only works well when areas areindependent –

The Netflix Choice



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The Netflix Choice

1. Tightly-Coupled Monolith

2. Independent Silos

3. Highly Aligned, Loosely Coupled

Highly Aligned Loosely



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Highly Aligned, Loosely

• Highly Aligned – Strategy and goals are clear, specific, broadly

understood – Team interactions are on strategy and goals rather

than tactics –

Requires large investment in management time tobe transparent and articulate and perceptive andopen

• Loosely Coupled – Minimal cross-functional meetings except to get

aligned on goals and strategy – Trust between groups on tactics without

previewing/approving each one – groups can movefast

– -



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Highly-Aligned Loosely-Coupled teamwork




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• Values are what we Value• High Performance








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Pay Top of Market is Core

to One outstanding employee gets

more done and costs less than two

adequate employees

We endeavor to have onl

Three Tests for Top of Market



Confidential 94

Three Tests for Top of Marketf r P r n

1. What could person get elsewhere?

2. What would we pay forreplacement?

3. What would we pay to keep person? – If they had a bigger offer elsewhere

Takes Great Judgment



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Takes Great Judgment

• Goal is to keep each employee at topof market for that person

– Pay them more than anyone else likely

would – Pay them as much as a replacement

would cost

– Pay them as much as we would pay to

keep them if they had higher offer fromelsewhere

Titles Not Very Helpful



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Titles Not Very Helpful

• Lots of people have the title “MajorLeague Pitcher” but they are not allequally effective

• Similarly, all people with the title“Senior Marketing Manager” or“Director of Engineering” are not

equally effective• So the art of compensation is

answerin the Three Tests for each

Annual Comp Review



Confidential 97

Annual Comp Review

• Hiring is market-based at manyfirms, but at Netflix we also make theannual comp review market-based –

Applies same lens as hiring• Essentially, rehiring each employee

each year, for purposes of comp –

At annual comp review, manager has toanswer the Three Tests for the personalmarket for each of their employees

No Fixed Budgets



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No Fixed Budgets

• There are no centrally administered“raise pools” each year

• Instead, each manager aligns their

people to market each year – themarket will be different in differentareas

Annual Comp Review



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Annual Comp Review

• Some people will move up in compvery quickly because their value inthe marketplace is moving upquickly, driven by increasing skillsand/or great demand for their area

• Some people will move down or stayflat because their value in the

marketplace has moved down orstayed flat – Depends in part on inflation and

Compensation Not Dependent



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p pn N tflix

• Whether Netflix is prospering orfloundering, we pay at the top of themarket –

i.e., sports teams with losing records stillpay talent the market rate

• Employees can choose how muchthey want to link their economic

destiny to Netflix success or failureby deciding how much Netflix stockor stock options they want to own

Bad Ideas



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Bad Ideas

• Manager sets pay at Nth percentile of title-linked compensation data

– The “Major League Pitcher” problem

• Manager cares about internal parityinstead of external market value – Fairness in comp is being true to the

market• Manager gives everyone a 4% raise

– Ver unlikel to reflect the market

When Top of Market Comp



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p pD n Ri ht...

• Nearly all ex-employees will take astep down in comp for their next job

• We will rarely counter with higher

comp when someone is voluntarilyleaving because we have alreadymoved comp to our max for that

person• Employees will feel they are getting

aid well relative to their other

Versus Traditional Model



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Versus Traditional Model

• Traditional model is good prior yearearns a raise, independent of market – Problem is employees can get materially

under- or over-paid relative to themarket, over time

– When materially under-paid, employeesswitch firms to take advantage of market-based pay on hiring

– When materially over-paid, employeesare trapped in current firm

Employee Success



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Employee Success

• It’s pretty ingrained in our society thatthe size of one’s raise is the indicator of how well one did the prior year – but atNetflix there are other factors too –

namely, the outside market• In our model, employee success is big

factor in comp because it influencesmarket value –

In particular, how much we would pay tokeep the person – But employee success is not the only factor

in comp, so the linkage of prior year

Good For Each Employee to



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p yn r t n Th ir M rk t V l

• It a healthy idea, not a traitorousidea, to understand what other firmswould pay you, by interviewing and

talking to peers at other companies – Talk with your manager about what you

find

– Minor exception: interviewing withgroups that directly compete withNetflix, because their motive is in part

Efficiency



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Efficiency

• Big salary is the most efficient form of comp

– Most motivating for any given expenselevel

– No bonuses – just include in salary – somuch simpler

– No free stock options – just big salary

–Great health plan options, but highemployee co-pay

– No philanthropic match

Optional Options



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Optional Options

• Employees can request to trade salaryfor stock options, if they wish

• The options are fully vested, grantedmonthly, and cost employees in pre-tax

salary approximately half of what suchan option would cost in the openmarket

• Options ultimately valuable only if

Netflix stock climbs over the next 10years• Investing in Netflix stock or stock




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p

• High Performance• Values are what we Value








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In some time periods, insome groups, there will be

Some people, through bothluck and talent, will have

extraordinary career growth

Baseball Analogy: Minors to



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gy

• Very talented people usually get tomove up, but only true for the verytalented

• Some luck in terms of what positions

open up and what the competition is• Some people move to other teams to

get the opportunity they want• Great teams keep their best talent• Some minor league players keep

playing even though they don’t moveup because they love the game

Netflix Doesn’t Have to be



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• In some times, in some groups, theremay not be enough growthopportunity for everyone

• In which case we should celebratesomeone leaving for a bigger job thatwe didn’t have available to offer

them• If that is what the person prefers

Two Necessary Conditions



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f r Pr m ti n

• Job has to be big enough – We might have an incredible manager of

something, but we don’t need a director of it because job isn’t big enough

• If the incredible manager left, we would replacewith manager, not with director

• Person has to be a superstar in currentrole –

Could get the next level job here if applyingfrom outside and we knew their talents well

– Could get the next level job at peer firm

Timing



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Timing

• If manager would promote employeeto keep them if employee werethinking of leaving, manager should

promote now, and not wait• Both tests still have to be passed

– Job big enough

–

Superstar in current role

Development



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Development

• We develop people by giving themthe opportunity to developthemselves, by surrounding them

with stunning colleagues and givingthem big challenges to work on – Mediocre colleagues or unchallenging

work is what kills progress of a person’s

skills

Development



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Development

• Formalized development is rarelyeffective, and we don’t try to do it

– E.g. Courses, mentor assignment,

rotation around a firm, multi-year careerpaths, etc.

• High performance people aregenerally self-improving throughexperience, observation,introspection, reading and discussion



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Individuals should managetheir own career paths, and

Like retirement planning –safer as individual

responsibility



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Individual’s economic securityis based upon their

We try hard to consistentlyprovide opportunity to grow

both




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• Values are what we Value• High Performance








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Why is culture important?What is our culture trying to



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Culture is How a Firm

OperatesWhat practices give Netflix the

best chance of continuous

success for many generations of



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Continuous Success =Continuous growth in



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Need a culture that supportsrapid innovation and



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Need a culture that supportsrapid innovation and

Both arerequired for

There is tension betweenthese two



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Need a culture that supports



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Need a culture that supports

High performance people andeffective teamwork



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Need a culture that avoids



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This slide deck is our currentbest thinking about



Our culture is a work inprogress

Freedom Responsibility Culture

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