3 Big Ideas to Steal From Netflix

Take a look inside CEO Reed Hastings' people management manifesto--a document that's won much admiration among Silicon Valley execs.

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Netflix has made controversial headlines recently after releasing all 13 episodes of its new original series “House of Cards” at one time. Hollywood and Wall Street surely are watching to see if the bold premiere strategy will bomb or prove to be brilliant. Silicon Valley execs, too, are watching the company closely–but for very different reasons.

Facebook COO Sheryl Sandberg, for one, has her eye on a slideshow Netflix CEO Reed Hastings wrote and posted online. The presentation–which you can view on the Netflix website here–details the company’s philosophy regarding talent hunting, employee compensation, and leadership development, and has met with admiration from fast-growing tech leaders. Sandberg calls it perhaps “the most important document to come out of [Silicon] Valley.”

So what makes Netflix’s leadership philosophy so great? Here are three of the company’s people management strategies:

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1. Reward performance, not effort.

It may sound harsh but according to Hastings, employees who produce B-level work–even if they put forth A-level effort–should be let go (with a generous severance package, of course).

A-level workers, conversely, should be rewarded–even if they are producing great work with relatively minimal effort. A talented worker doesn’t need to put in a certain number of hours behind a desk (Netflix espouses a flexible work schedule, and doesn’t restrict the number of vacation days employees can take per year) so long as they are producing quality work. The only exceptions, says Hastings, are “brilliant jerks.” Putting up with one bad egg–even a really talented egg–is not worth the damage that a caustic personality can cause to your entire team.

Hastings describes the Netflix hiring philosophy with a metaphor about professional sports teams. Pro teams “hire, develop and cut smartly” so that they can have “stars in every position.” But the metaphor is not perfect, he admits. Unlike a sports team, a successful business does not have a restricted number of positions to fill–talented individuals sometimes create the need for new positions, and an atmosphere of internal competition and cutthroat behavior should never be encouraged or tolerated.

2. Protect employee freedom.

As businesses grow, they often take on more employees, lower their standards for talent, and implement stricter policies to compensate for this lack of autonomy among their employees. It doesn’t have to be that way, Hastings insists.

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Rather, companies ought to raise their standards of talent and autonomy for employees as the company grows in size. That way, rather than developing a complex series of policies to police work, growing businesses can remain flexible and competitive in the marketplace.

The conventional wisdom that preventing error is cheaper than fixing it, doesn’t hold true when applied to a creative environment, Hastings writes. By raising standards for performance parallel to the development of growth and complexity within an organization, businesses are able to get “big, fast, and flexible”–an ideal trifecta, he writes.

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3. Pay your employees what they deserve (no more, no less).
Paying your employees a competitive rate is crucial in retaining top talent. As Hastings explains, “One outstanding employee gets more done and costs less than two employees.” For that reason, Netflix strives to pay its employees top-of-market salaries. But this doesn’t mean paying employees inflated rates in an attempt to trap or bribe them into staying on board.

Instead, Hastings writes, Netflix offers market-appropriate salaries to employees by using a three-pronged evaluation of: what the employee could get elsewhere, what the company would have to pay to replace the employee, and what the company would be willing to pay to keep a specific employee in his or her job. Rather than branding it as “traitorous” for employees to know their worth in the external job market, Hastings suggests companies encourage this type of research–and pay top dollar to keep talented people in valuable positions.

Finally, businesses should think outside the box when it comes to raises, he writes. By aligning employees’ pay against the market rate for their position, salaries will automatically go up–but at varying rates. Some employees salaries will grow rapidly (based on the skills that they are acquiring and the demand for their position in the external marketplace) while others will remain relatively flat. The important–and ultimately fair–thing to do, Hastings concludes, is to pay employees for their individual worth (even if that varies between positions) at top-of-market value.

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