I still like to think about what my first boss told me—that I was naive. Knowing how the corporate world works I see he was right. I was naive in understanding the processes of business. But on the other hand, isn’t it naive for so many corporations to use a raise process that pushes all your best talent out the door?
João makes a strong case. So why do companies still follow the normal raise methods? Reed’s theory is that the 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.
But the pay-top-of-market model at Netflix is so unusual that it is hard to understand.
How is any manager supposed to know, on an ongoing basis, what top of market IS for each of her employees? You’d have to invest dozens of hours throughout the year making uncomfortable phone calls to people you barely know to find out how much money they and their staff are making. Netflix legal director Russell found this to be just as frustrating as you might imagine:
The most valuable player on my team in 2017 was a lawyer named Rani. Rani moved from India to California when she was a teenager. Her mother was a mathematics professor at Stanford and her father a well-known chef of innovative Indian cuisine. Rani, as a lawyer, was somehow the intersection of a brilliant mathematician and a brilliant cook. She was able to manipulate precise and intricate ideas in a way I’d never seen before. She possessed this third sense that I can best refer to as “finesse,” which made her a superior lawyer.
I hired Rani at a high salary—which I felt was a generous top-of-market offer—and she had a great first year on the job. When it got to be raise time I had a problem. Unlike the other lawyers on my team Rani has a unique job, so it was difficult to find any market data for the role. Some of the others were getting big raises that year—up to twenty-five percent—due to clear market changes.
I spent dozens of hours trying to find data for Rani. After a lot of research, I called fourteen contacts at different companies, but none of them would share salary figures with me. So, I started calling headhunters. Finally, I received three figures from recruiters. They were all over the place, but the top one was only five percent over what Rani was already making. From that data, a five percent raise put Rani at top of market. So that’s what I raised her.
Oh boy, was that a bad day! When I told Rani her raise she started grinding her teeth and she wouldn’t meet my eyes. As I explained how I’d come up with the figure her eyes shifted to the window. It was like she was already calculating which company to move to next. When I stopped speaking, she sat silently for a very long time and then said, with a slight quiver in her throat: “I’m disappointed.” I suggested if she felt the raise didn’t reflect her market worth, she should bring me data. She did not.
For the next comp review cycle, I implored Human Resources to help. The numbers HR dug up were nearly thirty percent higher than the figures I had found in my own search the previous year. This time Rani also stepped up and called her own contacts. She gave me the names of four people at other companies doing similar jobs with salary figures comparable to what HR had shown me. I had underpaid her the year before because the data I had was not a good reflection of the actual range.
Getting salary comparisons for yourself or for your staff isn’t just time-consuming and cumbersome. It often requires calling people in your network and asking the embarrassing question, “How much money do you make?”
But this isn’t the only concern. What about how incredibly expensive this all must be? Mathias gave João a 23 percent raise that he didn’t ask for and wasn’t even thinking about. Russell gave Rani a 30 percent raise in year two. How many companies can afford to give their employees these types of pay increases? Wouldn’t your profit margin have to be sky-high? Otherwise annual raises would put you out of business.
* * *
• • •
The answer to both of these questions is yes. Yet overall the investment pays off.
In a high-performance environment, paying top of market is most cost-effective in the long run. It is best to have salaries a little higher than necessary, to give a raise before an employee asks for it, to bump up a salary before that employee starts looking for another job, in order to attract and retain the best talent on the market year after year. It costs a lot more to lose people and to recruit replacements than to overpay a little in the first place.
Some employees will see their salaries grow dramatically in a short time. If the market value for an employee shifts up because her skill set increases or there’s a shortage of talent in her field, we shift her salary up with it. The salaries of other employees may be flat year to year, despite their doing great work.
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.
Figuring out top of market can take a lot of time, but not as much time as finding and training a replacement when your best people leave for more money at another company. Even though it can be tough, it is Russell’s job (with help from HR) to understand what other organizations would pay Rani. It’s a responsibility that Rani should share. No one should know your market range better than (first) you and (second) your boss.
But there is one person at every moment who likely does know your market worth better than either you or your boss does. And that is someone worth talking to.
WHEN RECRUITERS CALL, ASK “HOW MUCH?”
Let’s return for a moment to Sugarplum Mary. Who is the one person in the world who knows Sugarplum’s value better than she, Mrs. Claus, and even Santa himself? It’s the recruiter at the elf workshop down the way. By definition, what she is offering is exactly market value at that moment. If you really want to know what you’re worth, talk to recruiters.
Recruiters call Netflix employees (and probably your talented employees) frequently, trying to get them to interview for other jobs. You can bet the hiring company’s got money and they’re willing to pay. What would you like your employees to do when they get these calls? Take the phone into the bathroom and turn on the faucet while they whisper into the phone? If you haven’t given them clear instructions, that’s probably exactly what they do—and they did the same thing at Netflix, until 2003 when the company started having pay-top-of-personal-market discussions.
* * *
• • •
Not long after that, Chief Product Officer Neil Hunt came to Patty and me to report that one of his most valuable engineers, George, had received an offer for a higher-paying job at Google. We were both against offering George more money to stay and we felt he’d been disloyal interviewing for another job behind our back. On the drive back to Santa Cruz that afternoon Patty huffed, “No one employee should be irreplaceable!” But overnight both Patty and I started thinking about how much value the company would lose if George left.
When Patty jumped into my car the next morning, she said, “Reed, my head cracked in the night. We’re being stupid! George is not replaceable. Not really.” She was right. There were only four people in the world who had the same algorithm programming knowledge, and three of them worked at Netflix. If we let George go, other companies might try to target the remaining two.
We brought together the top executive team—including Neil, Ted Sarandos, and Leslie Kilgore—to discuss what to do about George in particular and all the recruiters coming after our talent in general.
Ted had a strong opinion, based on his own experience
at a previous employer. This was his story:
When I lived in Phoenix I worked for a Houston-based home video distributor. My company offered me a job as branch manager of the Denver distribution center. It was a big promotion for me then—and I took it. They gave me a nice raise and agreed to pay for my Denver housing for six months while I sold my Phoenix house.
But after six months in Denver, I couldn’t sell my house. I was financially under water. I started renting a lousy apartment in Denver with my wife, while still paying for this great house in Phoenix that I couldn’t live in. Then a recruiter called from Paramount. I took the call because I was so miserable with my housing. They offered me a position with a lot more money that allowed me to move back to Phoenix. I was happy in my job, but this offer solved all my problems.
I went to my boss and told him I was leaving. He said, “Why didn’t you tell us that you couldn’t sell your house? We value you. We can change your deal in order to keep you!” They gave me more money to match the Paramount deal and bought my Phoenix house. I thought, “For the last six years I never took a recruiter’s call and now I see my market value was climbing all the while. I’ve been underpaid for years because I viewed it as an act of disloyalty to have the conversation about making sure I was paid what I was worth.”
I was really upset with my boss. I felt like asking, “If you knew what I was worth, why didn’t you offer it to me?” Then as I grew up, I realized: Why would he? It’s my own responsibility to know what I’m worth and ask for it!
After Ted told this story he said: “George was right to go interview at a competitor to find out what his worth is—and we would be stupid not to pay him his top-of-market value, now that we know also. In addition, if there are other people on Neil’s team who Google would offer that same job to, we should up their salaries to the same level. That’s their current market value.”
Leslie came forward and told us she was already doing as Ted was suggesting:
Whenever I hire a new employee, I tell them to read Rites of Passage at $100,000 to $1 Million+, which back in the eighties and nineties was the handbook for executive recruiters. It tells you how to know your market value and how to talk to recruiters to get that data.
I say to all my people, “Understand your market, understand the book, go and meet these recruiters—and I give them a list of names of the recruiters specializing in their jobs. I want all my employees to make an active choice to stay. I don’t want them to stay because they lack options. If you’re good enough to work at Netflix, you’re good enough that other options will be out there. If you feel like you have a choice, you can make a good decision. Working at Netflix should be a choice, not a trap.
After listening to Ted and Leslie, I was persuaded. Their comments were completely in line with everything else we were implementing around pay-top-of-personal-market salaries. We decided not only to give George a raise but also that Neil should also determine who else on his team Google would offer that job to—then bump up their salaries. That’s what pay-top-of-personal market is all about. Then 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.
After that, we told all managers that they shouldn’t wait for their people to come to them with a competitor’s offer before raising salaries. If we didn’t want to lose an employee and we saw her market value rising, we should increase her pay accordingly.
* * *
• • •
At just about every company on earth, interviewing for another job would anger, disappoint, or alienate your current boss. The more valuable you are to your manager, the more annoyed he will be, and it’s not difficult to see why. When an excellent new employee decides to go and just check out a job at the company down the road, you risk losing your entire investment. If during the interview, she finds the new position is so much more exciting than what she’s doing now, you’ll lose her—or at the very least her enthusiasm. That’s why managers at most companies make their employees feel like traitors for speaking to recruiters at other companies.
Netflix doesn’t see it this way. VP of content Larry Tanz remembers how he learned this lesson. It was 2017 and Netflix had just reached the hundred-million-member mark. Larry was getting ready for a bash at the Hollywood Shrine Auditorium, where Adam Sandler would perform. He was grabbing his coat to head for the door when the phone rang: “It was a Facebook recruiter asking me to come in for an interview. I felt it was wrong to be even speaking to her, so I murmured that I wasn’t interested.”
Four weeks later, Ted Sarandos, Larry’s boss, was giving a monthly update to his staff: “The market’s heating up and you are going to be getting calls from recruiters. You’ll likely get calls from Amazon, Apple, and Facebook. And if you’re not sure that you’re being paid top of market, you should take those calls and find out what those jobs are paying. If you find out they are paying more than we pay you, you need to let us know.” Larry was surprised: “Netflix is probably the only company where they encourage you to speak to and even interview with the competition.”
On a trip to Rio a few weeks after that, Larry received a second call from Facebook: “We were meeting with the famous Brazilian singer Anitta in her living room to discuss her upcoming Netflix documentary Vai Anitta. For the two hundred million people in Brazil, Anitta is like Madonna and Beyoncé combined, so when my cell buzzed, I didn’t answer it.” But when Larry heard Facebook’s message, he called back. “They asked me to come in but wouldn’t tell me what the job paid. I said I wasn’t looking for a job, but I’d come and talk with them.”
Larry told his boss he was going to the interview. “That already felt odd. At most companies, going to interview with a competitor is considered a lack of loyalty.” Larry did get a job offer from Facebook and it paid more than he was making. Ted, as promised, raised his salary to the current market rate.
Now Larry encourages his own staff to take those calls from the recruiters: “But I also don’t wait for them to come to me. If I see someone could make more money somewhere else, I give them the raise right away.” To retain your top employees, it’s always better to give them the raise before they get the offers.
Of course, this worked out for Larry, who got a higher salary, and for Ted, who kept the talented Larry. But Ted’s instructions sound extremely risky. How many others have taken those calls, fallen in love with the job they interviewed for, and left his team? Ted explains his reasoning like this:
When the market heats up and recruiters are calling, employees get curious. No matter what I say, some of them are going to have those talks and go to those interviews. If I don’t give them permission, they’ll sneak around and then leave without giving me a chance to retain them. A month before I made that statement, we lost an amazing executive whose talents we will not be able to replace. When she came to me, she’d already accepted the other job. There was nothing I could do. When she told me that she’d loved working at Netflix but she’d received a forty percent pay raise, my heart sank. I could have matched that if I’d known her market value had changed! That’s why I want my employees to know they can talk to other companies as much as they want, as long as they do it openly, and tell us what they learn.
The question Ted receives from new employees today is, “Are you sure you want me to take that call, Ted? Isn’t that disloyal?” His response is the same it’s been since George came to Neil with that Google offer: “It’s disloyal to sneak around and hide who you are speaking to, but openly interviewing and giving Netflix the salary data benefits all of us.”
The rule at Netflix when recruiters call is: “Before you say, ‘No thanks!’ ask, ‘How much?’”
THE FOURTH DOT
In order to fortify the talent density in your workforce, for all creative roles hire
one exceptional employee instead of ten or more average ones. Hire this amazing person at the top of whatever range they are worth on the market. Adjust their salary at least annually in order to continue to offer them more than competitors would. If you can’t afford to pay your best employees top of market, then let go of some of the less fabulous people in order to do so. That way, the talent will become even denser.
▶ TAKEAWAYS FROM CHAPTER 4
The methods used by most companies to compensate employees are not ideal for a creative, high-talent-density workforce.
Divide your workforce into creative and operational employees. Pay the creative workers top of market. This may mean hiring one exceptional individual instead of ten or more adequate people.
Don’t pay performance-based bonuses. Put these resources into salary instead.
Teach employees to develop their networks and to invest time in getting to know their own—and their teams’—market value on an ongoing basis. This might mean taking calls from recruiters or even going to interviews at other companies. Adjust salaries accordingly.
Toward a Culture of Freedom and Responsibility
Now that your talent density is increasing you are almost ready to take dramatic measures to increase employee freedom. But first you’ll need to take candor up a notch.
No Rules Rules Page 11