THE THIRD DOT
Once you have a workforce made up nearly exclusively of high performers, you can count on people to behave responsibly. Once you have developed a culture of candor, employees will watch out for one another and ensure their teammates’ actions are in line with the good of the company. Then you can begin to remove controls and give your staff more freedom. Great places to start are the lifting of your vacation, travel, and expense policies. These elements give people more control over their own lives and convey a loud message that you trust your employees to do what’s right. The trust you offer will in turn instill feelings of responsibility in your workforce, leading everyone in the company to have a greater sense of ownership.
▶ TAKEAWAYS FROM CHAPTER 3A (VACATION)
When removing your vacation policy, explain that there is no need to ask for prior approval and that neither the employees themselves nor their managers are expected to keep track of their days away from the office.
It is left to the employee alone to decide if and when he or she feels like taking a few hours, a day, a week, or a month off work.
When you remove the vacation policy, it will leave a hole. What fills the hole is the context the boss provides for the team. Copious discussions must take place, setting the scene for how employees should approach vacation decisions.
The practices modeled by the boss will be critical to guide employees as to the appropriate behavior. An office with no vacation policy but a boss who never vacations will result in an office that never vacations.
▶ TAKEAWAYS FROM CHAPTER 3B (TRAVEL AND EXPENSE)
When removing travel and expense policies, encourage managers to set context about how to spend money up front and to check employee receipts at the back end. If people overspend, set more context.
With no expense controls, you’ll need your finance department to audit a portion of receipts annually.
When you find people abusing the system, fire them and speak about the abuse openly—even when they are star performers in other ways. This is necessary so that others understand the ramifications of behaving irresponsibly.
Some expenses may increase with freedom. But the costs from overspending are not nearly as high as the gains that freedom provides.
With expense freedom, employees will be able to make quick decisions to spend money in ways that help the business.
Without the time and administrative costs associated with purchase orders and procurement processes, you will waste fewer resources.
Many employees will respond to their new freedom by spending less than they would in a system with rules. When you tell people you trust them, they will show you how trustworthy they are.
Toward a Culture of Freedom and Responsibility
The summer after we successfully lifted the vacation policy, I was preparing to run a race with Patty McCord’s eleven-year-old son, Tristan. As we trained by running along the Santa Cruz coast, I found myself reflecting on my experience a decade earlier at Pure Software.
The first couple of years at Pure Software we had been a small group working with no rules or policies. But by 1996 we’d grown, largely through acquisition, to seven hundred employees. As we brought in new people, some of them acted irresponsibly, costing us money. We responded as most companies do: we put policies in place to control people’s behavior. Every time we acquired a company, Patty would take our handbook and their handbook and merge the two together.
All these rules meant that going to work was less fun—and our most maverick employees, who were also the most innovative, left the company for more entrepreneurial environments. Those who chose to stay preferred familiarity and consistency. They learned policy adherence as the ultimate value. I realized during those long runs with Tristan that at Pure Software we had, without much thought, dummy-proofed the work environment. The result was that only dummies wanted to work there (well, not really dummies—but you get what I mean).
That summer, I realized that Netflix had reached a point where it was likely to go down the same route as Pure Software if we didn’t actively work against it. The company was getting big, and it was increasingly difficult for our leaders to keep track of what everyone was up to. This would normally be the time to introduce more policies and control processes in order to deal with the complexity that comes with growth. But after the success of our vacation and expenses policy experiments, I began to wonder whether we could do the opposite. Were there other rules we could do without? Instead of increasing employee control as we grew, could we increase employee freedom?
We decided that rather than putting more rules and procedures in place, we would continue to do two other things:
1. We would find new ways to increase talent density. In order to attract and retain the best people, we would have to make sure that we offered the most attractive methods of compensation.
2. We would find new ways to increase candor. If we were going to remove controls, we would need to make sure that our employees had all the information they needed to make good decisions without management oversight. This would require increasing organizational transparency and eliminating company secrets. If we wanted employees to make good decisions for themselves, they would have to understand as much about what was going on in the business as those at the top.
These two points are the topics of the next two chapters.
FYI: Tristan crushed me in the race.
SECTION TWO
NEXT STEPS TO A CULTURE OF FREEDOM AND RESPONSIBILITY
Fortify talent density . . .
4 ▶ Pay Top of Personal Market
Pump up candor . . .
5 ▶ Open the Books
Now remove more controls . . .
6 ▶ No Decision-making Approvals Needed
In the coming section, we’ll take the process of implementing a culture of Freedom and Responsibility to a deeper level. In our talent-density chapter, we’ll discuss compensation processes for attracting and retaining top performers. In our candor chapter, we’ll move from talking about providing honest individual feedback, as explored in chapter 2, to organizational transparency.
FORTIFY TALENT DENSITY . . .
4
PAY TOP OF PERSONAL MARKET
One Friday afternoon in 2015, manager of original content Matt Thunell felt his heart pounding as he paged through a brand-new script. Squeezed into a corner table at a noisy Hollywood hot spot, agent Andrew Wang ate his lunch quietly as Matt read. From selecting screenplays to producing pilots, Matt’s known as one of the most talented creative executives in the business. One of his skills: fostering bonds with the right agents. Wang hadn’t shared the Stranger Things draft with anyone yet, but because of their great relationship, he slipped Matt the script right there at the lunch table.
Matt raced back to the office and passed the document to Brian Wright (the ex-Nickelodeon VP we met in chapter 2). Brian is known throughout the TV world for his uncanny ability to sense what audiences will watch. “That script was beautiful,” Brian gushes. “Great characters and moving at a breakneck speed.” The arguments others would make were obvious: “The tween protagonists are too old for kids and too young for adults, so, uninteresting to most viewers,” or “It’s an eighties period piece that’ll only interest a niche audience.” Brian saw differently: “Everyone was going to watch this show. Stranger Things was going to be big and Netflix was going to make it.”
By spring 2015, the script was purchased, and the deadline was looming. But Netflix didn’t have a studio yet. Hits like House of Cards and Orange Is the New Black had been made by other studios and then licensed exclusively to Netflix. Netflix hadn’t produced content itself. Now Netflix was entering a new phase. “Ted had made it clear, future original shows we would produce ourselves.”
At this stage, Ne
tflix had only a handful of people on the production team, far less than the many dozens of people a studio usually requires. Matt remembers it like this:
We managed to pull off Stranger Things because each member of the team was wildly competent. Rob is a super-brilliant negotiator. So when one of the show’s stars didn’t want to sign a multi-year contract, he knew exactly what to say. Laurence was the finance guy. He’s supposed to be watching the money. But he did his entire finance job while spending all other waking moments doubling as a production executive—things like renting spaces for the writers to work in. Laurence and Rob did the work of about twenty people.
Stranger Things season 1 took just over a year to finish. It aired on July 15, 2016. A few months later, it was nominated for best drama series at the Golden Globes.
The success of Netflix is founded on these types of unlikely stories: small teams consisting exclusively of significantly above-average performers—what Reed refers to as dream teams—working on big hairy problems. Here’s Matt again:
At most places, there are some great employees and some just okay ones. The okay ones are managed while the stars are relied upon to give everything they can. At Netflix, it’s different. We live in a walled garden of excellence, where everyone is a high performer. You go into these meetings and it’s like the talent and brain power in the room could generate the office electricity. People are challenging one another, building up arguments, and each of them is practically smarter than Stephen Hawking. That’s why we get so much done at such incredible speed here. It’s because of the crazy high talent density.
The high talent density at Netflix is the engine that drives Netflix success. Reed learned this simple but critical strategy after the layoffs in 2001. More complicated was figuring out what steps to take in order to attract and retain that top talent.
OFFER ROCK-STAR PAY
In the first few years of Netflix, we were growing fast and needed to hire more software engineers. With my new understanding that high talent density would be the engine of our success, we focused on finding the top performers in the market. In Silicon Valley, many of them worked for Google, Apple, and Facebook, and they were being paid a lot. We didn’t have the cash to lure them away in any numbers.
But, as an engineer, I was familiar with a concept that has been understood in software since 1968, referred to as the “rock-star principle.” 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.
The fact that one of these programmers would so dramatically outperform another has caused ripples across the software industry ever since, as managers grapple with how some programmers can be worth so much more than their perfectly adequate colleagues. With a fixed amount of money for salaries and a project I needed to complete, I had a choice. I could hire ten to twenty-five average engineers or I could hire one “rock-star” and pay significantly more than what I’d pay the others, if necessary.
Since then I have come to see that the best programmer doesn’t add ten times the value. She adds more like a hundred times. Bill Gates, whom I worked with while on the Microsoft board, purportedly went further. He is often quoted as saying: “A great lathe operator commands several times the wages of an average lathe operator, but a great writer of software code is worth ten thousand times the price of an average software writer.” In the software industry, this is a known principle (although still much debated).
I started thinking about where this model applied outside the software industry. The reason the rock-star engineer is so much more valuable than his counterparts isn’t unique to programming. The great software engineer is incredibly creative and can see conceptual patterns that others can’t. She has an adjustable perspective, so when she gets stuck in a specific way of thinking, she has ways to push, pull, or prod herself to look beyond. These are the same skills needed in any creative job. 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. A really good scooper can probably fill two or three times the number of cones an average one could. A really good driver might have half the average number of accidents. 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. In all creative roles, the best is easily ten times better than average. The best publicity expert can dream up a stunt that attracts millions more customers than the average one. Going back to the Stranger Things scenario, Matt Thunell’s relationship with Andrew Wang and many similar agents makes him hundreds of times more successful than a creative executive who doesn’t have those relationships. Brian Wright’s ability to see that Stranger Things will be a success, when other studios believe the tween-aged protagonists won’t be popular, makes him thousands of times more valuable than a content vice president who doesn’t have that script sixth sense. These are all creative jobs and they all follow the rock-star principle.
In 2003 we didn’t have much money but we had a lot to accomplish. We had to think carefully about how we’d spend the little we had. We determined that for any type of operational role, where there was a clear cap on how good the work could be, we would pay middle of market rate. But for all creative jobs we would pay one incredible employee at the top of her personal market, instead of using that same money to hire a dozen or more adequate performers. This would result in a lean workforce. We’d be relying on one tremendous person to do the work of many. But we’d pay tremendously.
This is the way we have hired the majority of employees at Netflix ever since. The approach has been remarkably successful. We have exponentially increased our speed of innovation and our output.
I’ve also found having a lean workforce has side advantages. Managing people well is hard and takes a lot of effort. Managing mediocre-performing employees is harder and more time consuming. By keeping our organization small and our teams lean, each manager has fewer people to manage and can therefore do a better job at it. When those lean teams are exclusively made up of exceptional-performing employees, the managers do better, the employees do better, and the entire team works better—and faster.
IT’S NOT JUST WHAT YOU PAY, IT’S ALSO HOW YOU PAY IT
Reed’s strategy sounds great. But if you run a start-up no one’s ever heard of, you may well wonder whether top performers will come work for you, even if you are ready to pay.
The research suggests that they will. A 2018 survey by OfficeTeam asked twenty-eight hundred workers what reasons would motivate them to pack up their desk and quit their jobs. Some 44 percent of respondents, well over any other category, stated they would leave their current job for one that pays more.
If you work for a small, unknown company, and hope to apply Reed’s theory, you’ll probably find the person you need.
But it’s not just how much you pay people that matters. The
form of payment is also important. At the vast majority of companies, highly paid white-collar employees receive a salary plus a bonus, which is paid if they meet a set of predetermined goals. A large part of the top talent’s pay is contingent on performance.
This is not as great as it sounds. When Reed and Patty were figuring out how to attract rock-stars to Netflix, they needed to differentiate the company from those they were poaching from. They came up with a plan, which is still in place today.
Let’s imagine you’ve spent all your savings developing an ultramodern scooter that will take people to work by flying above the traffic. You find one crazily talented marketer and want to choose a compensation method that will motivate him to work hard, do his very best, and stay with the company for years to come. You’re considering two options:
1. Pay him an annual salary of $250,000.
2. Pay him a $200,000 salary plus a 25 percent bonus based on how much he achieves.
No Rules Rules Page 9