When Netflix launched in 1997, the company was essentially a mail-order version of Blockbuster, the video rental store that dominated the home entertainment industry at the time. Today, Netflix produces award-winning content, has more than 200 million subscribers across 190 countries, and is consistently listed among the best places to work. (Shortform note: Netflix had 167 million subscribers at the time of the book’s publication, but that number has since grown to over 200 million. The company experienced a boom at the height of the Covid-19 pandemic, gaining more than 36 million subscribers in 2020 as a result of lockdowns around the world.)
To achieve this level of success, Netflix had to adapt and thrive in a rapidly changing industry. The keys to Netflix’s success have been unconventional business practices:
These practices have created a company culture that focuses on empowering employees to innovate and take accountability, rather than conditioning them to simply follow protocol. In No Rules Rules, Netflix CEO Reed Hastings details his logic in cultivating the company’s culture, while co-author and business professor Erin Meyer provides context for how these unusual business practices shaped the company’s success. We’ll explore each practice in detail in this guide.
The first critical business practice that Hastings established at Netflix was to have only top employees. This practice grew out of Hastings’s early experience at Netflix: A few years after Netflix was founded in 1997, the company was hit with the repercussions of the 2001 dot-com crash. Venture capital funds dried up and Hastings was forced to lay off a third of his 120 employees, including many who produced adequate work. Although Hastings feared that the layoffs would decimate morale, he discovered that his remaining staff buzzed with energy and produced high-quality work.
Hastings soon realized that by eliminating less-than-stellar workers, he was left with a higher level of talent per employee. This created a talent-concentrated environment in which top performers thrived: High-performing employees were eager to work with other talented workers they could learn from and who pushed them to produce quality work, which in turn increased individual satisfaction and morale. Seeing how a lean, high-performing workforce improved the company, Hastings vowed to hire only the best employees.
A Better Way to Handle Layoffs
Hasting’s narrative of events tends to romanticize the idea of layoffs—while Netflix experienced an uptick in performance after cutting down its workforce, research suggests that layoffs are merely a short-term fix and typically lead to a 41 percent decline in job satisfaction and a 20 percent decline in job performance. A reduced staff also means a heavier workload for remaining employees, which then leads to higher rates of burnout and turnover.
Instead of laying off workers during a crisis, some suggest finding ways to cut costs in the short term, such as asking employees to go on unpaid leave for a few weeks. If layoffs are unavoidable, make them as painless as possible by giving affected employees other opportunities, whether it’s by helping them find jobs in other companies, giving them the chance to pitch business proposals and win grants, or providing them with training to gain new skills that they can use elsewhere.
As Hastings cultivated a high-performing workforce, he faced the threat of other companies poaching his employees. Hastings realized he would have to pay top dollar to maintain the company’s high concentration of talent, and he implemented three measures to get employees to stay:
1) Pay top-of-market salaries. Hastings knew that Netflix had to pay enough not just to attract the highest-performing employees but also to prevent them from being poached. He prioritized paying his employees more than any other company would offer them.
(Shortform note: While Hastings believes in paying top-of-market rates, Ray Dalio of Bridgewater Associates thinks you should just pay “north of fair.” In Principles, Dalio recommends paying employees just enough so that they don’t have to worry about money and can focus on their work, but not so much that they’ll become complacent—they should still be motivated to work hard and earn more.)
2) Eliminate performance-based bonuses. At most companies, employees earn annual bonuses if they achieve predetermined goals. However, Hastings claims, this format assumes managers can accurately predict which achievements will be most valuable to the company in the year ahead, and those metrics are constantly subject to change. Instead, Netflix rejected bonuses and put that money into larger base salaries.
(Shortform note: Hastings mentions one drawback of bonuses—that job candidates prefer guaranteed money over the possibility of a bonus—but this doesn’t give a complete picture of the flaws of the bonus system. Paul Marciano expands on these flaws in Carrots and Sticks Don’t Work. He explains that bonuses may prompt employees to slack off once they reach their goal, or they may cover up ineffective management—employees may work hard simply because they’re motivated by a reward, not by a good manager. Marciano recommends finding ways to empower and show respect to your employees so they’re motivated by engagement instead of bonuses.)
3) Give raises that reflect employees’ market value. Unlike at other companies where an employee may get a three percent raise each year, a Netflix employee who’s performing well and whose skills are highly valuable may get a 20 percent raise one year to reflect the market demand for her skills—but the following year, Hastings says, if the market hasn’t changed, that same employee could receive no raise.
(Shortform note: Netflix’s unorthodox approach to giving raises means that employees can experience a windfall year after year. Some argue that this is unsustainable from an economic perspective. However, some experts suggest that raising wages is not an economic issue but a management issue. Many companies choose to invest their huge earnings in share prices rather than their employees, but initial higher wages are easier to cut back if the company falls on hard times. Evaluate whether your company is justifying low wages and meager raises by saying it’s a safeguard against losses. Then, start viewing employees as an investment that can help your company thrive in any economic condition.)
Aside from putting measures in place to attract and retain top talent, Hastings realized that maintaining a high concentration of talent also meant firing good employees to make room for great ones. At Netflix, managers regularly assess their staff’s standing by asking themselves, “Would I fight to keep an employee if he said he was thinking of leaving?” If the manager wouldn’t fight to keep the employee on the team, then they should either talk to the employee about how he can improve or offer him a generous severance package.
(Shortform note: Leaders who take Hastings’s approach to firing—letting go of people who are no longer a good fit—should apply the same rule to themselves. In Good to Great, Jim Collins writes that exceptional leaders have a “company-first” mentality: They prioritize the success of the organization over their personal ambition, even if it means giving up control to someone who can better steer the company forward. Some of the signs that it’s time for you to step aside are: seeing an increase in resignations from your team, feeling uninspired and incapable of coming up with new ideas, and realizing that there’s someone who can do your job better than you do.)
The second unconventional business practice that Hastings implemented at Netflix was to promote candid, frequent feedback at all levels. Hastings learned that he could maximize the potential of all the company’s talented employees by encouraging them to be open and vocal with everyone on the team—superiors, colleagues, and subordinates. In fact, frequent feedback became so ingrained in Netflix’s culture that not speaking up was considered an act of disloyalty, because it inhibited the company’s improvement.
(Shortform note: Some may think that it’s best to maintain the peace and keep people comfortable by sugarcoating feedback or letting small issues slide. But like Hastings, hedge fund billionaire Ray Dalio believes that it’s actually a sign of care and respect to tell people what they need to improve. In Principles, Dalio writes that everyone at his hedge fund Bridgewater not only has the privilege but the obligation to speak up because doing so allows people to address issues and weaknesses right away instead of letting them fester and cause bigger problems later on.)
Even if everyone in the organization agrees on the value of candor, well-intended but poorly received feedback can create counterproductive tension and resentment. To avoid this, Hastings took several steps to develop a culture of candor:
1) Let employees give the boss feedback. Leaders set the tone for a candid environment by encouraging their staff to let them know when they’re veering in the wrong direction.
(Shortform note: As Hastings says, it’s important for managers to receive feedback. However, be mindful that in a typical company, employees normally don’t speak up because they’re afraid of offending their bosses or hurting their careers. Manage their fear by creating a psychologically safe environment. For example, consistently and authentically engage with your team by having honest conversations and giving them genuine praise.)
2) Teach employees how to give and receive feedback. Hastings says that when giving feedback, you should make it helpful and motivating—the goal is for the individual, team, or company to improve, not to hurt the recipient, vent, or advance your own agenda. You should also focus your feedback on how someone can improve, not on what she’s doing wrong.
(Shortform note: Helpful feedback isn’t always about points for improvement. In fact, experts recommend that you give positive feedback more frequently so that employees will be more receptive to negative feedback.)
When receiving feedback, Hastings says you should be open without getting defensive or giving excuses, then reflect on whether you should act on the feedback. (Shortform note: One way to stay open to feedback is by making sure to separate the actual feedback from the messenger. You might be tempted to discount valid feedback just because of the person who’s giving it, if you dislike that person.)
3) Give feedback anywhere, anytime. Don’t wait until the “right moment” to give constructive criticism—by then, the other person may not have the opportunity to use your feedback to correct the issue. (Shortform note: Netflix employees are even encouraged to give feedback in the middle of a meeting, if they feel the need to. However, some experts argue that it’s best to give feedback in private in two instances: first, when other team members aren’t affected; and second, when you want to coach the employee after he receives feedback from others.)
No matter how much you preach the benefits of candor, some people will still avoid giving and receiving honest feedback because it’s often uncomfortable. For that reason, Hastings implemented two processes to ensure that everyone participates:
Hastings created a non-hierarchical feedback system—the annual written 360. (Shortform note: A “written 360” refers to a 360-degree review, which is also called multisource feedback, multi-rater feedback, or multi-source assessment.) Each employee receives written feedback from any colleague who wants to give it—including bosses, supervisors, coworkers, and subordinates. Feedback recipients can follow up with commenters about how to improve, and these discussions are often more valuable than the initial comments.
(Shortform note: Make the most of 360s and the vital feedback they provide by following up with individuals to make sure that they understand the feedback. Then, work with them to address the feedback in three steps: First, make them aware of what they need to do to implement the feedback. Second, make sure they commit to making the necessary changes. And third, motivate them to change by setting goals for their improvement.)
Hastings saw that the discussions following written feedback were effective, so he implemented live 360 reviews. A manager and her team gather for several hours and go around the room as each employee takes a turn receiving feedback. Although this process can be uncomfortable and potentially embarrassing, the feedback could save receptive employees from being fired in the future.
(Shortform note: Such open discussion can create a good deal of tension between those giving feedback and those receiving. While you want to manage this tension, some argue that having a little drama during a meeting is a good thing. In Death by Meeting, Patrick Lencioni writes that having disagreements keeps participants engaged, so you should actively look for signs of disagreement. Pay attention to comments and people’s facial expressions, and prod further when you notice that they’re trying to avoid conflict.)
The third unconventional business practice that Hastings established at Netflix was to eliminate controls. This meant giving employees enough relevant information that they could make big decisions on their own—a practice that was only possible with the culture of radical transparency and candor that Hastings had established. In this section, we’ll discuss how this transparency also increased Netflix’s flexibility and efficiency.
(Shortform note: Hedge fund Bridgewater has a similar principle of extreme transparency, which Ray Dalio describes in Principles: The firm records all meetings and interviews and makes these recordings available to the entire team. Additionally, each employee has a personality profile, which allows co-workers to see everyone’s strengths and weaknesses at a glance. Bridgewater also makes use of an in-house app that allows team members to rate each other in real-time. Such levels of transparency can be uncomfortable, but Dalio emphasizes the importance of putting the team’s best interest before your pride.)
Hastings made sensitive information, such as financial data, available to all employees. By being transparent about this information, Hastings allowed for dispersed decision-making. In other words, he created an organizational structure in which executives and managers lead by giving employees enough relevant information instead of exercising control over employees’ decisions.
With access to relevant information, employees could operate more autonomously and make decisions on their own—they could determine the risks they were willing to take and take ownership of the consequences, without having to seek approval from higher-ups.
(Shortform note: Netflix takes pride in giving its employees the power to make big decisions by providing them with enough relevant information, but some argue that this practice might just be a covert way of exercising control. They argue that managers may already know what decision they want employees to make and manipulate them by giving selective information that will point them in the desired direction. This bogus empowerment can erode trust and demoralize employees who can detect that the empowerment is inauthentic.)
Empowerment Only Works in Some Situations
Netflix empowers its employees to use the information they have to calculate—and make—risky decisions. Hastings found that this led to some big wins for the company. However, empowerment doesn’t work in every scenario. While delegating responsibilities to team members and asking for their input can improve job performance and satisfaction, the results vary depending on the task and circumstances. In particular, research shows that:
Empowering employees encourages creativity, but it doesn’t improve the performance of routine tasks—in these cases, employees tend to view empowerment as an additional burden.
Different cultures have different degrees of receptivity to empowering leadership. Eastern cultures tend to be more open to leaders who give additional responsibilities, while Western cultures, ironically, may view empowering leaders as controlling.
Less experienced employees respond more positively to empowering leaders, possibly because they see additional tasks as a chance to prove themselves.
By understanding the type of employees you have and the kind of work they do, you can figure out how much empowerment you should give them to produce positive outcomes.
However, this system comes with a great deal of risk: Employees could make decisions that are costly and harmful to the company’s progress and reputation. For this reason, the authors stress, dispersed decision-making can only work under certain conditions:
Meyer explains that if the company has developed a high concentration of talent, every employee should be deserving of the trust and freedom to make decisions without oversight or controls.
(Shortform note: Not a lot of companies have the level of talent that Netflix has, so it may not be easy to trust employees to make decisions without oversight. In Built to Last, Jim Collins says that another way to develop a strong sense of trust is through indoctrination: Align new hires tightly with the corporate philosophy so that they can operate autonomously while adhering strongly to the company’s core values.)
Meyer explains that in some industries and organizations (such as vehicle manufacturers), controls are necessary to ensure safety and accuracy. On the other hand, if the company’s success depends more on adapting and staying relevant in a changing market, then leading with context is an important way to promote innovation.
(Shortform note: Meyer makes a clear distinction between companies that should be led by control and those that shouldn’t: Companies that need controls are those whose businesses rely heavily on safety and accuracy, while companies that need relevant information are those that rely on creativity and innovation. However, some creative companies may only appear as if they’re leading with relevant information, when in fact they have more abstract, self-imposed unspoken controls in place such as profits and shareholder expectations. In The Innovator’s Dilemma, Clayton M. Christensen argues that these hidden controls reveal themselves when creative companies try to pivot but are blocked by their self-imposed controls.)
An organization that has a dispersed decision-making system is called a loosely coupled organization. In these organizations, each department is independent enough that lower-level managers and employees can make decisions without greatly impacting other departments. As a result, employees enjoy more freedom, departments have more flexibility, and progress moves more quickly throughout the organization.
(Shortform note: One way for companies to get around a tightly coupled system—one where there are layers of approvals—is to create a spin-off organization that has a different structure more suited to handling innovation. In The Innovator’s Dilemma, Clayton M. Christensen writes that these smaller spin-off companies have more freedom to invest in new ideas in the face of disruptive innovations, unlike larger companies that typically manage their risks by taking a wait-and-see approach to big changes.)
When you lead by giving relevant information, you allow your employees to find their own routes to a common destination—and your job is to ensure that everyone knows which direction to go. Meyer explains that the CEO provides information to the senior managers about the general direction and values of the company, those leaders use that information to give their teams another layer of information that homes in on their specific responsibilities, and the process continues down to the most junior employee.
(Shortform note: Creating company-wide alignment means getting rid of forces that constantly oppose each other, slowing down progress or causing a company to stagnate. Researcher Jim Collins advises sticking to your core philosophy even when introducing major changes, and making sure you correct any misalignments right away—for example, if you value teamwork, eliminate incentives that reward individual performance.)
With a highly motivated staff and a culture of candor and accountability, Hastings was able to give Netflix employees more autonomy to make big decisions. It also enabled Hastings to implement another unconventional measure at Netflix: He abolished the vacation policy and the travel and expense approval process.
(Shortform note: Hastings uses unconventional practices at Netflix to drive the message that great freedom comes with great responsibility, but he doesn’t explain how companies that don’t have Netflix’s unusual culture can create enough accountability to make the risky move of abolishing limits on vacations or expenses. To foster more accountability in your workplace, experts say you should be clear about your expectations, ensure that everyone has both the skills and the resources they need to do their jobs, set milestones to track progress, give feedback, and ensure that employees see consequences following undesirable behaviors.)
Netflix neither allots vacation time nor tracks days off, giving employees more control to create a work-life balance. This makes it easier to attract top talent and sends a message to employees that management trusts them. To prevent employees from taking too much vacation, Hastings instructed managers to provide enough relevant information for employees to make good decisions—for example, this may include telling employees that they can’t take time off within two weeks of a deadline, or that no more than one team member can be out at a time.
On the other hand, to ensure that employees still took enough vacation, he encouraged leadership at all levels to take big vacations, talk openly about them, and encourage employees to do the same.
(Shortform note: There are a few alternatives to the unlimited vacation policy that may encourage employees to take time off: First, you can implement a minimum vacation policy, which relieves employees of the pressure of determining what’s considered an acceptable amount of vacation time. Second, you can impose mandatory time off—employees have to take one week off every four months (or any other specified time period). Third, you can reward people who go on vacation with spending money.)
Hastings also eliminated travel and expense approvals and instead made it Netflix’s policy for employees to “act in the company’s best interest.” For instance, it’s in the company’s best interest for an employee to stick to a modest budget for lodging, unless she’s in an unusually expensive area and must pay up to afford a hotel that allows her a decent night of sleep before a presentation. This policy empowers employees to use their judgment, but it also requires managers to provide information about what’s appropriate and inappropriate so that employees can make wise decisions.
(Shortform note: Some employees may disagree with the company’s idea of what’s appropriate and inappropriate—for example, they may think they “deserve” a pricey meal if they’re asked to work out of town on a weekend. To resolve any disagreement with your company’s policies, try using some negotiating tactics. For example, in Never Split the Difference, Chris Voss suggests the strategy of showing the other person how helping you achieve your desired solution will satisfy their own wants. In the case of the pricey meal, you can explain how the extra expense eats into the budget for the venue of the company’s summer outing.)
To let employees know that their bosses could be monitoring their actions and thus discourage overspending and abuse, Netflix managers regularly check a sampling of expenses. Hastings also says it’s important to reinforce the threat of getting caught by telling employees when someone is fired for overspending.
(Shortform note: Even though Hastings and Meyer say that you should publicize these firings to let employees know you’re paying attention, there are certain things you should do as a manager to protect the dignity of the person being fired. Research suggests that making the effort to do so has a positive effect on the employee’s reaction—if they’re made to feel shame, they might view the firing as unfair and lash out by badmouthing the company. Allow them to leave with their dignity intact by not sharing the fired employee’s name and by not making a spectacle of the firing. Give them a chance to quietly pack up their belongings when other employees aren’t around.)
By 2011, Netflix had cultivated a culture of autonomy and accountability that was enabling the company to produce great results in the U.S. The company began expanding globally and, by 2016, Netflix was in more than 130 countries worldwide.
(Shortform note: Netflix is now in 190 countries, setting the stage for the company’s next phase and a new form of disruption: producing non-U.S. content. This strategy seems to be paying off. Netflix has a roster of international hits, including the wildly popular Spanish show Money Heist and the record-breaking South Korean drama Squid Game.)
As Netflix expanded, Hastings considered whether the corporate culture he’d worked so hard to develop would work outside the U.S. He made a plan to make the international expansion as smooth as possible: He would hire foreign employees who could adapt to the culture he’d cultivated, the company would then train those new hires on the ins and outs of working within Netflix’s culture, and he would be willing to adapt to and learn from the cultures of his new employees.
How to Preserve Your Company Culture Abroad
Aside from Hastings’s give-and-take approach to cross-cultural adaptation, companies can preserve their core philosophies by adhering to Meyer’s principles when expanding operations to other countries:
Determine the pressure points. Identify the specific aspects of the company culture and the country’s culture that are likely to cause conflict, such as decision-making processes (consensus or authoritarian?) and the approach to timelines (rigid or flexible?).
Make sure everyone is heard. Use a common language and speak slowly and clearly during meetings, then summarize what was discussed. Give every cultural group the chance to contribute by asking international participants to give their input.
Preserve creativity. It’s prudent to put formal systems in place when it comes to departments like finance and IT, but keep creative departments flexible.
Have a diverse workforce in every office. Having homogeneous staff at each office might create chasms between international offices. For example, a Singapore office with mostly young creatives might have a hard time communicating with an office in Copenhagen with mostly middle-aged finance experts. Ensuring diversity helps all employees get used to working with other cultures on a day-to-day basis.
Hastings found that his employees from other cultures often struggled most with Netflix’s culture of candor. This was a cornerstone of Netflix’s culture, but each country’s attitude toward candor and providing feedback—especially to superiors—differed greatly.
(Shortform note: To better understand a culture’s approach to candor or other company practices and attitudes, consult an expert such as a local corporate anthropologist. This anthropologist can serve as a “culture translator,” helping you understand local norms and behaviors, as well as correcting any stereotypes that you might have about a culture. Another way to understand cultural nuances is to ask employees directly about their expectations and preferences.)
Through their experiences, Netflix’s leaders learned important lessons for creating a middle ground in which employees from indirect cultures can still adhere to the company’s culture of candor.
Formal feedback is less daunting than delivering impromptu feedback. Make feedback an agenda item for meetings, provide instructions and a clear structure for the feedback, and invest time and effort in relationship building to soften the sting of negative feedback.
(Shortform note: During these formal feedback sessions, you shouldn’t just be mindful about your delivery of negative feedback, but also of the culture’s attitude toward positive feedback. While some cultures thrive on praise and positive reinforcement, others see praise from their managers as unwelcome or embarrassing.)
Keep in mind that colleagues from other cultures may have different attitudes toward frankness. Discuss and explore these cultural differences. Adapt to giving and receiving feedback that is more (or less) candid than you’re typically comfortable with. This might mean softening your negative feedback by refraining from placing blame and by framing the critique as a suggestion.
How to Give and Receive Feedback in Other Cultures
Meyer outlines some general principles for cross-cultural feedback in The Culture Map:
Explain how you normally deliver feedback in your culture.
Don’t try to mimic the other culture, because you risk offending the other person.
If you’re used to receiving indirect negative feedback, learn to view direct feedback as a sign that the other person respects you enough to be honest with you.
If you’re used to giving indirect negative feedback and find yourself in a more direct culture, be explicit about both positive and negative comments, but make sure that you keep the amount of both types of feedback balanced over time.
If you’re used to giving direct feedback, one way to adjust to indirect cultures is by not mentioning the negative at all. Instead, praise only the positives—employees can infer what’s not being addressed directly.
Starting as a DVD-by-mail service, Netflix evolved into a streaming service that now offers video on demand to over 200 million subscribers worldwide (as of October 2021). No Rules Rules details the unique culture that propelled Netflix to success in a rapidly changing industry where creative innovation and agility are key.
The main principles behind the Netflix culture are cultivating a highly talented staff, creating an atmosphere of radical candor, and removing controls and approvals. The book discusses the unconventional practices that are rooted in this culture, such as firing adequate employees, sharing sensitive financial data with all employees, and eliminating vacation policies.
Reed Hastings is the co-founder, chairman, and co-CEO of Netflix. His father was a lawyer who worked for the Nixon administration, and his mother was a debutante from a Social Register family. Hastings’s mother had an aversion to high society and raised her children to be similarly disinclined.
After graduating from Bowdoin College, Hastings joined the Peace Corps as a volunteer teacher in Swaziland then earned an MS in Computer Science from Stanford University. In 1991, he launched his first company, Pure Software, which later merged with another company to form Pure Atria. At Pure Atria, Hastings met Marc Randolph, who would later become Netflix’s co-founder.
The Netflix origin story varies depending on who’s telling it: Hastings says he got the idea after he was charged a $40 late fee on a VHS rental; however, Randolph says that he and Hastings had brainstorming sessions as they carpooled to the Pure Atria office. In any case, after Pure Atria was acquired, Hastings and Randolph co-founded Netflix in 1997, with Randolph as CEO.
Randolph ceded the CEO role to Hastings in 1999 before leaving Netflix in 2003. The two remain on good terms—in an interview, Randolph says he considers Hastings to be the best entrepreneur in the world, the rare breed who’s excellent at both starting and scaling companies. Randolph adds that, if the opportunity presented itself, he would go into business with Hastings again “in a heartbeat.”
Hastings owns about 1% of Netflix and has a net worth of $6.1 billion (as of November 2021). By many accounts, he isn’t the usual rock-star billionaire CEO. He’s been described as low-key, modest, and self-effacing—likely a result of his upbringing. Some credit his personality to his age and experience: While other big tech CEOs were in their 20s or 30s when they founded their companies, Hastings was already in his 40s by the time Netflix went public in 2002.
Outside of Netflix, Hastings is an advocate of education reform. He served on the California State Board of Education and is a strong supporter of charter schools. He and his wife Patty have also made a number of donations to educational institutions, including a $120 million endowment to two historically Black colleges and the United Negro Fund.
Connect With Reed Hastings:
Erin Meyer is an author and professor at INSEAD, a leading international business school located in Paris, France. Having lived and worked in Africa, Europe, and the U.S., Meyer has a deep understanding of different management and communication styles across cultures. She used her insights as well as data collected from over 30 countries as the basis for her first book, The Culture Map, published in 2014.
In 2017 and 2019, Meyer was selected by Thinkers50 as one of the most impactful business writers in the world. According to Meyer’s website, she was also named one of the top 30 most influential HR thinkers in 2018. Her work has been published in the Harvard Business Review, The New York Times, and Forbes. No Rules Rules is her second book.
Connect with Erin Meyer:
No Rules Rules, published by Penguin Press in 2020, grew from the Netflix Culture Deck—127 slides outlining the key principles of Netflix’s culture of “freedom and responsibility.” Hastings made the deck available online in 2009, and it became a Silicon Valley sensation. It got millions of views (over 15 million by the time it was updated in 2017) and garnered praise from the likes of Facebook COO Sheryl Sandberg.
However, not everyone was a fan—Meyer included. In the introduction to No Rules Rules, she reveals that she thought the culture deck described a hostile working environment that went against sound management principles such as providing psychological safety for employees and maintaining smooth workplace relationships. Still, Meyer was intrigued by the company’s undeniable success in a rapidly shifting industry. She also found it interesting that, despite seeming like a highly stressful workplace, Netflix placed second in a ranking of companies with the happiest employees.
In 2015, Hastings was on the lookout for an impartial expert to help him write a book explaining how and why Netflix’s unusual approach led to success. He wanted to demonstrate to younger generations that there are other ways of operating a business apart from the usual industrial, top-down model. Impressed with Meyer’s work in The Culture Map, Hastings reached out to her and eventually invited her to interview Netflix employees. Meyer welcomed the chance to better understand a company culture that she described as “weird.” A big part of No Rules Rules comes from over 200 interviews that Meyer conducted with current and former Netflix employees at every level, in different offices around the world.
No Rules Rules was released at a time when Big Tech companies were under increasing scrutiny. While the other FAANG (Facebook, Amazon, Apple, Netflix, and Google) companies grappled with issues such as self-serving ideologies, mistreatment of women and people of color, and questionable privacy safeguards, Netflix remained largely unscathed. (Netflix did have their own issues, but these wouldn’t surface until October 2021.) A writer from the New York Times questioned whether the timing of the book’s release threatened to draw Netflix into the swirl of Big Tech controversy but ultimately concluded that No Rules Rules was a timely reminder that freedom and responsibility should go hand in hand.
No Rules Rules falls under the genre of books about the culture and practices at highly successful companies. Other books in this category include:
Principles: Life and Work—Ray Dalio, founder, co-chairman, and co-chief investment officer of Bridgewater Associates, writes about the firm’s culture of openness and transparency, which echoes Netflix’s culture of radical candor. Dalio believes that these principles have enabled Bridgewater to become the largest hedge fund in the world.
Creativity, Inc.—Similar to Netflix, Pixar Animation Studios relies heavily on creativity and innovation. In this book, Pixar co-founder Ed Catmull writes about how promoting candor and embracing change can nurture and sustain a creative environment.
Built to Last—Jim Collins and Jerry I. Porras find common themes among enduringly successful companies. Like Netflix, these companies have a distinctive culture (described as “cult-like”), which empowers people to experiment and get creative.
The Culture Code—while Netflix is built on a culture of high performance and radical candor, Daniel Coyle argues that organizations become successful by developing a culture based on the concepts of safety, vulnerability, and purpose.
We’ll compare and contrast the ideas from these books with No Rules Rules in this guide.
No Rules Rules made the New York Times bestseller list and was nominated for the 2020 Financial Times and McKinsey Business Book of the Year.
Positive reviews say that No Rules Rules is insightful and entertaining, with clearly written concepts supported by detailed examples and anecdotes. Critical reviews say that the book is repetitive and doesn’t present an objective view of the company—it highlights the positives of the culture without going into detail about the negative aspects.
The book is divided into four sections:
Throughout the book, the narrative switches between Hastings and Meyers. Hastings provides his first-person account of the events, as well as his reasoning for cultivating this kind of culture, while Meyer adds context with data about other companies’ business practices and excerpts from interviews with hundreds of current and former Netflix employees.
We’ve divided this guide into four parts, reorganizing the content under four key themes that are essential to the Netflix culture:
As reviewers mentioned, the book highlights the positives of the Netflix culture without discussing the negative aspects. We’ve thus added commentary to give a fuller picture of the principles in the book, citing other works to support or offer counter-arguments to the authors’ unconventional management ideas.
When Netflix launched in 1997, the company was essentially a mail-order version of Blockbuster, the video rental store that dominated the home entertainment industry at the time. Instead of going to a store to pick out rentals of movies and television series, Netflix users received their DVDs by mail and sent them back when they were finished. Today, Netflix not only streams movies and TV shows but also produces its own award-winning content. The company now has more than 200 million subscribers across 190 countries, its stock price rose from $1 in 2002 to $350 in 2019, and it’s consistently listed among the best places to work.
(Shortform note: Netflix had 167 million subscribers at the time of the book’s publication, but that number has since grown to over 200 million. The company gained more than 36 million of those subscribers at the height of the Covid-19 pandemic, when people around the world were largely stuck at home due to lockdowns. Netflix’s stock price has also seen an impressive increase: Starting at just $15 per share when the company went public in 2002, it hit a high of $700.99 in November 2021, fueled by massively successful original content. While subscriber growth slowed in early 2021, Netflix is still the undisputed leader among streaming platforms, with nearly 100 million more subscribers than its closest competitor (as of October 2021).)
To achieve this level of success, Netflix had to adapt and thrive in a rapidly changing industry. The company made four major evolutions in the span of just 15 years:
What Netflix Did Right—and What Blockbuster Did Wrong
By staying nimble and going through these four major changes in just 15 years, Netflix was able to stay a step ahead of the competition. In contrast, chief competitor Blockbuster went from 9,000 brick-and-mortar stores to just one and filed for bankruptcy in 2010. Some blame Blockbuster’s failure on the rise of Netflix, but others argue that it’s a combination of factors. While Netflix relied on innovation to propel the company forward, Blockbuster’s success was hindered by:
Indecisiveness—the company flip-flopped between changing the business model to eliminate late fees and pivot to digital—which would initially eat into the company’s profitability—and doing what they’d always done. In the end, leaders decided to stick to their original business model.
Misalignment—Blockbuster’s leaders and investors didn’t see eye to eye when it came to the company’s future, resulting in CEO John Antioco being fired during a critical period. The company heads also heavily favored retail and largely ignored the separate online division.
Complacency—Hastings actually tried to sell Netflix to Blockbuster, but former Netflix CEO Marc Randolph says that Antioco didn’t seem to take Hastings’s $50 million asking price seriously. Blockbuster didn’t see Netflix as a threat and didn’t consider its potential, dismissing the business as unsustainable and unprofitable.
The keys to Netflix’s success have been unconventional business practices. Specifically, the company focuses on:
These practices, which we’ll explore in more detail in this guide, have created a culture of autonomy and accountability (what Netflix calls “freedom and responsibility”), focusing on empowering employees to innovate and take accountability, rather than conditioning them to simply follow protocol.
In this book, Netflix CEO Reed Hastings and Erin Meyer, a business professor and author, tell the story of Netflix’s evolution, and they illustrate how these unusual business practices shaped the company’s success. Our guide explores each of these practices in detail and how Netflix applies the corporate culture to other cultures in offices around the world.
The first critical business practice that Hastings established at Netflix was to have only top employees. This practice grew out of two lessons Hastings learned: one from his first company and another from the early days of Netflix.
In the first few years after Hastings founded Pure Software in 1991, the company culture was flexible and fun. Employees enjoyed a great deal of freedom, whether that meant working from home or buying office equipment without purchase orders or approvals.
However, as Pure Software grew, it became more difficult to manage without implementing some controls. Soon, the formerly flexible startup culture had morphed into a rigid corporate environment. Hastings realized that the employees who thrived in rules-heavy workplaces were people who excelled at following protocol, rather than the innovators he needed to keep the company agile and successful. Ultimately, this led to Hastings’s downfall at Pure Software: When market needs changed, the company couldn’t adapt and Hastings was forced to sell the company to his competitor.
(Shortform note: Ordinarily, growth is a good thing for a company, but it's not without its drawbacks. In the case of Pure Software, it meant the company culture changed over time, which ultimately led to a buyout. Small businesses can manage growth—without sacrificing the elements that made them successful—in five ways: First, hire a team that reflects your company vision. Second, regularly revisit your budget plan. Third, maintain working capital. Fourth, leverage your strengths. Fifth, be aware of changes as the company grows and adjust processes accordingly.)
Why Failed Entrepreneurs Will Likely Fail Again
Hastings was able to leverage his failure at Pure Software, using the lessons he learned to increase his chances of success at his next company. However, he’s more of an exception rather than the rule—most entrepreneurs who fail once will most likely fail again. That’s because they tend to blame outside factors and don’t properly evaluate the root cause of their failure before trying their luck with another venture. If you fail and plan to go into business again, take the time to evaluate what you did wrong in your first attempt and determine the changes you should make to avoid another failed venture.
The second lesson came with the 2001 dot-com crash: Venture capital funds dried up and Hastings was forced to lay off a third of his 120 employees, including many who produced adequate work.
Although Hastings feared that the layoffs would decimate morale, he discovered that his remaining staff was buzzing with energy and producing high-quality work. Hastings realized that by eliminating less-than-stellar workers, he was left with a higher concentration of talent per employee. This created an environment in which top performers thrived: High-performing employees were eager to work with other talented workers they could learn from and who pushed them to produce quality work, which in turn increased individual satisfaction and morale. Seeing how a lean, high-performing workforce worked in the company’s favor, Hastings vowed to hire only the best employees.
A Better Way to Handle Layoffs
Hastings’s narrative of events tends to romanticize the idea of layoffs—while Netflix experienced an uptick in performance after cutting down its workforce, research suggests that layoffs are merely a short-term fix and typically lead to a 41 percent decline in job satisfaction and a 20 percent decline in job performance. A reduced staff also means a heavier workload for remaining employees, which then leads to higher rates of burnout and turnover.
For a more pragmatic approach to layoffs that better prepares your organization for changing manpower needs, experts suggest developing a workforce change strategy for three different economic conditions:
When things are going well: Be disciplined about hiring and keep a lean, high-performing staff to begin with.
During downturns: Find creative ways to cut costs without laying off employees during short-term crises. For example, Honeywell employees went on unpaid or partially paid leave for weeks, which saved the company from cutting thousands of jobs.
During periods of transformation: If your company is set to undergo restructuring or some other major change that would render staff redundant, consider re-training current employees to take on new roles.
If layoffs are unavoidable, make them as painless as possible by giving affected employees other opportunities, whether it’s by helping them find jobs in other companies, giving them the chance to pitch business proposals and win grants, or providing them with training to gain new skills that they can use elsewhere.
Once Hastings cultivated a high-performing workforce, his new challenge was how to retain it— having a pool of stellar performers meant that other companies always threatened to poach Netflix’s employees. Hastings thus implemented three measures to prevent poaching.
The first safeguard from poaching that Hastings implemented was to pay more than any other company offered—even if it was more than the employee asked for. By contrast, most companies count on job candidates to undervalue themselves, which allows companies to pay people below their value. However, as employees’ skills grow and they become more valuable, it’s often inevitable that they’ll get job offers with higher salaries. Even if workers love their jobs, research shows that most people will change jobs for more money. As a result, this model ultimately decreases an organization’s concentration of talent by creating an environment that encourages employees to leave for better-paying jobs.
Other Perspectives on Determining Salaries
While Hastings believes in paying top-of-market rates to retain staff, Ray Dalio of Bridgewater Associates thinks you should just pay “north of fair.” In Principles, Dalio recommends paying employees just enough so that they don’t have to worry about money and can focus on their work, but not so much that they’ll become complacent—they should still be motivated to work hard and earn more.
“Just enough” may be relative, but Gravity Payments CEO Dan Price seems to have found the magic number for his employees: He cut his own salary so that he could afford to raise the minimum wage at his company to $70,000 a year, which was enough to allow employees to quit working multiple jobs and better take care of their families. Since raising Gravity Payments raised their minimum wage, the company’s revenue grew and more employees were able to pay off debts, buy homes, and start families.
To pay top-of-market salaries, Hastings says that managers at Netflix must know their employees’ market values. Additionally, Netflix relies on employees to know their value. Hastings and the rest of the executive staff even encourage their workers to take headhunters’ calls and interview for jobs to find out what their skills are worth. Employees are then instructed to share the information with their managers.
What to Do When You’re Blindsided by a Resignation
Few companies encourage the same level of transparency as Netflix does when it comes to employees’ other job prospects, so an employee’s resignation may come as a surprise. To deal with unexpected resignations, experts give the following tips:
Don’t take it personally. Do your best to manage your emotions, then have a conversation with the employee about their reasons for leaving. While you often won’t be able to change their minds, the discussion might reveal information and options that weren’t available before—for example, you may discover that they’re resigning for personal reasons and that a flexible schedule or an extended leave will enable them to stay.
Invite them back after a year. Experts say that immediately presenting a counter-offer is counter-productive because it’s difficult to trust someone who has already decided to leave. Instead of convincing them to stay, maintain a relationship with them and consider recruiting them again in a year.
Communicate with other employees. Use it as an opportunity to find out if anyone else is interested in learning and taking over the resigning employee’s responsibilities, and to discuss career paths. If other team members will have an increased workload, assure them that it’s only temporary and that you’ll find a replacement as soon as possible.
Wish the resigning employee well. Have a party to acknowledge the person’s contributions and to send a message to your team that they’re valued.
It may sound risky to encourage employees to window-shop for other jobs, but fostering transparency gives Netflix an opportunity to keep its workers. (We’ll go into more detail about Netflix’s organizational transparency in Chapter 5.) Meyers writes that if managers discourage employees from talking with recruiters, employees might simply feel that they have to sneak around. Then, if an employee receives an enticing offer, she’s more likely to accept it before telling her manager that she’s leaving. By contrast, at Netflix, the employee can feel comfortable coming to her manager with another job offer, which gives the manager an opportunity to raise the employee’s salary and fight to keep her.
How to Make Employees Stay When You Can’t Afford Top-of-Market Salaries
Netflix pays top dollar so that employees won’t be lured by other companies and accept enticing offers and to ensure that it can offer raises to poached employees—but what if you can’t afford to give your star performers a big raise? Experts say that you can retain high-performing employees by:
Communicating how their work makes a difference in the company to make them feel like they’re making an impact
Providing career development support through training and mentoring
Showing your appreciation for your employees and celebrating their accomplishments
Offering other benefits aside from cash, such as better health and dental insurance
Respecting that they have a life outside of work—for example, allowing more flexibility for new parents
Hastings writes that the second safeguard from poaching that Netflix implemented was to reject bonuses and instead put that money into larger base salaries. The move paid off, as Hastings discovered that job candidates prefer guaranteed money over the possibility of earning bonuses.
Many big companies pay employees a salary and incentivize workers to achieve more by offering annual bonuses for reaching predetermined goals. However, Hastings argues that the bonus system assumes that managers can accurately predict which achievements will be most valuable to the company in the year ahead—but those metrics may change.
Creating a bonus system doesn’t allow for the flexibility to chase evolving goals—rather, it incentivizes employees to pursue potentially irrelevant goals to earn their bonuses. (Shortform note: While Netflix doesn’t offer incentives to employees, it now offers bonuses to directors and actors as a means to attract the biggest names in the entertainment industry.)
Additionally, high-performing employees like the ones that fill Netflix’s offices are internally motivated to work hard, and dangling a bonus in front of them doesn’t change that. In reality, the allure of the bonus makes employees constantly aware of whether they’re on track to reach their goals, and that concern actually crowds workers’ minds and inhibits their creativity—a key component of most of the jobs at Netflix.
(Shortform note: Hastings says that high performers are more driven by intrinsic motivation rather than extrinsic rewards like bonuses. If you’re looking to improve intrinsic motivation in your organization, Daniel Pink suggests that you increase employees’ feelings of autonomy and purpose. You can do this by breaking their routines and occasionally letting them choose new projects to work on, involving them in the goal-setting process, and designing policies that show you trust them. Read more in our full guide to Drive.)
Why Bonuses Don’t Work
Hastings mentions one drawback of bonuses—that job candidates prefer guaranteed money over the possibility of a bonus—but this doesn’t give a complete picture of the flaws of the bonus system. In reality, there are many other issues with bonuses, as Paul Marciano points out. In Carrots and Sticks Don’t Work, Marciano writes that bonuses and other reward systems fail because:
They’re focused on short-term gains rather than long-term impact.
They limit performance. When an employee reaches a goal and gets the accompanying bonus, he might start to slack off.
They promote unethical behavior. Employees may prioritize the ends rather than the means, doing whatever it takes to earn a bonus.
They cover up ineffective managers. Employees may work hard simply because they’re motivated by a reward, not by a good manager.
They can feel manipulative.
They don’t improve company culture.
Marciano recommends replacing incentives with engagement to motivate employees—give them respect, empowerment, supportive feedback, consideration, and trust; clarify expectations; and treat them as partners.
Hastings says that the third safeguard from poaching that Netflix implemented was to reject conventional methods of giving raises like raise pools (allotting a certain amount of money to divide among employees) and salary bands (putting a cap on the total salary an employee can reach through raises). As Meyer explains, these traditional raise schemes mean that you may only get a two- to five-percent raise per year, so you would be more inclined to move to another company with higher pay that’s equivalent to getting a 10-percent raise.
(Shortform note: Abandoning traditional raise schemes is more important than ever as millennials and Gen Z populate the workforce. In the past, many people stayed in their jobs for the long term because of their employer’s pension plan—the promise of a payout and comfortable retirement. However, the number of employers offering such plans has decreased dramatically in the past 30 years. As there’s no longer a financial reward for loyalty, millennial and Gen Z workers are prone to frequent job-jumping to increase their wages and develop a meaningful career.)
In contrast, Hastings says that Netflix decided to give raises based on market changes. A Netflix employee who’s performing well and whose skills are highly valuable may get a 20-percent raise one year to reflect the market—but the following year, if the market hasn’t changed, that same employee may still be doing excellent work and receive no raise. If an employee’s skill set continually increases, or if the market for those skills continues to rise, that employee may see steady raises year after year.
On the other hand, if the market for another employee’s position remains stable, that employee may not get a raise for multiple years, even if she’s performing well. (The exception to Netflix’s follow-the-market policy is that if the market for a particular position drops, Netflix generally does not decrease that employee’s salary.) Nevertheless, this raise scheme guarantees that a Netflix employee won’t find a more enticing pay increase elsewhere.
Can Your Company Afford to Give Big Raises?
Netflix has an unorthodox approach to giving raises, which means that employees can experience a windfall year after year. Some argue that this is unsustainable and that it’s impossible for other companies to follow Netflix’s lead because of economics. However, some experts suggest that raising wages is not an economic issue but a management issue. Many companies choose to invest their huge earnings in share prices rather than their employees.
Companies tend to choose this route because raising wages is seen as risky—management doesn’t want to be stuck paying high salaries during the inevitable recession. But research upends this thinking: Underpaying employees actually makes it more difficult to cut pay when times are hard, while giving generous salaries can help see a company through hard times. That’s because higher pay makes people more committed to the company and more willing to do what it takes to show their support—even if it means taking a temporary pay cut for the company to stay afloat. (As an added benefit, research also suggests that paying employees higher wages results in higher profits for the company.)
In short, evaluate whether your company is justifying low wages and meager raises by saying it’s a safeguard against losses during difficult times. Instead, start viewing employees as an investment that can help your company thrive in any economic condition.
Reflect on how your company determines your pay and how that impacts your performance.
How is your pay structured? (For example, do you have a salary, are you eligible for bonuses, and do you get raises?)
How does your pay structure impact the way you work? (For example, do you have to reach annual goals to get your bonus?)
How do you think it would affect your motivation if you had a larger salary without annual bonuses?
How well do you feel your most recent raise reflected what you deserved?
How open-minded would you be about starting a new job solely for a bigger paycheck?
Reflect on how your company determines pay, and how that impacts employee performance.
What is the pay structure at your company? (For example, are employees paid a salary, are they eligible for bonuses, and do they get raises?)
If you helped shape those policies, why did you feel they were the best choices for your organization?
In what ways do you think this pay structure optimizes employees’ productivity (and creativity, if applicable)?
In what ways do you think this pay structure detracts from employees’ productivity (and creativity)?
What is one aspect of Netflix’s pay structure that you’d consider adopting, and why?
The previous chapter discussed how Hastings decided to pay top dollar to attract and retain Netflix’s top talent. However, Hastings also realized that having a high concentration of talent doesn’t just mean hiring and keeping the best people—it also means firing good employees to make room for great ones. In this chapter, we’ll discuss how Netflix lets go of adequate employees and manages the potential pitfalls of this practice.
To separate good employees from great ones, Hastings says that Netflix encourages managers to regularly assess their staff’s standing by asking themselves, “Would I fight to keep an employee if he said he was thinking of leaving?” (Netflix calls this the “Keeper Test.”) If a manager wouldn’t fight to keep an employee on the team, then the manager should either talk to the employee about how he can improve or offer him a generous severance package.
Hastings believes that each employee should remain in a position only as long as the employee is the best person for the job and the job is the best fit for the employee. Someone may be the perfect match for a job when he starts, but over time that can change, depending on the employee’s growth and the company’s needs.
(Shortform note: Leaders who take Hastings’s approach to firing—letting go of people who are no longer a good fit—should apply the same rule to themselves. In Good to Great, Jim Collins writes that exceptional leaders have a “company-first” mentality: They prioritize the success of the organization over their personal ambition, even if it means giving up control to someone else who can better steer the company forward. Some of the signs that it’s time for you to step aside are: seeing an increase in resignations from your team, feeling uninspired and incapable of coming up with new ideas, and realizing that there’s someone who can do your job better than you do.)
At most companies, you have to do something wrong to get fired, but at Netflix, you can be fired because your manager has found (or thinks they can find) someone better. This is why the company encourages employees to think of Netflix not as a family—as many companies promote—but as a professional sports team. Hastings asserts that families are supposed to support each other no matter what, even when some members fail to pull their weight, and that mentality leads organizations to keep low-performing employees out of sentimentality.
(Shortform note: Contrary to Hastings, Ray Dalio argues that treating employees like family is actually beneficial to a company. In Principles, he writes that the family approach strengthens relationships, making them more special than quid pro quo employment agreements. Dalio adds that this familial bond makes employees feel like they have a shared mission, so they struggle well together and help each other grow. It’s worth noting that Dalio’s hedge fund Bridgewater still lets go of underperforming “family members.”)
By contrast, Hastings writes, sports teams frequently trade players if they think they can upgrade. Additionally, professional athletes are expected to perform at the highest level, understand that their performance counts more than mere effort, continuously refine their skills, and form a strong bond with their team.
In taking this approach to hiring and firing, Hastings says that Netflix tries to remove the shame of being let go. Although it’s always disappointing to be fired, employees should be proud to have been a part of the organization for the time they were there, just as sports players are when they are traded from a championship team. When new hires start working at Netflix, they must understand this mentality—and by taking the job, they’re choosing to sacrifice some job security to work on a winning team.
How to Reduce the Shame of Getting Fired
Hastings writes that thinking of a company as a sports team instead of a family takes away some of the stigma of being let go. However, this mentality doesn’t make the experience any easier—professional athletes themselves struggle with being traded. Even though they know that being let go is part of the job, athletes still describe the experience as tough, emotional, and shocking.
It just goes to show that whether a company takes the family approach or the professional sports team approach, getting fired is never easy. To help diminish the shame for fired employees, Brené Brown recommends that you:
Clearly explain why they’re being let go. Be as straightforward as possible so that you don’t confuse them with ambiguity.
Discuss how you can make the process easier for them.
Stay calm and steadfast in your decision. Avoid becoming defensive, and be honest even if the employee gets emotional.
Read more about handling sensitive situations with courage and empathy in our full guide to Dare to Lead.
Many outsiders view Netflix’s policy as harsh and even unethical. For many, the prospect of losing a job suddenly—despite hard work and dedication—is daunting, and it can have financial, professional, and emotional consequences. However, Hastings has no qualms about the practice: He pays employees top-of-market salaries and makes sure that new hires understand the company’s ethos and practices around maintaining a high concentration of talent. Additionally, exiting employees receive generous severance packages (anywhere from four to nine months’ salary, depending on the person’s position).
A Fear of Firing May Indicate Poor Culture Fit
Outsiders, and even employees, might view Netflix’s firing policy as ruthless, despite the promise of a substantial severance package: After all, receiving money doesn’t always soothe the emotional pain of being fired. The Wall Street Journal, for one, published an article discussing the Netflix culture and the company’s “blunt firings.”
However, what outsiders may fail to acknowledge is that these blunt firings are nothing new to employees—Netflix leaders explicitly describe the kind of environment the company has, so anyone who joins Netflix knows exactly what they’re signing up for. Furthermore, some argue, while an employee may feel demoralized or struggle to overcome the fear of being fired, it doesn’t mean that the Netflix culture is wrong; rather, it might mean that the employee simply isn’t a good fit for the culture.)
Such large severance packages can be expensive, but Netflix can afford them because they cut other firing-related costs. In most companies, when a manager is considering firing someone, the manager creates a performance improvement plan (PIP) for the employee, giving the employee an opportunity to make improvements and protecting the company from being sued. However, Hastings argues, PIPs are expensive: The employee continues receiving pay, plus the manager and human resources spend hours documenting the progress. Netflix’s approach cuts the time and expense of a PIP and instead puts that money into a large severance package.
(Shortform note: PIPs are not only expensive in comparison to severance packages, as Hastings says, but they may also be ineffective because they address the wrong problem. PIPs focus on performance issues—or the symptoms of the problem—rather than the root cause. One way to stop relying on PIPs to improve performance is to instead focus on improving communication: Be clear about job expectations from the beginning of the hiring process, then constantly remind employees about what they’re supposed to deliver.)
The company is able to eliminate the need for PIPs because the culture of candor means that every employee gets constant feedback on how to improve. (We’ll discuss this culture of candor in more detail in Part 2.) Exiting employees must also sign an agreement not to sue Netflix to receive their severance packages.
(Shortform note: It takes a special kind of employee to understand Netflix’s culture and maintain peak performance without job security—most people need a sense of safety at work. In The Culture Code, Daniel Coyle writes that psychological safety is important because it strengthens ties between team members, increases employee loyalty, and helps teams stick together through difficult times.)
Hastings contends that many of Netflix’s employees feel that the benefits of working in a talent-concentrated environment are worth the lack of job security. However, as we’ll talk about next, Netflix’s leaders had to be careful that the cut-throat policy didn’t create fear.
The strict performance standards at Netflix can cause employees to feel that the possibility of being fired is an ever-present threat. While this fear can motivate employees to work tirelessly to keep their jobs, Hastings recognizes that people do their best work when they’re inspired by passion, not fear.
(Shortform note: Fear may be effective, but research agrees with Hastings: This negative motivator is likely to backfire. Aside from passion, other positive motivators for employees are good leaders, recognition, stability, and the chance to make a difference. Another interesting motivator is self-indulgence, which employees may get from money or fame; however, you should take care that this particular motivator doesn’t override the company’s objectives.)
To minimize anxiety among employees, Netflix uses two strategies.
If an employee is unsure about her standing, Hastings writes that she should ask her manager directly whether the manager would fight to keep her if she said she was leaving. The employee can decide how to move forward based on her manager’s answer: She can rest assured that her job is safe, ask for specific feedback to improve her performance, or discuss whether she’s still the best fit for the job.
(Shortform note: Before giving your response, it’s important to consider whether your perception of your employee’s performance is fair. In Radical Candor, Kim Scott writes that when it comes to perceived low performers, you should first reflect on whether you’ve done anything to hold the employee back—have you been clear about your expectations and given them ample feedback? Equally important is your response to high performers. Don’t just shower them with praise; make sure that they stay challenged and that you support their continued growth.)
Whenever an employee is fired, the people on that person’s team are left wondering what happened, whether or not their former coworker saw it coming, and if they could be next. Hastings describes these post-exit Q&A sessions as an opportunity for managers to be open about what happened, which alleviates employees’ fears.
(Shortform note: It’s not a common practice to have a Q&A session with remaining employees after someone is fired. If your company doesn’t have the same level of openness that Netflix has, experts recommend at least addressing the firing by making a short statement, which should clarify the process for handling performance problems. This way, you can reassure employees that the firing happened after a fair process and that they won’t get fired out of the blue.)
Consider the pros and cons of working for a company where managers determine if they should fire an employee based on whether or not they would fight to keep the employee at the company.
If you were applying for a dream job at Netflix and found out about the practice of firing and giving generous severance packages to adequate employees, how would that impact your interest in the job?
If you would be hesitant to join the company because of this practice, what would be your main concern?
What—if anything—appeals to you about working in an environment with this practice? (For example, maybe you value the opportunity to work with all high-performing colleagues.)
At your current job, how does your level of job security impact your performance?
Consider the pros and cons of your current firing philosophies compared to Netflix’s practices.
What are your current firing practices and overarching philosophies?
What problems, if any, have you or the company faced because of these practices?
How could adopting Netflix’s philosophy of firing adequate employees quickly and providing generous severances solve any of your company’s problems?
Does each of your employees pass your test of whether or not you would fight to keep the employee at the company?
If not all of your employees pass, what is your next step?
In Part 1, we discussed how Netflix attracts and retains top talent. In Part 2, we’ll discuss how Netflix maximizes these talented employees’ potential by promoting frequent feedback.
Hastings writes that he encouraged employees to openly share their feelings with everyone on the team—superiors, colleagues, and subordinates—as long as they did it with positive intent, without attacking or hurting others. In fact, frequent feedback became so ingrained in Netflix’s culture that not speaking up was considered an act of disloyalty, because it inhibited the company’s improvement.
(Shortform note: Some may think that it’s best to maintain the peace and keep people comfortable by sugarcoating feedback or letting small issues slide. But like Hastings, Bridgewater’s Ray Dalio believes that it’s actually kinder and a sign of care and respect to tell people what they need to improve. In Principles, Dalio writes that everyone at Bridgewater not only has the privilege but the obligation to speak up because doing so allows people to address issues and weaknesses right away instead of letting them fester and cause bigger problems later on.)
Hastings says that in most workplaces and social settings, people typically refrain from giving critical and constructive feedback because they want to avoid conflict. People also aren’t receptive to corrective feedback because it tends to make them feel vulnerable, doubt themselves, or become frustrated.
(Shortform note: Bridgewater’s Ray Dalio says that this feeling of vulnerability and frustration comes from your ego, which he describes as your underlying desire to be capable, to be seen by other people as capable, and to be praised. Your ego leads you to react to negative feedback emotionally, rather than rationally.)
Even though it may lead to discomfort, Hastings argues that corrective feedback done constructively has a number of benefits, such as preventing misunderstandings, increasing the pace of work progress, and reducing office politics. Ultimately, corrective feedback raises performance levels and provides the opportunity to produce a better outcome because it creates a process of constant learning and improvement.
(Shortform note: One way to minimize the discomfort that comes from corrective feedback and merely enjoy its benefits is to normalize failure. In Creativity, Inc., Ed Catmull writes that Pixar views failure as a normal part of a highly innovative environment. To remove the stigma of failure, Catmull says you should admit your own errors and explain what you learned from them. He does caution that you should watch out for employees’ consistent failure, because this means that they’re not learning from their mistakes.)
However, even if everyone agrees on the value of candor, well-intended feedback can still be poorly received and create counterproductive tension and resentment. To avoid this and develop a culture of candor, Hastings offers the following guidelines:
Hastings writes that the higher your position in an organization, the less feedback you typically receive because colleagues are less likely to question an executive than a mid-level employee. However, feedback is especially crucial at the management level because the consequences of a manager’s error are typically greater than a junior employee’s mistake—the junior employee may flub a single project, while the manager could steer the company into a bad business deal. Leaders need their staff to let them know when they’re veering in the wrong direction.
(Shortform note: As Hastings says, it’s important for managers to receive feedback. However, employees normally don’t speak up because they’re afraid of offending their bosses or hurting their careers. Manage their fear by providing a psychologically safe environment. You can start by consistently engaging with your team in an authentic way by having honest conversations with them and giving them genuine praise for their accomplishments.)
To show that you’re open to receiving feedback and to make it less intimidating for employees to critique you, Hastings says you should include “feedback” as an agenda item in one-on-one meetings. You should also respond to feedback in an open, appreciative way.
(Shortform note: Even if you give your employees permission to offer feedback, they may feel unsure of actually doing so. Encourage them by asking for specific feedback. Rather than vaguely asking them if they have any feedback, ask them about particular points for improvement, such as how you can become a better manager or what you can do to streamline a process.)
Even well-intended, constructive criticism can make the recipient feel hurt and defensive, so it helps to have parameters. Hastings developed the following guidelines:
The goal of giving feedback should be to help the individual, team, or company improve—not to hurt the recipient, vent, or advance your own agenda. (Shortform note: Helpful feedback isn’t always about points for improvement. In fact, experts recommend that you give positive feedback more frequently so that employees will be more receptive to negative feedback.)
Corrective feedback should focus on how someone can improve, not what she’s doing wrong. (Shortform note: Some argue that corrective feedback isn’t helpful at all and that you should instead focus on what employees are doing well.)
When receiving feedback, Hastings warns, fight the urge to be defensive or to give an excuse. Show the person you appreciate her candor and helpful intention by listening and considering the advice with an open mind. (Shortform note: One way to remain open to feedback is to make sure you’re separating the actual feedback from the messenger. You might be tempted to discount valid feedback just because of the person who’s giving it, if you dislike that person.)
You don’t have to follow all feedback—as long as you consider it. When someone gives you feedback, thank her, consider her message, and decide whether or not to use it. (Shortform note: If you disagree with the feedback, take time to reflect on it then discuss your disagreement with the other person, working together to determine how you can move forward.)
Managers should also coach employees on how to give feedback and monitor their feedback delivery. Ultimately, Hastings says, candid feedback should be delivered in a way that makes the recipient feel positive and motivated, not discouraged and unproductive. (Shortform note: While feedback should be motivating, you should avoid using the “feedback sandwich”—giving positive feedback, followed by negative feedback, then ending with more positive feedback. This method may send mixed messages and undermine the negative feedback.)
People often want to wait until the right moment to give constructive criticism to avoid embarrassing or upsetting the recipient. But if you wait to give feedback, you may be robbing the person of the opportunity to use your critique and correct the issue. For this reason, Hastings says that Netflix encourages employees to give feedback anywhere, anytime—even if it’s in the middle of a meeting. With a culture of candor and a staff of people who know how to give and receive constructive criticism, a public critique that could be considered disruptive in another setting becomes a corrective lifesaver.
(Shortform note: Netflix employees can give feedback in the middle of a meeting, but some experts argue that not all feedback should be given in public, saying it’s best to give private feedback in two instances: First, when other team members aren’t affected; and second, when you want to coach the employee after he receives feedback from others. You should also remind employees to give only essential feedback during meetings. Otherwise, you risk wasting time on inconsequential matters, which was one of the criticisms against Bridgewater’s similar culture of extreme openness and feedback-giving.)
In the previous chapter, we discussed how frequent feedback helps each employee achieve peak performance—but no matter how much you preach the benefits of candor, some people will still avoid giving and receiving honest feedback because it’s often uncomfortable. For that reason, Hastings implemented two processes to ensure that everyone participates.
Hastings wanted a formalized way for employees to receive feedback, but he felt that the standard performance review that many companies use had a glaring shortcoming: Feedback only goes from superiors to subordinates, missing insight from coworkers who work with you in a different capacity.
Instead of a traditional performance review, Hastings and the executive team thus implemented an annual written 360. (Shortform note: A “written 360” refers to a 360-degree review, which is also called multisource feedback, multi-rater feedback, or multisource assessment.) In the written 360, each employee receives written feedback from any colleague who wants to give it—including bosses, supervisors, coworkers, and subordinates. Comments must be actionable and constructive, and they should clearly describe what an employee should stop doing, keep doing, and start doing.
(Shortform note: This feedback mechanism is called the “SKS form.” It’s an effective tool not only in the workplace but also in your personal life, because it’s based on a spirit of respect and collaboration, and it helps improve relationships by making you aware of each other’s needs.)
The annual 360s are not tied to raises, promotions, or firings—rather, they’re purely meant to give each employee the opportunity to give and receive thorough feedback. The culture of candor dictates that there already should be a constant stream of feedback, but an annual 360 can give a more comprehensive evaluation. (Shortform note: Think of regular feedback as stretching every day, while the annual 360 is like getting an occasional deep-tissue massage—the periodic treatment allows you to address the knots and pains that a quick daily stretch can’t relieve.)
Despite Netflix’s open and honest culture, certain suggestions are hard for many people to give and receive, but those comments are often vital to improving someone’s performance—this process ensures that they don’t get glossed over.
(Shortform note: Make the most of 360s and the vital feedback they provide by following up with individuals to make sure that they understand the feedback. Then, work with them to transform the feedback into improved performance in three steps: First, make them aware of what they need to do to implement the feedback. Second, make sure they commit to making the necessary changes. And third, motivate them to change by setting goals for their improvement.)
When Hastings first implemented the written 360s, he allowed anonymous comments so that people could feel comfortable being totally open. After a couple of years, Hastings struck the anonymous option and found that feedback became more concrete and turned into a springboard for more valuable discussions. Employees also put more effort into their comments, because their names and credibility were attached.
(Shortform note: If, contrary to Hastings, you find that feedback is more effective when given anonymously at your company, then this may be a sign of a bigger problem: a lack of trust among team members. Help employees understand that anonymity leads to reduced accountability, produces misleading results, and sends mixed messages. Then, assure them that any negative feedback they give in a named survey or evaluation won’t be held against them.)
Hastings saw that the biggest benefit of the written 360s was the discussions that grew out of the written comments, so he implemented face-to-face 360-degree reviews. In a live 360, a manager and her team gather for several hours and go around the room as each employee takes a turn receiving feedback. This format has two benefits:
1) It provides insight into the interpersonal dynamics of the team as a whole by enabling everyone to hear teammates’ comments about each other. If one person offers a suggestion, someone else can dispute or build on it, and the person receiving the feedback gets a sense of how she may be effective in one context but may need improvement in another area.
(Shortform note: Such open discussion about teammates’ flaws and areas for improvement may create some tension between the critic and the person being critiqued. While you want to manage this tension, some argue that having a little drama during a meeting is a good thing. In Death by Meeting, Patrick Lencioni writes that having disagreements keeps participants engaged, so you should actively look for signs of disagreement. Pay attention to comments and people’s facial expressions, and prod further when you notice that they’re trying to avoid conflict.)
2) Each employee becomes more accountable to her team, which improves the team’s overall effectiveness and collaboration. This also reinforces the principle of acting in the best interest of the company instead of merely trying to please the boss.
(Shortform note: While an employee’s attempts to please you may be ego-boosting, this kind of behavior can be disruptive. Not only does it take the employee’s time away from their actual work, but it can also cause friction among team members who may view their co-worker’s efforts as self-serving. Take care not to encourage this kind of behavior and get employees to refocus by letting them make decisions solo instead of constantly consulting you, having them work with other leaders, and giving everyone on your team the same amount of time and attention.)
Even if you’re acclimated to the company’s culture of candor, fielding constructive criticism from your entire team in front of your entire team can be daunting. However, no one aims to attack or embarrass their teammate—especially because they’ll also have a turn on the hot seat. The culture of autonomy and accountability also ensures that employees will call out a coworker whose comments are out of line. Meyer writes that some employees still see the process as uncomfortable and potentially embarrassing, but if they can be receptive to comments and avoid getting defensive, the feedback could save them from failing a manager’s future assessment.
Make the Most Out of Live Feedback Sessions
The idea of a live feedback session may seem more daunting than a written review because you see the other person’s reaction to your feedback in real-time. However, in Creativity, Inc., Pixar co-founder Ed Catmull writes that the advantages of a live session over a written one are that you have the power to control the tone of the discussion and give people the chance to ask follow-up questions.
To make the most out of feedback sessions like a live 360, Catmull says you should first establish a safe, judgment-free environment. Remind employees that their feedback can help you address issues that may cause serious problems in the future, and reassure them that they won’t be punished for their opinions. Then, at the live sessions, you can further encourage people to speak and be more receptive by:
Involving people who are passionate about the projects up for discussion. Because they’re invested in the projects, they likely won’t hold back from giving their opinion.
Encouraging collaboration. Address flaws and areas for improvement without using personal attacks, then find ways to work together to find solutions. For example, instead of saying, “Why are your reports so disorganized?” you can say, “Your reports are a little disorganized, so let’s figure out how we can improve the content.”
Offering suggestions instead of making demands. If you’re discussing a specific project, defer to the project manager when it comes to implementation.
Reflect on the kind of feedback that could help you improve your performance.
Describe your current performance review process.
If you were to do a written 360, who would you like to get feedback from?
What kind of feedback would you hope to receive (for example, pertaining to your professional skills or your ability to collaborate)?
If your company doesn’t have a process for you to get the feedback you’re interested in, how could you solicit it from your colleagues?
Once Hastings had created a culture of candor at Netflix, as discussed in Part 2, he built on that transparency by making sensitive data—including profit and loss statements (P&Ls) and other financial documents—available to all employees. While direct feedback raised individual performance and increased accountability, Hastings instituted organizational transparency to build employees’ trust in the company and its leaders, which would boost the staff’s sense of ownership and responsibility for contributing to the company’s success. Additionally, he found that making information available to employees empowers them to make the best decisions, as we’ll discuss in Chapters 6 and 7.
(Shortform note: Bridgewater has a similar principle of extreme transparency, which Ray Dalio describes in Principles: The firm records all meetings and interviews and makes these recordings available to the entire team. Additionally, each employee has a personality profile, which allows co-workers to see everyone’s strengths and weaknesses at a glance. Furthermore, Bridgewater uses an in-house app that allows team members to rate each other in real-time. Such levels of transparency can be uncomfortable, but Dalio emphasizes the importance of putting the team’s best interest before your pride.)
When an executive shares information that’s typically confidential with an entire company of employees, they gain confidence in their standing in the company, loyalty to the company and its leadership, and tremendous trust in the leaders to be transparent. Hastings also takes other measures to create an atmosphere of trust and openness: He doesn’t have an enclosed office, he conducts most of his meetings out in the open, and he even had the locks removed from employee lockers at Netflix’s Singapore office.
(Shortform note: Even though Netflix champions transparency in arguably extreme ways, some argue that more privacy is ideal in a creative environment: One communications agency found that bringing in clients early in the creative process for the sake of transparency can put more pressure on employees and disrupt idea generation. Additionally, too much transparency in any workplace may lead to information overload and, consequently, analysis paralysis, which impedes decision-making.)
By contrast, at most companies, only executives and high-level managers are privy to sensitive information, such as financial data or possible company reorganizations that could lead to job losses. This is because executives don’t think that the information is relevant to lower-level employees or don’t want to upset employees or cause panic.
(Shortform note: Despite Bridegwater’s principle of extreme transparency, Ray Dalio writes that the firm has a few exceptions to the rule. Some information that should remain confidential includes employees’ personal issues that don’t affect the community, sensitive information that can put the long-term interests of Bridgewater or its clients at risk, and information that may be distracting to employees. Such exceptions have led some to opine that Bridgewater only champions transparency when it’s in their own best interest.)
Let’s look at four specific ways that Netflix practices transparency and the positive outcomes that come from this practice.
For a publicly held company, financial data has an impact on the organization’s stock prices, so sharing this information with staff can be risky. If one of your employees shares your quarterly numbers with anyone outside the company before they’ve been released publicly, that employee could go to jail.
However, Hastings continued to share financial information with his staff even after Netflix went public while also warning them about the serious consequences of leaking it. He even began holding weekly all-staff meetings in which he gave everyone a copy of the P&L and discussed the weekly metrics.
When an employee violated that trust and leaked confidential data to a competitor, Hastings still didn’t back down from his commitment to transparency. He insists that it’s ultimately beneficial to the company—with a deeper understanding of how the company’s doing, employees have a greater sense of ownership as well as the proper context to make decisions without needing information or approval from managers.
(Shortform note: Sharing your financials for context is useless if your employees can’t make sense of raw data. Not everyone who sees the information is an accountant, so make the numbers more easily digestible through simple summaries, graphs, and charts.)
The Risks of Sharing Financials
As Netflix’s experience has shown, sharing financial data (what some companies call “open-book management”) can lead to leaks, whether it’s done deliberately or inadvertently. If you choose to implement this practice, watch out for these other risks that can be just as damaging as leaks:
Panic during tough times—when employees see that the company isn’t doing well, they’ll naturally think about the implications for them. Be sure to let them know what you’re doing to get the company back on track, and encourage them to focus on what they can contribute so that they feel like they’re part of the solution.
Misalignment—opening books to get everyone aligned can have the opposite effect of creating confusion, particularly in organizations that prioritize other core values over profit. In this case, explain how profit gives the organization the means to fulfill its central purpose.
Even if your company hasn’t come to a decision, Hastings recommends being open with employees about the possibility that their jobs could be eliminated, while emphasizing that you appreciate them and their work and that you want them to stay, if possible. Hastings feels that keeping this secret could make employees feel like strangers in their own companies—and many employees appreciate knowing all the information available to make informed decisions, rather than being kept in the dark and potentially blindsided later.
(Shortform note: Many companies treat possible layoffs as confidential information, so you may not be in a position to alert your staff as Hastings suggests. If an employee asks directly if their job is in danger, experts say that you should reassure them that management is carefully considering all options and that you’ll share more substantive information as soon as possible. If you’ve revealed sensitive information in the past, you’ll be in a tight spot—people will expect you to do it again. Make it a personal policy not to share anything with a select few that you can’t share with the whole team.)
However, this route comes with two risks:
1) The employees could become anxious and distracted, which could interfere with their efficiency at work. (Shortform note: During uncertain times, it’s necessary to show compassion for your employees, but make sure you don’t sacrifice effectiveness. While you should show concern, you shouldn’t tiptoe around giving negative feedback or making decisions that may disappoint employees.)
2) The employees could start looking for new jobs, which means that you risk losing them even if the reorganization doesn’t go through. (Shortform note: If a star employee ends up leaving, stay in touch and consider rehiring them when the time is right.)
Despite these risks, Hastings believes that transparency is the best option because employees will suffer far more stress if they do lose their jobs without notice than they would by simply knowing that it’s a possibility.
(Shortform note: If you’ve been sharing the company’s financials, then the possibility of layoffs shouldn’t come as a complete shock to your employees. To manage stress around layoffs, communicate regularly and clearly with your employees to let them know about the company’s performance and give them a better idea of where they stand.)
When an employee is fired, Hastings advocates for being transparent with the people who benefit from knowing the truth, including the fired employee’s colleagues. When employees know why their coworkers have been fired for work-related actions, they can avoid making the same mistakes. Furthermore, speculation is inevitable anytime someone is fired, so if you get in front of the gossip and share the truth, employees learn that they can trust you to be transparent. Although it’s tempting and common for company leaders to spin or obscure the whole truth, this is a sure way to erode trust among employees.
(Shortform note: Hastings discusses the value of letting employees know when and why someone is fired, but not everyone views the practice as necessary. Some Netflix employees have even described the “postmortem” emails and meetings—which may involve hundreds of people—as “awkward and theatrical.” However, Netflix stands by its policy of organizational transparency, saying that they announce not just bad news, such as firings, but also good news, such as hirings and promotions. )
Everyone makes mistakes, and Hastings says that owning up to yours encourages employees to take risks despite the possibility of failure. Hastings notes that leaders often fear that being honest about their shortcomings will cause employees to lose faith in them. The pratfall effect states that the opposite is true as long as you’ve already built trust and proven your competence. (Shortform note: The pratfall effect is a phenomenon wherein admitting a mistake can make a competent person seem more relatable and likable.) However, if people already see your performance as inadequate, admitting your mistakes will only worsen their view of your abilities.
(Shortform note: To come across as competent, experts recommend that you learn how to identify and solve problems on your own, pay close attention to explanations so that you don’t keep asking the same questions, and show confidence in your abilities.)
How to Admit Your Mistakes
Hastings says that admitting your mistakes has a number of benefits, but he isn’t explicit about how to go about it. In Thank You for Arguing, Jay Heinrichs outlines a five-step process for owning up to your mistakes while also improving your reputation:
Determine your goal. Figure out what you want the outcome to be.
Fess up first. Being the first one to talk about your mistake means you can better control the narrative.
Use future tense. Immediately follow up your admission with possible solutions and a plan of action.
Don’t belittle the victim. Treat the mistake with the appropriate amount of gravity to demonstrate that you care about the consequences of your mistake.
Don’t rely on an apology. Apologies reinforce your guilt and may come off as insincere. Instead of saying sorry, acknowledge that you didn’t meet your own high standards.
Reflect on your company leaders’ level of transparency and how that impacts your attitude and performance.
Describe the last time you felt that a manager or leader at your company was withholding information from you and your colleagues.
How did that impact your feelings about the company and your connection to it?
What is one type of information that company leaders keep secret that you think they should share with staff?
How do you think being open with this type of information would impact performance and morale?
Reflect on your level of organizational transparency and how that impacts your employees.
What kind of information do you withhold from most of your staff (with the exception of top executives or pertinent employees)?
Do you think employees would be interested in or benefit from knowing any of this information? Why or why not?
What do you think the consequences would be if you made this information accessible to all employees?
How could you minimize one of these consequences?
What is one type of information that you currently withhold that you could consider sharing with your staff?
In the previous chapter, we discussed how Netflix gives employees access to sensitive information. In this chapter, we’ll cover how this level of transparency empowers lower-level employees to make decisions and own the consequences, rather than requiring them to seek approval from higher-ups.
In most companies, all big decisions must pass through the higher-ups. However, managers and executives are not necessarily the most qualified to make decisions on everything from marketing strategies to financial structuring—that’s why they have competent staff to lead those efforts. When one or a handful of company leaders has the final say-so on everything, their lack of vision or fixed perspective can severely limit innovation. Additionally, running every decision up the chain of command slows progress and growth, and if the boss shoots down an idea, employees have to spend even more time developing a new proposal.
(Shortform note: Having just a small group of leaders make final decisions doesn’t hinder innovation just due to lack of vision, as Hastings says—it also creates an environment where employees may be surprised by the decisions made. They may feel resentful of the decision or their inability to provide input, or they may feel disconnected from all decisions because their impression is that their input doesn’t matter—both feelings that quickly lead to disengagement.)
By contrast, Hastings discloses that Netflix has a model of dispersed decision-making, where employees have control over their projects. They’re encouraged to move forward on the projects that they believe in, even if their bosses disagree. In the spirit of autonomy and accountability, Netflix urges its employees not to make decisions that will please their boss, but ones that will benefit the company.
Dispersed decision-making is critical for companies where creative innovation is the key to adapting and staying relevant (as opposed to industries like medicine, where error prevention is the top priority). However, Meyer stresses that this structure is only possible with the foundation of a high concentration of talent and a culture of candor and radical transparency. In order for managers to feel confident watching employees forge ahead against their advice, they must believe in the competence of that employee and they must rest assured that their equally competent colleagues will candidly share feedback on the proposal. Yet, even with those elements, managers must be trained to refrain from overriding decisions they disagree with and must put their trust in high-performing employees who’ve exhibited good judgment.
How to Give Employees More Autonomy
As Hastings and Meyer explain, dispersed decision-making doesn’t work for every industry or for all cultures—many companies still have a more hierarchical organizational structure where the decision-making takes place solely at the top. However, even if your organization keeps a tighter rein on its workers, you should still trust employees with some degree of autonomy and avoid micromanaging. Otherwise, you risk having employees who are frustrated that you don’t trust them and a team bogged down by approval processes and bottlenecks. You also end up overloaded, because you spend too much time addressing minor issues instead of focusing on more important tasks.
To give employees more autonomy and avoid micromanaging, experts recommend the following:
Clarify expectations at the beginning of each project. Then, check on progress every week instead of keeping an eye on employees every step of the way.
Let go of perfectionism. Be satisfied with 95 percent of a perfect performance, 95 percent of the time.
Let go in small doses. If you’re hesitant to let go of control, start with one low-stakes project. Use this experiment to get used to the idea of trusting your team members.
Prioritize. Write down your top two or three responsibilities and focus on performing those.
Don’t be too available. You may have trained your team to be overly reliant on you. If you’re used to responding to their emails right away, make a conscious effort to give them time to come up with their own solutions.
Define the goals, not the processes. Make sure your employees know what their goals are by clearly defining your customers’ needs and the company’s objectives. Then, let them determine how to meet those goals based on their own skills and processes. (Read more about having an individualized approach to management in our full guide to First, Break All the Rules.)
At Netflix, Meyer explains that employees are empowered to make risky decisions. This dispersed decision-making gives the employee the autonomy and power to take risks, as well as accountability when risks don’t pay off.
Company leaders expect some risks to fail, and they expect employees to learn from those failures to avoid making the same mistake twice. Employee performance is not based on the outcome of any single risk, but rather on their overall record of taking risks that benefit the company. That means that people don’t lose their jobs for taking a risk that doesn’t pay off—only for failing to take big risks or for taking consistently bad risks.
Empowerment Only Works in Some Situations
Netflix empowers its employees to make risky decisions, which has led to some big wins for the company. However, empowerment doesn’t work in every scenario. While delegating responsibilities to team members and asking for their input can improve job performance and satisfaction, the results vary depending on the task and circumstances. In particular, research shows that:
Empowering employees encourages creativity, but it doesn’t improve the performance of routine tasks—in these cases, employees tend to view empowerment as an additional burden.
Different cultures have different degrees of receptivity to empowering leadership. Eastern cultures tend to be more open to leaders who give additional responsibilities, while Western cultures, ironically, may view empowering leaders as controlling.
Less experienced employees respond more positively to empowering leaders, possibly because they see additional tasks as a chance to prove themselves.
By understanding the type of employees you have and the kind of work they do, you can figure out how much empowerment you should give them to produce positive outcomes.
To help employees succeed, Meyer writes that Netflix has developed a four-step approach to proposing ideas (what the company calls the “Netflix Innovation Cycle”). Let’s examine each of the four steps in detail.
Although you don’t need approval to move forward on an idea, leadership expects you to make well-informed decisions, which includes gathering and considering feedback from managers and colleagues. Hastings writes that you’re likely to get a mix of support and dissent, all of which will give you insight as you alter, abandon, or move forward with your idea.
(Shortform note: The culture of openness at Netflix means that others get to weigh in on your ideas. While this kind of collaboration helpfully reveals potential problems and blind spots, it also has its pitfalls: Employees may be confused or uncomfortable with the lack of defined roles in a more fluid—rather than hierarchical—process, there may be in-fighting if employees don’t know how to express or accept dissenting opinions, and they may confuse collaborative discussions with action.)
As we discussed in Chapter 3, Netflix’s culture of candor makes it an act of disloyalty to withhold disagreement or skepticism about an idea, because speaking up ignites discussion that could prevent someone from moving forward with a disastrous idea. Meyer notes that the feedback process is a critical first step in the idea-proposing process because it actively works against the human inclination to conform, which can lead people to go along with bad ideas.
(Shortform note: In workplaces that don’t have a culture of candor like Netflix’s, employees may hesitate to rock the boat with their feedback. In these cases, it’s important to create an environment that encourages employees to go against the consensus. In Originals, Adam Grant writes that you can prevent homogeneous thinking and surface dissenting ideas in three ways: First, ask onboarding employees for their opinions right off the bat. Second, look for authentic dissenters by asking employees to name coworkers who don’t speak up enough. Third, encourage people to speak up about problems even if they haven’t identified solutions.)
When a proposal involves a lot of time, work hours, and resources, it’s critical to test the idea on a smaller scale before committing to it full-out. (Shortform note: This is what Jim Collins calls “firing bullets before cannonballs.'' First, companies launch “bullets,” or small-scale projects, to see which ones are viable. Then, they put all their firepower into “cannonballs,” or the projects that have the best chance of success based on the bullets. This method prevents companies from suffering catastrophic consequences from taking uncalculated risks.)
Most companies encourage some form of testing out ideas—but Meyer writes that Netflix urges employees to test ideas even if the bosses disagree with them. (Shortform note: Collins emphasizes that, as a manager, allowing small experiments that you may not agree with can be a game-changer and eventually lead to a major shift in business. In Built to Last, he writes that an unapproved experiment was how American Express went from being a freight company to a travel company.)
When you have a proposal, Hastings says you become the project manager (what he calls an “informed captain”), meaning you are responsible for researching, making decisions, and executing the project. The feedback and testing in Steps 1 and 2 are meant to make you a more knowledgeable project lead.
At many companies, you may spearhead a project, but you need signatures and approvals from higher-ups to move forward, and that takes some of the ownership out of your hands. At Netflix, as the project manager, you have decision-making freedom and ownership of the project from conception to execution. You negotiate the deals, you sign the contracts—and, Hastings emphasizes, you carry the burden of responsibility to do everything possible to ensure that your decisions help to move the company forward.
Give Your Employees the Confidence to Take the Lead
The tremendous amount of responsibility that comes with proposing an idea and following it through to completion might intimidate employees into inaction. Help them gain more confidence to propose projects and take risks by:
Making them aware of their lack of self-confidence and how it affects the team and their career progression
Building trust so that they know that you’re on their side
Helping them identify and leverage their strengths as well as pinpoint and improve on their weaknesses
Giving them assignments with detailed instructions and well-defined deliverables before assigning more challenging projects that are still doable
Celebrating their accomplishments through praise or a congratulatory email, and giving them specific feedback about what led to their success
If you’ve worked hard to seek feedback on, test out, and take the lead on your proposal, and it still fails, Hastings says that the only option is to learn from the experience. Share your failures by writing an open memo about your failed bet and what you learned from it. This sends the message that failure is part of the creative process and encourages others to innovate, while also giving everyone the opportunity to learn from the failure.
(Shortform note: As Hastings points out, failure is a normal part of innovation. It’s thus important for employees to learn how to deal with it, aside from owning up to it. In Dare to Lead, Brené Brown says you can help employees develop failure resilience, or the ability to recover quickly when something goes wrong. This entails first reassuring onboarding employees that they’ll be supported—not penalized—if they fail. Then, train them to respond to failure rationally rather than emotionally, separating facts from feelings to paint an accurate picture of the situation.)
Managers who disagreed with your proposal must be especially aware of how they react to its failure—if they smugly remind you of their dissent, they’ll smother innovation and make everyone risk-averse. Instead, managers should encourage employees to share about their failed bets, then focus on takeaways and move on.
(Shortform note: It’s important to learn to override your ego when you’re wrong to keep you from becoming defensive or combative. But it’s also important to learn to override your ego when you’re right and resist the urge to say, “I told you so.” Take a page from Bridgewater’s playbook and learn to value the best ideas, no matter where they come from, because the ultimate goal isn’t being right—it’s the company’s success.)
Alternatively, if your proposal is a success, you, your manager, and your team should celebrate it. If your manager initially disagreed with your idea, she should readily admit that she was wrong and that she’s glad you moved forward despite her reservations.
(Shortform note: Hastings writes that you should celebrate success, but he doesn’t say why it’s important to do so. Beyond being an emotional release, celebrating success encourages you to reflect on what led to success so you can determine how to replicate it.)
Reflect on how much freedom you have to pursue projects you believe in.
Describe the last project you pitched or spearheaded.
How much freedom did you have to see the project through execution?
At which point(s) did you have to consult or seek approval from a manager to move forward?
What would you have done differently if you were responsible for making all decisions for the project?
Who would have taken the blame if the project had failed?
In the previous chapter, we discussed how radical transparency enables Netflix to have a system of dispersed decision-making, which allows employees to make informed decisions without having to seek approval from higher-ups. Now, we’ll explain how to max out that decentralization of power by creating an organizational structure in which executives and managers lead by giving enough relevant information (what Netflix calls “leading with context instead of control”).
Meyer explains that unlike at most companies, when Netflix employees face big decisions, company leaders don’t exert control by intervening. At Netflix, managers provide employees with enough relevant information (the “context”) to make decisions that align with the company’s goals and strategies.
Leading with relevant information builds on the dispersed decision-making model discussed in Chapter 6, and it greatly contrasts with the direct oversight that most companies practice. In many workplaces, Meyer notes, managers give employees instructions, monitor progress, and correct their work before finalizing it or presenting it to clients. Even when company leaders try to move away from direct oversight, they often implement control processes that continue to give them the final say and that prevent employees from having real freedom.
In many ways, it’s easier to lead with direct oversight and control processes. But—as with many of Netflix’s practices—the benefits of removing controls are far greater than the costs.
Does This Management Style Truly Empower Employees?
Netflix takes pride in giving its employees the power to make big decisions by providing them with enough relevant information, but some argue that this practice might just be a covert way of exercising control. They argue that managers already know what decision they want employees to make and manipulate them by giving selective information that will point them in the desired direction. You might think of this bogus empowerment as similar to the “close door” button on elevators—the option is only there to make you feel like you have control, but in reality, the button doesn’t work.
While empowerment is meant to increase employees’ freedom and build trust, false empowerment—wherein managers only pretend to give employees power—can erode trust and demoralize employees who can detect that the empowerment is inauthentic.
If you want to give your employees sincere empowerment, you first have to reflect on the kind of leader you are: In The 21 Irrefutable Laws of Leadership, John C. Maxwell writes that you can only truly empower other people if you’re secure in yourself and aren’t afraid of navigating change, recognizing that others can contribute to the organization, and being replaced by those you develop.
Controls keep power in the hands of company leaders—the higher someone’s position, the more power she possesses. Thus, removing controls empowers employees by giving them more freedom to take action without approvals. However, Hastings notes, removing controls comes with risk: Employees could make decisions that are costly and harmful to the company’s progress and reputation.
(Shortform note: Research shows that most managers don’t know how to hold employees accountable for their actions—a conundrum when you’re allowing your employees to make big decisions on the company’s behalf. One way to make employees more accountable in all situations, including after large-scale costly decisions, is to set clear expectations and to put them down in writing, which prevents misunderstandings.)
For this reason, the authors stress, the decentralization of power can only work after you’ve used the strategies described in earlier chapters to build a corporate culture of autonomy and accountability. Let’s look at each of the conditions you need to have to successfully lead by giving relevant information.
The authors assert that the reason that most companies lead with control boils down to a lack of trust in employees’ skill and judgment. Senior leaders have presumably worked their way up and earned the trust to make important decisions, while lower-level employees typically have less experience and thus present a higher risk. Furthermore, in companies that don’t have the same level of transparency as Netflix, employees may not know information critical to making informed decisions.
(Shortform note: While senior executives typically make the big decisions in a control-led company, they aren’t always the right people to make the best decisions—especially if they’re more of a boss than a true leader. For example, “positional leaders” (those that John Maxwell describes in The 5 Levels of Leadership as having a job title but no real influence) might be obsessed with holding on to power, and may thus make self-serving decisions instead of thinking about the team and the company.)
By contrast, Meyer explains that if the company has developed a high concentration of talent, then every employee should be deserving of the trust and freedom to make decisions without oversight or controls. In the absence of controls, leaders need only provide enough relevant information for high-performing employees to make independent decisions.
Building Trust Through Indoctrination
Not many companies have the level of talent that Netflix has, so it may not be so easy to trust employees to make decisions without oversight.
Jim Collins says that another way to develop a strong sense of trust is through indoctrination. In Built to Last, he describes how some companies ensure that new hires are the right fit for their “cult-like culture.” Through orientation seminars, company songs and cheers, insider-only language, and socialization among employees, companies align new hires tightly with the corporate philosophy.
The objective isn’t to turn these new employees into unthinking robots, but to empower them to think for themselves while strongly adhering to the company’s core philosophy. When companies see that employees are sufficiently indoctrinated, they give these employees more operational autonomy.
Meyer explains that in some industries and organizations, controls are necessary to ensure safety and accuracy. For example, vehicle manufacturers must lead with control to guarantee that their products are safe and functional.
On the other hand, if the company’s success depends more on adapting and staying relevant in a changing market, then leading by giving enough information is an important way to promote innovation.
(Shortform note: Meyer makes a clear distinction between companies that should be led by control and those that shouldn’t: Companies that need controls are those that rely heavily on safety and accuracy, while companies that need relevant information are those that rely on creativity and innovation. However, some creative companies may only appear as if they’re leading with relevant information, when in fact they have more abstract, self-imposed controls in place such as profits and shareholder expectations. In The Innovator’s Dilemma, Clayton M. Christensen argues that these hidden controls reveal themselves when creative companies try to pivot but are unable to because the self-imposed controls prevent them from doing so.)
In software engineering (which is Hastings’s background), there are two ways to design systems:
1) In a tightly coupled system, Hastings writes, the various components are interconnected and, as a result, you can’t change one thing without adjusting everything else. In a company, this often means that the CEO leads by control, making decisions that are carried out by the various departments. If one department has an issue, that department manager has to discuss it with the CEO so that the rest of the departments can adapt accordingly. If you want to lead your team by giving relevant information in a tightly coupled organization, by definition you can’t change the structure of your team without reforming the approach of the entire company. While this limits innovation, it allows strategic changes to be uniformly implemented throughout the company.
How to Modify a Tightly Coupled Organization
One possible way for established companies to get around a tightly coupled system is to create a spin-off organization that has a different structure more suited to handling innovation—as long as it doesn’t directly compete with the parent company.
In The Innovator’s Dilemma, Clayton M. Christensen writes that having this smaller company has two advantages: First, the smaller company can celebrate little wins that the larger company would likely ignore; these wins drive motivation, which then leads to bigger wins. Second, a smaller company has more freedom to invest in new ideas in the face of disruptive innovations, unlike larger companies that typically manage their risks by taking a wait-and-see approach to big changes.)
2) In a loosely coupled system, Hastings says that few components are interdependent, which makes it easier to change some aspects of the system without impacting the rest. In an organization, this means that lower-level managers and employees can make decisions and resolve issues without concern that their actions will have repercussions in other departments. You can only lead by giving relevant information in a loosely coupled organization.
Netflix is clearly a loosely coupled company, with its project-led model, dispersed decision-making, and few control processes. As a result, employees enjoy more freedom, departments have more flexibility, and decision-making and progress move more quickly throughout the organization. However, if the company wants to change its strategy, the loosely coupled structure makes it more difficult to keep the entire organization aligned in that shift—and that alignment is critical to successfully leading by context. A loosely coupled organization is still the better approach for innovative companies, but leaders must take care to establish alignment.
Factors That Lead to Misalignment in a Loosely Coupled System
Hastings reminds leaders to establish alignment in an organization with many independent parts, but he doesn’t name specific areas to monitor for alignment. Experts say that you should keep a close eye on these three factors that lead to misalignment:
Leaders don’t understand the importance of alignment. Leaders may be too focused on their own silos without paying attention to how their teams are part of a bigger picture.
There’s no one to oversee all the components of the organization. While the CEO is usually in charge of ensuring alignment across the board, loosely coupled organizations are often too complex for one person to handle. With the number of employees and business lines as well as different expectations from each group, a loosely coupled organization needs a strategic leadership team in place.
The different components are so focused on their own day-to-day activities that they don’t give much thought to the organization’s direction and purpose as a whole.
Think of your company’s evolution as a journey with your staff. When you lead by giving relevant information, you allow your employees to find their own routes—and your job is to ensure that everyone knows which direction to go. Meyer explains that the CEO provides relevant information to the company’s senior managers about the general direction and values of the company. In turn, those leaders use that information to give their teams another layer of information that homes in on their specific responsibilities. The process continues down to the most junior employee.
Employees can only make independent decisions in the best interest of the company’s mission and strategy if they have the right information—and when they make poor decisions, managers should refrain from blaming the employees and instead reflect on how they failed to provide adequate information and created misalignment.
How to Create Alignment
To be aligned means that all elements of a company—from decisions and actions to goals and even the office layout—reinforce each other. Without alignment, forces will constantly oppose each other, slowing down progress or causing a company to stagnate.
To make sure that you have company-wide alignment, Jim Collins recommends these three actions in Built to Last:
Emphasize the company’s core values. When everyone has an understanding of the company’s philosophy and objectives, it’s more likely that they’ll make decisions that are aligned.
Look at the big picture. While employees may be free to generate and execute ideas, they should consider whether these ideas make sense within the existing company structure. Projects, goals, and policies should also reinforce each other. For example, if your company’s goal is to prioritize science-based innovation over keeping shareholders happy, make it a policy not to let investors interfere with scientists’ work.
Correct misalignments right away. Agile companies go through many changes—setting new goals, introducing new products, restructuring—but the one thing that shouldn’t change is their core philosophy. Stay vigilant and eliminate misalignments when you notice them. For example, if you value teamwork, eliminate incentives that reward individual performance.
Reflect on what would be required to enable managers at your organization to lead by giving relevant information instead of control.
What’s the last decision you faced at work that required you to get your boss’s approval?
If your boss were leading with relevant information instead of control, what information would you have needed to make that decision (such as financial data or clarity about the CEO’s current priorities)?
If you or your manager wanted to lead with relevant information, what would need to change in your company to meet the four conditions (high concentration of talent, emphasis on innovation, a loosely coupled system, and company-wide alignment)?
If applicable, what could you do this week to make progress toward creating one of those conditions?
Reflect on how you could lead by giving relevant information instead of control.
Give an example of how much freedom a mid-level employee has to make decisions without consulting her boss.
In your example, what kind of information would that employee need to make even bigger decisions independently?
What would be the consequences of providing employees with that level of information?
What do you consider to be the biggest challenges and risks of leading with relevant information instead of control in your company? (For example, it may be training managers to provide adequate information and allow employees to make decisions they disagree with, or it could be trusting your staff to make big decisions.)
How could you resolve one of these challenges or reduce one of the risks?
With a highly motivated staff and a culture of candor and accountability, Hastings was able to give Netflix employees more freedom and empower lower-level employees to make decisions that most companies delegate to managers and executives. This also enabled Hastings to implement another unconventional measure at Netflix: He abolished the vacation policy and the travel and expense approval process.
Giving employees so much freedom is unorthodox and can be risky. To safeguard against abuse, Hastings says you should remove controls strategically to ensure that employees understand the weight of responsibility and the context to make good decisions. If done well, this creates a culture in which autonomy and accountability spiral up: As employees enjoy more freedom, they act more responsibly, and as they act more responsibly, management can feel confident offering more freedom.
How to Hold Employees Accountable
Hastings uses the unconventional practices at Netflix to drive the message that great freedom comes with great responsibility, but he doesn’t explain how companies that don’t have Netflix’s unusual culture can create enough accountability to make the risky move of abolishing limits on vacations or expenses. To foster more accountability in your workplace, experts say you should be clear about the following:
Expectations—discuss the results you expect from your employees, strategies for getting those results, and how you’re going to measure outcomes. Then, ask them to summarize what you’ve talked about to ensure you’re on the same page.
Skills and resources—give them the tools to set them up for success. If you can’t provide them with skills training and the right resources, it might be best to farm the tasks out to someone else.
Milestones—don’t wait until it’s too late to find out if your employees can meet your expectations. Set up milestones and regularly check in with them to see if they’re on track.
Feedback—let them know how they’re doing based on your agreed milestones. Then, ask if there’s any way you can help.
Consequences—react appropriately. If they succeed, reward them. If they fail despite all the support you’ve given them, you should let them know that they missed the mark and decide on a response that corresponds with the offense. For example, you could issue a verbal or written reprimand, give them a low score on their performance appraisal, or—in extreme cases—fire them.
First, let’s look at how Hastings strengthened this culture of autonomy and accountability when he removed the vacation policy.
Even before launching Netflix, Hastings believed that the quality of employees’ work mattered more than the quantity of time they spent producing it, especially in creative industries. So, since 2003, Netflix has neither allotted vacation time nor tracked days off.
(Shortform note: If you’re not able to implement an unlimited vacation policy in your organization, there are a few alternative policies you can try to encourage employees to take enough time off: First, you can implement a minimum vacation policy, which relieves employees of the pressure of determining what’s considered an acceptable amount of vacation time. Second, you can impose mandatory time off—employees have to take one week off every four months (or any other specified time period). Third, you can reward employees who go on vacation with spending money.)
Despite the benefits of abolishing the vacation policy, Hastings had to implement the change strategically to avoid two potential problems:
Problem #1: Workers take too much vacation time. If too many people take off at once, or they leave while their team is pushing to meet a deadline, this could cripple workflow, especially with a small staff (as Netflix had when the policy went into effect).
Solution #1: As discussed in Chapter 7, managers must give employees enough relevant information to make sound decisions about when to take vacations and for how long. This may include telling employees that they can’t take time off within two weeks of a deadline, or that no more than one team member can be out at a time.
How to Manage Employees’ Vacation Time Fairly
While employees may understand that they can’t all take time off at once, it may put you in an uncomfortable position if two employees happen to block off the same dates. To avoid conflict within the team, experts give the following tips for managing vacation requests:
Discuss vacations as a team. That way, they can work out schedules among themselves prior to finalizing vacation plans. Emphasize that vacations are important and that you want everybody to have the opportunity to rest.
Have a rota system. Have a rotating list so that people get a chance to pick their vacation dates ahead of everyone else each year, making sure that each employee gets their chance to be first.
Close shop. It can be especially difficult to decide who gets to take a vacation around the holidays, so in the spirit of fairness, consider letting the whole company take a break at the same time.
Problem #2: Workers take too little vacation time. Some workers don’t want colleagues to think they’re not carrying their weight. Under normal vacation policies, the threat of losing unused vacation days often motivates employees to take time off if they wouldn’t otherwise.
Solution #2: Hastings and Meyer assert that leaders must set an example by taking big vacations, talking openly about them, and encouraging employees to do the same. Regardless of what managers say, workers will follow what they do—if they say that everyone should feel free to take plenty of vacation, but they only take a week off all year, employees won’t feel comfortable taking long vacations. Similarly, if the CEO takes five weeks’ vacation but a department head barely takes two, that manager’s team will follow her lead. In other words, all leaders—from the executive suite to the middle managers—must set a good example of work-life balance for their subordinates.
How to Encourage Employees to Take Time Off
Aside from using your vacation time yourself, which may not always be practical—for instance, if you’re in the middle of closing an important deal, or if your company is experiencing a major transition—there are other ways to encourage employees to take time off:
Systematize processes. Some employees are hesitant to go on leave because they’re worried that things will go wrong without them. Encourage them to build systems that can run even without them around.
Remind them. Send out announcements to encourage them to use their leave credits, especially around the holidays.
Be supportive. When they ask for time off, ask them questions about their plans and be excited for them.
Get rid of disincentives for use. Some vacation policies reward employees for not taking time off. For example, your company might applaud when a new parent returns to work earlier than expected. Evaluate whether such unintended messages are keeping your employees from using their allotted vacation time.
Surprisingly, at Netflix, employees don’t take significantly more time off with no vacation policy than they would under a restricted vacation policy. Additionally, Hastings notes, the policy (or non-policy) brings significant benefits:
1) It gives employees more control over their lives to create a work-life balance, which improves their job satisfaction and performance. (Shortform note: If you can’t give employees an unlimited vacation policy, you can still help them achieve work-life balance and increase their job satisfaction, performance, and productivity by giving them a flexible work schedule.)
2) It makes it easier to attract and retain the industry’s top talent, especially millennials and Gen Z workers who favor less restrictive work settings. (Shortform note: Some argue that these perks may attract talented workers, but they may not be enough to make them stay. While unlimited vacation can be a useful factor in luring in employees, what will make them commit to your company is a collaborative working environment where their ideas are respected. So, focus on building cohesive, innovative teams instead of fringe benefits.)
3) It sends a message to employees that management trusts them, which inspires them to live up to that trust. (Shortform note: Abolishing the vacation policy is one way to show employees that you trust them, but make sure you don’t undermine your efforts with two cues that show you don’t trust them: first, having a risk-averse workplace that stifles innovation; and second, prioritizing profits over relationships and employee autonomy.)
After seeing the success that came from eliminating the vacation policy, Hastings was reluctant to put any additional policies in place, including travel and expense approval processes. In Netflix’s early years, the staff was small enough that travel and expenses could be addressed on a case-by-case basis, but as the company grew, it reached a point where some kind of policy had to be put in place. Hastings wanted to give employees the freedom to use their judgment, but he needed to safeguard against abuse and overspending.
First, Hastings implemented a policy that simply asked employees to spend company money as if it were their own. However, it soon became apparent that everyone’s spending habits varied greatly—taking business class for a short flight might seem reasonable to some and frivolous to others. Wording the policy this way punished frugal, conscientious employees while giving others a free pass to spend lavishly.
Hastings learned from the misstep and came up with a well-worded policy that he reinforced with context, safeguards, and transparency.
Clearly Communicate Expense Policies (or Non-Policies)
Whether you have a non-policy like Netflix initially did or a formal policy like most companies, it’s important to communicate your approach to expenses with employees to avoid issues like those Hastings describes. Experts say that a lack of clarity leads to a host of other issues such as slow processing and an increased risk of fraud, so let your employees know what’s acceptable and unacceptable spending by:
Making the guidelines easily accessible: Employees should know where they can find your policies for easy reference. If you’re making changes or updates to the policies, send a message through various channels—email, newsletters, the company intranet, messaging apps, and in meetings—so that employees are more likely to read them.
Having a summary: Not everyone will read through a multi-page handbook, so put the highlights in a summary sheet.
Finding champions: Tap leaders and employees who are in-house influencers to inform employees about policies.
Letting them have a say: Welcome ideas from employees, especially those with roles that require them to regularly use company money, to improve systems and processes.
Hastings writes that Netflix’s new policy for travel and expenses was to simply act in the company’s best interest. Typically, blanket policies are too inflexible to fit the nuances of real life—for example, a policy that limits how much employees can spend on lodging seems straightforward until someone has a meeting in an unusually expensive location where the only decent hotels are very pricey. In that case, it would be in the company’s best interest for the employee to pay up for a good hotel so that she can get some decent rest and be alert for her meetings.
Asking employees to act in the company’s best interest builds in enough flexibility for any scenario, and it gives employees the freedom to use their best judgment.
Be Aware: “Best Interest” Is Subjective
While Hastings’s “acting in the company’s best interest” policy makes room for flexibility, keep in mind that your definition of “best interest” may differ from your employees’, and it’s thus arguably unfair to penalize them for doing what they think is best—even if their “best” option isn’t what you would do.
As an example of how vague “best interest” policies can go wrong if people are unfairly penalized, the state of Montana previously didn’t have an explicitly stated numerical speed limit. Instead, the law simply stated that motorists should drive at a speed that was “reasonable and prudent.” However, police could ticket motorists, at their own discretion, for speeding—in effect, penalizing motorists for driving at the speed they felt was best.
The Montana Supreme Court eventually struck down the law, saying it was unconstitutionally vague, and that it was unfair to cite motorists for speeding when there weren’t specified limits to begin with. The immediate impact of this was Montana having no laws policing speeding: arguably an untenable and dangerous situation.
Without strict guidelines, employees need to understand the context of what their bosses consider appropriate and inappropriate so that they can make wise decisions.
At the most basic level, Hastings says, employees should feel that they could confidently justify their purchase to their boss—because they may have to.
(Shortform note: Some employees may disagree with the company’s idea of what’s appropriate and inappropriate—for example, they may think they “deserve” a pricey meal if they’re asked to work out of town on a weekend. To resolve any disagreement with your company’s policies, try using some negotiating tactics. For example, in Never Split the Difference, Chris Voss suggests the strategy of showing the other person how helping you achieve your desired solution will satisfy their own wants. In the case of the pricey meal, you can explain how the extra expense eats into the budget for the venue of the company’s summer outing.)
While employees exercise their freedom to make travel plans and expense costs without pre-approval, they must know that there’s always a chance that their bosses could be watching. This means that managers must regularly check at least a sampling of employees’ expenses. On the back end, managers can safeguard against overspending in one of two ways:
1) Managers can review their department’s receipts monthly and, if they find any problematic expenses, they can discuss them with the employee directly. After one or two of these discussions, employees typically tighten up their spending.
(Shortform note: Regularly reviewing receipts can take up a lot of time and resources, especially if you’re taking the time to discuss expenses with your employees. Manually sifting through receipts increases operational costs by as much as 43 percent. Give yourself the most time possible to explain problematic spending to your employee and come up with solutions by automating the system. Use tools like cloud-based software that’s a virtual one-stop-shop for all things expense-related—aside from allowing employees to upload receipts and enabling managers to set spending limits, you can include a copy of the expense policy for easy reference.)
2) Managers can defer to the company’s internal auditing department’s annual audit of 10 percent of all expenses. If the auditing department finds that an employee is overspending, the employee is fired on the first offense. This option radically increases both autonomy and accountability.
(Shortform note: One U.K. study found that only 18 percent of employees who’ve padded their expense reports have ever been caught. To minimize expense fraud, be aware of the tactics employees typically use to inflate their business travel expenses, such as overstating gas expenses (by as much as 40 percent) or out-of-pocket expenses like restaurant tips and reimbursing expenses twice with two separate supervisors.)
Despite managers’ efforts to explain context and outline the consequences of overspending, some people will still try to abuse the system. Meyer cites research that most people will cheat for their own gain if they think they won’t get caught, so employees must know that there is a very real possibility of getting caught—and that, if they do, there are very real consequences.
(Shortform note: It’s easy to think that no one in your company is the type of person to abuse the system, but people who cheat for their own gain aren’t necessarily bad people. They may have just found themselves in situations where people in general are more likely to cheat. Research shows that these situations include: being less connected to the cheating—for example, employees may be more willing to put a pricey dinner on a company’s tab because they aren’t actually stealing money; underestimating how much incentives can affect your judgment; and being too tired to resist temptation.)
To reinforce the threat of getting caught, managers must tell their employees when someone is fired for overspending. Although they don’t need to share the fired worker’s name, this kind of transparency is a critical ingredient for the freedom of abolishing travel and expense approvals.
(Shortform note: Even though Hastings and Meyer say that you should publicize these firings, there are certain things you should do as a manager to protect the dignity of the person being fired. Research suggests that making the effort to do so has a positive effect on the employee’s reaction—if they’re made to feel shame, they might view the firing as unfair and lash out by badmouthing the company. Allow them to leave with their dignity intact by not sharing the fired employee’s name to save them from embarrassment, and by not making a spectacle of the firing. Give them a chance to quietly pack up their belongings when other employees aren’t around.)
When managers entrust employees with making their own travel and expense decisions—even when this freedom is reined in by relevant information, safeguards, and transparency—the company’s costs are typically a little higher than they would be if the company had an approvals process. However, Hastings contends that those costs are outweighed by the benefits of creating a low-rule environment. These benefits include:
Without a restrictive approval process, Hastings says that employees have the flexibility to react, problem-solve, and make decisions under any circumstances. For example, when 4K resolution technology was new, Netflix partnered with Samsung to promote it. A tech product reviewer for The Washington Post agreed to test the new Samsung TV by watching House of Cards—which could give both companies a big publicity boost—but the night before, a junior Netflix employee discovered the TV was missing from the Netflix offices. As it was after hours, he couldn’t reach his boss for approval to purchase a $2,500 TV.
Empowered with the mandate to act in the best interest of the company, the employee bought the TV and averted a crisis—and the positive review in the Post was worth far more for Netflix than the cost of the last-minute purchase.
Stop Asking Employees to Front Money for the Company
Hastings says that the absence of an approval process gives employees more flexibility. But this idea can feel unrelatable to many: While Netflix employees are paid handsomely enough to be able to spend $2,500 on a TV, this isn’t the reality for the average employee at other companies. Fronting cash for company expenses puts an unfair burden on employees who don’t have access to corporate cards or who may not have ready cash for urgent expenses. Employees might also be frustrated and stressed by the paperwork and time-consuming process to get their money back, while finance personnel may be uncomfortable if they’re forced to deny some expense claims.
To take the burden away from employees, replace your reimbursement system with a proactive expense policy: Implement a pre-approval process so that employees can spend company money without stress.
Hastings says that the previous example illustrates the need to act quickly in order for employees to perform their jobs well. Approvals processes slow down the workflow, and sometimes the window of opportunity for an important purchase closes by the time the company has signed off on it.
(Shortform note: Employees must have good judgment to make sound decisions—like making big, urgent purchases—on the fly, so it’s important to improve your employees’ decision-making skills through training. One way to do this is to hold regular meetings to discuss complicated situations and ask the group to describe how they would handle each case.)
The authors write that, paradoxically, employees often spend less when they’re told to use their judgment than when they’re given concrete spending limits. For example, if a company has a specific limit for how much employees can spend when they take clients out to dinner, the employees will be more likely to spend up to the limit because they know they’re in the clear as long as they don’t go over the limit. By contrast, if employees are told to use their judgment, they’re likely to spend more conservatively, because they know they have to answer for their spending choices.
(Shortform note: Additionally, being too detailed when it comes to allowable amounts in various scenarios can backfire because employees might be overwhelmed by all the information and may need to constantly ask for guidance. Experts say that expense policies are most effective when they’re simple and easy to remember.)
How to Get Employees to Spend Less
Netflix doesn’t make use of a bonus system, but other companies have attached bonuses and rewards to employees’ low spending. This serves to encourage employees to be frugal. For example, one financial services company gives employees 50 cents for every dollar they save when they choose cheaper options for business travel. Employees are thus rewarded for choosing coach over business class for their flights or an Airbnb instead of a pricey hotel for accommodations.
Consider how approvals affect the way you work.
Describe the most recent incident when you needed travel or expense approval.
How much time did it take to get approval?
If your purchase or travel plans were time-sensitive (for example, an item had limited availability or your travel dates were soon), how did the approvals process affect your workflow?
How would your workflow have been different without any approvals process?
How would your purchases or travel reservations have been different if your only guideline was to act in the company’s best interest?
Consider how approvals affect your staff’s workflow.
Briefly describe the travel and expense approval policies at your organization.
Describe a recent incident when the policy created a conflict or a slowdown for one of your employees.
How did that issue affect the employee’s work?
If you considered removing approvals processes, what would your primary concern(s) be?
How could you eliminate or minimize that concern?
By 2011, Netflix had cultivated a culture of autonomy and accountability that was enabling the company to produce great results in the U.S. Hastings began expanding the company into other countries—first in Canada, then Latin America, Europe, and Pacific Asia. By 2016, Netflix was in more than 130 countries worldwide.
(Shortform note: Netflix is now in 190 countries, setting the stage for the company’s next phase and a new form of disruption: producing non-U.S. content. This strategy seems to be paying off. Netflix has a roster of international hits, including the wildly popular Spanish show Money Heist and the record-breaking South Korean drama Squid Game.)
Still, Hastings knew from his past international travels that certain experiences and practices can’t be translated directly into other cultures. He considered whether the corporate culture he’d worked so hard to develop would work outside the U.S., or whether it would cause confusion and misunderstanding.
He made a plan to make the international expansion as smooth as possible: He would find foreign job candidates who could adapt to the culture he had carefully cultivated at Netflix. The company would then train those new hires on the ins and outs of working within a culture of autonomy and accountability. Additionally, while Hastings acclimated international employees to the Netflix way, he would also remain open to adapting to and learning from their cultures.
How to Preserve Your Company Culture Abroad
Aside from Hastings’s give-and-take approach to cross-cultural adaptation, companies can preserve their core philosophies by adhering to Meyer’s principles when expanding operations to other countries:
Determine the pressure points. Identify the specific aspects of the company culture and the country’s culture that are likely to cause conflict, such as decision-making processes (consensus or authoritarian?) and the approach to timelines (rigid or flexible?).
Make sure everyone is heard. Use a common language and speak slowly and clearly during meetings, then summarize what was discussed. Give every cultural group the chance to contribute by asking international participants to give their input.
Preserve creativity. It’s prudent to put formal systems in place when it comes to departments like finance and IT, but keep creative departments flexible.
Have a diverse workforce in every office. Having homogeneous staff at each office might create chasms between international offices. For example, a Singapore office with mostly young creatives might have a hard time communicating with an office in Copenhagen with mostly middle-aged finance experts. Ensuring diversity helps all employees get used to working with other cultures on a day-to-day basis.
Hastings wanted to remain vigilant about finding the areas in which Netflix’s corporate culture clashed or aligned with local cultures so that he could lead his American and foreign employees in being as effective as possible. Hastings found a tool for this task when he read The Culture Map by Erin Meyer, who co-authored this book. Meyer had created culture charts that used scales to measure norms for various behaviors, such as communication and decision-making. By comparing the charts of different cultures, Hastings could quickly and easily see how two cultures were similar as well as different, and that insight could help him develop ways to bridge those differences.
More Rules for Bridging Cultural Gaps
Aside from her culture charts, Meyer has four important rules to guide you as you navigate cultural differences in international offices:
Be patient. You may have to learn a whole new set of leadership skills that are more relevant in another setting. Similarly, even if you orient employees toward your company culture, it may take time for them to unlearn habits that aren’t aligned with the culture.
Understand how all cultures within an office relate to each other. If you’re leading a multicultural team, go beyond learning how you should approach each team member and figure out how each one perceives other members.
Look at the positives in every culture. It may be frustrating to work in a place where people are conflict-averse when you’re used to candid discussions and confrontation. Learn to appreciate how and why other cultures do things the way they do.
Keep adapting. The more diverse your team, the more flexible you should be when it comes to understanding and accommodating differences.
Hastings found that his employees from other cultures often struggled most with Netflix’s culture of candor. This was a cornerstone of Netflix’s culture, but each country’s attitude toward candor and providing feedback—especially to superiors—differed greatly.
Through their experiences in countries with indirect cultures, Netflix’s leaders learned important lessons for creating a comfortable middle ground in which employees from indirect cultures can still adhere to the company’s culture of candor.
(Shortform note: To better understand a culture’s approach to candor or other company practices and attitudes, consult an expert such as a local corporate anthropologist. This anthropologist can serve as a “culture translator,” helping you understand local norms and behaviors, as well as correcting any stereotypes that you might have about a culture. Another way to understand cultural nuances is to ask employees directly about their expectations and preferences.)
According to Hastings, Netflix leaders discovered that employees in indirect cultures struggled to give feedback on the spot—but if they were given guidelines and assigned to prepare feedback, they excelled as they would on any other task. Managers thus learned not to expect impromptu feedback among employees and instead tweaked their strategy, making feedback an agenda item for meetings, providing instructions and a clear structure for the feedback, and investing time and effort in relationship building to soften the sting of negative feedback.
(Shortform note: During these formal feedback sessions, you shouldn’t just be mindful about your delivery of negative feedback but also of the culture’s attitude toward positive feedback. While some cultures thrive on praise and positive reinforcement, others see praise from their managers as unwelcome. In Japan, for example, praised employees may feel embarrassed and worry that the praise might cause their co-workers to view them with mistrust. In these situations, it might be better to commend the team rather than singling out an individual.)
The way people interpret the tone of communication is relative. A message that may sound straightforward and perfectly acceptable in an American office could be considered rude and aggressive in a Singaporean workplace—and the same message could sound indirect and fluffy to a Dutch employee.
Netflix employees must understand the company’s emphasis on candor while also keeping in mind that their colleagues from other cultures may have different attitudes toward frankness. To prevent cultural differences from impeding progress and efficiency, Netflix employees across the globe must adapt to giving and receiving feedback that is more (or less) candid than they’re typically comfortable with. This might mean softening your negative feedback by refraining from placing blame and by framing the critique as a suggestion.
How to Give and Receive Feedback in Other Cultures
Meyer goes into more detail on general principles for cross-cultural feedback in The Culture Map:
Explain how you normally deliver feedback in your culture.
Don’t try to mimic the other culture, because you risk offending the other person.
If you’re used to receiving indirect negative feedback, learn to view direct feedback as a sign that the other person respects you enough to be honest with you.
If you’re used to giving indirect negative feedback and find yourself in a more direct culture, be explicit about both positive and negative comments, but make sure that you keep the amount of both types of feedback balanced over time.
If you’re used to giving direct feedback, one way to adjust to indirect cultures is by not mentioning the negative at all. Instead, praise only the positives—employees can infer what’s not being addressed directly.
The key takeaways for organizations are whether and how to apply the practices that Hastings implemented at Netflix. Modern companies have two primary options for how to structure their organizations:
1) The rules-and-process approach is best for maintaining consistency and safety. Rules and processes maintain order and safety for the group at the expense of individuals’ freedoms.
(Shortform note: Make sure you regularly review and update your policies and procedures to comply with changes in regulations. Not doing so could put you at risk of non-compliance with updated employment law and emerging cybersecurity threats, among other issues.)
2) The autonomy-and-accountability approach is best for promoting innovation, which is essential for many companies today. Autonomy and accountability create more flexibility for people to move and adapt quickly.
(Shortform note: If you need evidence to show just how crucial flexibility is for a company, look no further than the Covid-19 pandemic. The companies that survived were those that were able to adapt and navigate their operations systems and employees through uncertain times.)
If your company’s success depends on being relevant and innovative rather than safe and consistent, then use the autonomy-and-accountability model for your overall organization. Leading a company with this approach requires you to make space for improvisation while providing enough direction to avoid chaos.
Hastings writes that you should think of the CEO’s role as the leader of a jazz band—the musicians (employees) need freedom and flexibility, but without the right conditions, the beautiful music becomes a loud mess. By virtue of having an innovative culture, your company will constantly evolve. Even once you’ve established a culture of autonomy and accountability, you must continue to maintain it, direct it, and tweak it where necessary, as Hastings did. Finally, as the leader of a jazz band, you should not only expect but also welcome constant change.
Assess Your Adaptive Leadership Abilities
Hastings provides a general analogy between the leader of an innovative company and a leader of a jazz band, but he doesn’t get into the specific characteristics you need to become an effective leader in a rapidly changing landscape. The type of leader Hastings alludes to here is an adaptive leader, one who can foresee future needs, communicate those needs to gain support, respond promptly and appropriately to disruptions, and remain accountable and transparent.
In The Practice of Adaptive Leadership, Alexander Grashow, Marty Linsky, and Ronald Heifetz outline six characteristics to consider when assessing your adaptive leadership abilities:
Multiple selves—acknowledge, accept, and be mindful that you play different parts in different contexts.
Psychology—recognize your triggers and how you respond to your surroundings.
Loyalties—assess where your loyalties lie to discover biases that may be affecting your decisions.
Repertoire—identify and develop your strategies for promoting change.
Roles—reflect on how other people perceive you, and remember that other people’s perception of you doesn’t mirror who you really are.
Authority—consider the boundaries of your authority and how much you can stretch these bounds without too much resistance to respond to changes.
Read our full guide to learn more about how you can diagnose adaptive challenges, create interventions, and push your organization amid uncertain times.
Reflect on an occasion when you experienced cultural differences.
Describe the last time you dealt with some confusion or misunderstanding when communicating with someone from another country.
What was the cultural difference that caused the confusion?
How did you find common ground?
How can you use this experience to inform your future interactions with people from that country or other countries?