management and compensation at netflix

A post by guest bloggers Ray Fisman and Tim Sullivan, authors of The Org

In putting together The Org, we left many stories on the cutting room floor. One case that we were particularly sorry to see go involved Netflix. The company is known for many things – its transformation of the home video business, the Netflix Prize, its audacious CEO. All the standard fare of Silicon Valley.

But there’s another aspect to the Netflix model (and that of Amazon), which involves thousands of unskilled laborers slaving away behind the scenes sorting and mailing DVDs. That is, the company embodies the diverging fortunes of the American worker – the pampered software engineer versus the envelope-stuffing drone. And it also highlights the divergent incentive and workplace design practices that define the work lives of America’s haves and have-nots, especially as the economy continues to move toward more knowledge work and the values of Silicon Valley come to be accepted more broadly.

Netflix, founded in 1997 and headquartered in Los Gatos, California, shipped its first DVDs in 1999.They moved into an environment dominated by Blockbuster. Remember them? They were a chain of traditional “bricks-and-mortar” video rental stores: you showed up, rented a movie, and then had to return it on time or face steep fines. Netflix promised that it would ship subscribers the movie they wanted, on time, and with no late fees and no return dates. By 2010, Blockbuster was toast, unable to compete.

In the meantime, Netflix successfully negotiated with media companies and made the leap into streaming media. In fact, a New York Times article from 2010 claimed that this new channel  accounted for 20 percent of all Internet download traffic in North America in peak evening hours.

So there was notable interest in exactly how Netflix achieved such great success, and when Netflix released a PowerPoint slide deck about its expectations for its employees (whose job it is to “distribute entertainment” to paying customers), people paid attention.

The slides are, we have to admit, downright inspirational, the kind of thing that every employee wants to hear. They also provide some sense of how Netflix solved the problem of how to organize itself, the challenges involved in shifting from delivering DVDs to streaming media, and the nature of inequality within the organization.

The title of the presentation is “Freedom and Responsibility,” complete with the “yin-yang symbol” on the first slide. The rest of the slides – all 126 of them – are focused on what Netflix demands of its staff and grants them in return.

Netflix’s demands make for a lofty list: values of “judgment, communication, impact, curiosity, innovation, courage, passion, honesty, and selflessness.” The company rewards high performance to the extent that “adequate performance gets a generous compensation package.” They use the keep test: “which of my people, if they told me they were leaving for a similar job at a peer company, would I fight hard to keep at Netflix.” Anyone who doesn’t make the cut gets fired. Hard work isn’t relevant; brilliant jerks need not apply. Employees must both thrive on freedom and be worthy of it. Most companies have to reduce the quality of their hires as they get bigger and lose talented people as the bureaucracy grows, but Netflix, it claimed, wouldn’t make that compromise.

Then comes the freedom. If you make the cut, the company doesn’t count the number of hours you work or the amount of vacation you take. It’s T&E policy? “Act in Netflix’s best interests.” Managers set context not rules. In return, Netflix’s pay is generous (“top of market”) and promotes employees as skill and luck allow.

Warehouse workers, of course, do not share in quite the same culture of “freedom and responsibility” as, say, software engineers. In fact, the warehouse staff had carefully prescribed and monitored goals. Line workers were expected to sort and process 650 discs each hour. Other workers checked the quality of the DVDs to make sure the products weren’t too damaged to send out again. And every 65 minutes, the entire staff stopped what they were doing and followed team leaders in a prescribed set of stretches designed to avoid repetitive motion injury.

The monitoring in the warehouse is also pretty intense. Computerized barcode readers scan the contents of each warehouse every day both to chronicle the location of each disc and to ensure that all of the discs that are supposed to in the warehouse are actually there. The workers know this, too, helping them avoid the temptation of pocketing a disc for resale or personal use.

And while Netflix claims that compensation is “top of market,” the slides note that some people will move up quickly in comp because there’s a high market demand for their skills – others, not so much. Assuming that awesome software coders require more training, are rarer, and are in higher demand than, say, DVD sorters, we know where the bulk of salary is going to go. And it’s easy to imagine, too, that well compensated coders will be more easily able to afford to buy stock options, which helps align them even closer to the fortunes of the company. And it’s all well and good to talk about loose T&E policies, but it seems unlikely that warehouse workers would be taking any trips on the company’s dime.

There’s another tradeoff to Netflix’s culture of freedom and responsibility, and it seems to be instability. Comments at the site seem to indicate that there is lots and lots of churn as low-performing employees are fired or leave voluntarily.

From the Netflix’s perspective, it’s OK if warehouse staff and customer service reps come and go: they’re easy to replace, warehouse staffers are becoming less important to the overall business, and there’s only so much a customer service rep can do to boost the overall fortunes of the company. A software innovation can have an impact on every subscribers’ experience, while even a really skillful DVD sorter can only affect a few subscribers, and then only indirectly.

But even this situation may suit Netflix’s needs as its business has shifted from shipping DVDs to streaming media. CEO Reed Hastings knew from the beginning that the company couldn’t be wedded to shipping DVDs – in fact, Netflix had earlier tried a hardware option that was too expensive and slow to use at home. As Netflix’s business shifted from spending a half-billion dollars on shipping movies through the mail to sending bits over the Internet, it also changed its staffing and their incentives: more software programmers (with proper incentives for fixing hard coding problems), fewer warehouse staff, and more customer service reps to handle calls from irate users whose connections weren’t working (or who were angry over mishandled price increases).

Of course, to compensate everyone in a similar manner would be corporate suicide (and it seems that most of their warehouse staffers were happy enough with their jobs). When you have employees handling hundreds of valuable products and you’ve promised your subscribers that they’ll get their next disc in two business days, you’d better have rigid controls for quality and pace – whatever promises your PowerPoint deck might make about freedom and responsibility. Frankly, we’re surprised that Netflix doesn’t in reality have a video camera over every warehouse workstation, as they’d been rumored to.


Written by teppo

April 4, 2013 at 7:06 pm

Posted in uncategorized

One Response

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  1. What I love about the book is that it is chock-full of these kinds of real-world examples, which can easily be used to introduce some very important organizational principles to someone new to org theory. Thanks for the post and if you have more on the cutting room floor, please share.


    Scott Dolan

    April 5, 2013 at 1:07 pm

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