solution

Case

Netflix Breaks the Rules⁸³

Why did Netflix survive as a start-up when the dot-com bubble burst in the late 1990s? Probably because, from the day he started Netflix, founder Reed Hastings believed in breaking the rules. His direct-to consumer mail and video streaming business model certainly helped Netflix to survive. But the firm’s unorthodox human resource management practices helped the company to attract and keep the high producers who design the products that are the firm’s lifeblood. Hastings knew that top Silicon Valley workers could choose where they worked, and high pay is pretty much standard throughout the Valley’s industries. How to set oneself apart? Hastings and his start-up colleagues believed that a culture that balanced a flexible work environment with few constraints and high responsibility was the answer. They called the policy “Freedom and Responsibility.”
Just how unorthodox are the Netflix HR practices? Consider this: As a Netflix professional you get unlimited vacations. One engineer takes 5-week vacations to Europe, because he likes (as he says) to take his time off in big chunks. (An HR officer must approve time off in excess of 30 days annually.) As a Netflix employee, your pay isn’t tied to performance appraisals, or even to a compensation plan. Frequent market salary surveys and pay hikes keep everyone’s pay aligned with Silicon Valley competitors’. Each employee decides whether to take his or her pay in cash or in Netflix stock. Options vest immediately. Netflix doesn’t recruit much at college job fairs, instead hiring mostly highly experienced professionals. There’s no training, professional development, or career planning at Netflix (except for legally required training, such as diversity training). You’re in charge of your own career.
But with freedom like that comes responsibilities. The company expects its salaried employees to work hard—to “do the jobs of three or four people,” as one report put it. And Netflix doesn’t have the “frat party” free-wheeling atmosphere that many dot-coms do. It’s an adult environment. Netflix does not coddle underperformers. Yearly 360-degree performance reviews provide “direct and honest feedback.” Those that aren’t cutting it are quickly let go, but (whenever possible) amicably. Rather than the sorts of litigiousness that often characterizes dismissals in other firms (having to prove the person was incompetent, for instance), Netflix writes a check. The company believes that a handsome severance payment helps maintain the person’s dignity, makes it easier for supervisors to make tough calls with underperformers, and, of course, minimizes blowback from those it dismisses. It’s more like a “no-fault divorce,” as one observer put it.

Questions

In many respects, the Netflix HR strategy seems like a dream come true for small businesses. You don’t need a pay plan; instead, you just update each person’s pay every few months based on market surveys. You offer no training and development. And you don’t track vacation time, more or less. If someone’s not doing well, you just pay him or her to leave, with no hassles. Netflix seems to have hit upon its own version of “Netflix High-Performance Work Practices.” Given that, answer the following questions (please be specific).

1. What (if anything) is it about Netflix that makes its HR practices work for it?

2. Would you suggest using similar practices in other businesses, such as, say, a new restaurant? Why?

3. List the criteria you would use for deciding whether another company is right for Netflix-type HR practices.

4. What argument would you make in response to the following: “Netflix just lucked out; they’d have done even better with conventional HR practices.”