LISTEN: Netflix co-CEO Reed Hastings explains the company's controversial policies, including that managers should fire everyone they wouldn't fight to keep on their team
- Netflix is famous for its unusual corporate policies — including unlimited vacation, direct and candid performance feedback, and the so-called "Keeper Test," which encourages managers to constantly evaluate whether they should keep or fire lackluster employees.
- Netflix cofounder and co-CEO Reed Hastings has written a new book — "No Rules Rules" — all about how those controversial policies have made Netflix one of the world's most innovative companies.
- On this episode of Starting Up, Hastings lays out his uncompromising business philosophy and shares his management advice for how to turn your company into a creative powerhouse.
- Visit Business Insider's homepage for more stories.
Netflix is having a moment. The company has seen historic levels of growth with many of its customers stuck at home during the coronavirus pandemic. In the first half of this year, it added nearly as many new subscribers as it did all of last year.
As a company, Netflix is known for some pretty unusual corporate policies that prioritize "freedom and responsibility." That includes things like unlimited vacation, direct and very candid performance feedback, and what the company calls the "Keeper Test." Basically, your managers are encouraged to constantly evaluate if they should keep you … or let you go.
Reed Hastings, Netflix's cofounder and co-CEO, has just published a book about the company's policies: "No Rules Rules: Netflix and the Culture of Reinvention."
Hastings sat down with Nich Carlson, Insider's Global Editor-in-Chief, to talk about how he runs Netflix — and how the company's unconventional policies help make it effective.
The following is a transcript of the conversation, edited for clarity.
Nich Carlson: So I want to start with, what are some of the books that inspired you to write this one, to really guide your development of Netflix and helped you in your career?
Reed Hastings: You know, when Erin [Meyer] and I set out to write No Rules Rules, we exactly had that question: What books have impacted the way organizations operate? And of course, there's older ones like "The HP Way" and "In Search of Excellence." There's the Jim Collins work, "Beyond Entrepreneurship," "Good to Great" — really powerful impacts. There's the radical transparency work that's come out over the last few years. So we hoped to continue that and to build upon it.
And, high level, we've had 300 years of the industrial economy. And because of that, everything is organized like a factory. Very top down, very process-centric, very mistake avoidance. And what we're trying to set out is an alternate theory, not for factories and not for safety-critical work, but for creative work, where ideas and mistakes are an inherent part of the innovation process.
And when you want to organize around increased innovation, then here are a set of ideas to think through and stimulate the conversation and build upon. And these ideas have worked very well for Netflix over the last 20 years.
Carlson: So one of the core, there seem to be many core tenets. I'm going to start with probably the biggest one, which is, I think you would call it F&R, which stands for "Freedom and Responsibility." And it seems to me that really began to spring out of a vacation policy, which is kind of a no vacation policy policy — which doesn't mean no vacation. It means that we're not going to track it, and we're all adults, and do what's right for you and what's right for Netflix, and that sort of thing.
I think there's a point in the book where someone brought a dog into the office. And so how, if you don't have policies, where do you decide where the line is, where it's like, "Well, actually we probably have some people in the office who might be allergic to dogs and we don't want them peeing on the rugs, and so, no, you can't have dogs."
So, where are the rules and how do you keep dogs from being all over the office, so to speak?
Hastings: Sure. That might be a good example because that policy is not so simple because the one you described, you then have to do all the carve outs for the guide dogs and other things. And then, what about not dogs? What about all these other types of possible pets? What about kids? It goes on and on and on.
So you can try to reduce the world to like, you're going to document all the cases and edge cases where it's justified or not. Or you can generally set context. Like, it's important to be considerate of your fellow workers, and one part of that is allergies, and you know here are some principles around it. And so we, again, try to have it be not so simple as a set of rules and to have it in fact be general principles of consideration, reminding people of that. That's worked very well.
Our former head of HR, Patty McCord, used to say, "Look, we don't have a clothing policy, but no one has come to work naked lately. Why aren't they coming to work naked?" Okay? And it turns out that the cultural standards around wearing clothing are good enough guidelines, and so it's one, another example where you don't need rules. So for each organization it's finding what rules we have that we really don't need.
But the fundamental, where it springs from, is this idea that our job is to try to inspire people rather than supervise them. So think about it as uplifting employees, giving them inspiration and ideas — and of course they're going to make some mistakes. That's a natural part of the innovation process. Versus the other model, which is supervising them where you tightly control them. You give them very specific objectives that they're supposed to do without asking too many questions.
Carlson: So there's a story in the book about the documentary "Icarus." You hired someone great, and he was at a film festival and he saw "Icarus" and thought it was amazing. Problem was, everybody else in the audience who was there to buy documentaries also thought it was amazing, so it got quickly bid up to very high levels for a documentary.
And he goes to Ted Sarandos, who's now the co-CEO of Netflix, and he says, "I kinda want to buy this. It's extremely expensive." And Sarandos says, "Is it the one? It's really your call." It's not his call.
And so, what is a boss supposed to do if they're not supposed to make those decisions and approve things? What do they do? What do they do all day?
Hastings: Well, we call it "Context, not Control." So what they do is they spend a lot of time understanding what people are doing. And if they perceive that people are buying films that are too much based on cooking, okay, and it's like, "Geez, half of our stuff are cooking documentaries." Then they would tend to set some context.
People want to watch cooking, but it's not the only thing they want to watch. Cooking documentaries are 5% of the stuff on cable television. Some things that, again, set out the principles. And what they wouldn't do is go in and kill individual projects.
So it's being a teacher. And then to be a good teacher, you have to know what your people are doing. So it's not like you're just disconnected, you're intimately aware of what they're doing, but then you're trying to adjust behavior through principles — through context — which of course has the advantage is it makes people think about it and they remember it for next time.
Carlson: So I'm just going to drill into one more slight tweak on that question, which is just, you know, I try to do this with people who are reporting to me: delegate and trust, and give them F&R, "Freedom and Responsibility." Sometimes it makes me feel floaty. You know like I'm like, actually, it would be more fun or I'd have a more concrete sense of what I'm supposed to be doing, but I was really in there.
So how, as a leader, do you deal with that floaty feeling and knowing you're doing the right thing and that you're not some sort of extraneous person?
Hastings: Many new managers over-manage. They want to really add value, and so they're really in people's shorts trying to show that they're adding value. And the trick is to have the maturity to back up, and again, you really want to know what's going on. Okay?
So think of it as a high sense of knowledge of all the things that are happening in your organization, but then, you're using that to reflect on, okay, let's suppose you see three things that don't make sense. One was the cooking documentaries, and another is not taking care of talent, and some third, and then you want to step back and say, "What did I fail to set in the context such that these smart people are making these mistakes?"
And then you say, "Okay, this is the context I want to shift. I want to be clearer about this principle of the importance of talent relations." And you know of course, then that helps generally. And occasionally, you don't have the right people, and so if you feel like with your people you have to individually correct typos or some extreme thing constantly, you've just got the wrong person.
If they can't do it, they can't do it, and that comes back to the "Keeper Test," and this basic idea of making job performance not about, did someone fail bad enough to lose their job? That's how we typically think about it. But instead, think about it as, how hard would you work to keep them if they were leaving for another company? And you know in your head, "Oh man, these four people, I would really work hard to keep. And these other four, I'm not so sure."
Carlson: So the "Keeper Test" is obviously a topic I wanted to get to. It's part of, I would venture to say, part of a broader concept of talent density is very important at Netflix. But let's go straight to the "Keeper Test," which is your competitor or someone else in the industry comes along, you have to imagine looking at your team — if someone on my team was approached by a competitor and made a nice offer and they're about to leave, would I really fight hard to keep them or would I let them go?
And if you would just be happy, or relieved, or just okay with them going — hopefully I'm saying this right — you really should just get rid of them actually, and move them out of the company. Fire them, to be very blunt about it.
So this, to an outsider, is probably one of the most radical things about Netflix. Where it's like, "Oh, you just can fire people who are okay to good, but maybe aren't amazing?" So let me just get right to it: Doesn't it feel awful to fire people like that? That's just the first human reaction I had.
Hastings: Absolutely. If you're going to be the coach of the team that wins the Olympics, okay? Let's say you're in charge of the hockey team for the US, or whatever country you represent. I think you know you better have incredible players at every position or you're not going to win the championship, you're not going to win the gold medal.
And you have to have the toughness of spirit to do the right things — in your judgment — to be able to win that championship. And you know we're trying to win the championship of film and television and be the most loved brand for our consumers — that we have the best content, the best service. And to do that, we have to have an Olympic caliber team.
And it's super disappointing to get cut from an Olympic team — there's no question. But there's no dishonor in it. You know, the person had the guts to try to compete at an elite level. And you know that's how we model it. Of course, we give them a generous severance package.
But the goal's not firing them, per se. The goal is finding someone in that role who will be a rockstar. So think of it as the opportunity cost of, what if you had someone in that role that was incredible and how much better it could make the whole team.
Carlson: So, let me ask an even more specific question on the "Keeper Test" which is, Netflix operates in California. California has strict labor laws. Is it really just one day someone comes in and they're fired because the "Keeper Test" didn't work on them anymore? More plainly put, does Netflix get sued all the time for wrongful termination? People often disagree that they should have been fired. And so, how does Netflix handle that legal area?
Hastings: Well, we try to never surprise anyone. It should be an ongoing dialogue. And we try to make it safe for the employees to anytime they want to ask their boss, "Hey, if I were leaving, would you work hard to keep me?" Okay? So both sides are enabled to basically not be surprised.
And then, to the specific legal issue, because we give a very generous severance package, you know, we've extremely rarely been sued. So again, the severance package is the right thing, which is you know we thought this was going to work out — it didn't. You tried really hard and we honor that, and then they have time and money to find another role.
Carlson: So I think we've already answered my next question, but I want to make sure. One of the big metaphors that the book uses is that you have F&R and you give your people F&R. And so you say, "Go buy that documentary, if it's the one," and the way people know what to do is they have a sense of poker chips. They're making bets on things.
You walk up to the table, you have a certain amount of money, you bet on things, you hope to grow your stack. But how do you know when your stack is shrinking? How do you know when, "I'm really running out of poker chips"? How does that happen?
Hastings: Well so, and to make specific your metaphor — let's say, suppose you'd made a number of bad decisions in the last year. You've generally had a good track record, but you buy four films in a row that don't work at all. Okay? Then both, you would ask your manager, "Hey, am I in the yellow zone? How — would you work less hard to keep me than you would before? I think I know what I'm doing wrong because I'm overemphasizing the cartoon nature of things, and I need to have films, to have some theory about what's going on."
And ultimately the manager is making a judgment of the expectation of future performance. Okay? So if you think of athletics — which we model ourself on — if you have a bad game and the coach thinks probably all your games are going to be bad, okay, then they should swap you out to be able to win the championship. If they … You have a bad game and they feel like that's anomalous and next year is going to be one of your best seasons, they definitely keep you.
So think of the past performance is one indicator, but it's ultimately a judgment call of the leaders for each person of, "Are they the best person we can have in this role?" And if they are, even though they've had a tough year, that's fine.
Carlson: And so, one more piece about firing people, which is especially around … Well, you talk about it. One of the phrases that struck me is that you're supposed to fire people loudly, or fire them loudly. Can you explain?
What does that mean? And that seems different than a lot of organizations as well. So what does it mean to fire people loudly?
Hastings: Oh, I don't know that phrase. That's not a phrase we use. Look, I would fire someone respectfully. Okay?
The person had the guts to try and to perform at this elite level, and we're making a judgment call. And we would explain that — because you don't want it to feel arbitrary to everybody else or it makes them nervous. So you're trying to balance being respectful of that person — not dragging them through the mud — with also making it clear to other people that it was a thoughtful decision.
And, you know, we're spending a bunch of time — because this is a radical philosophy in a way — but our actual turnover rate is extremely small. You know, it's five or 6% per year. So the fact that we're able to say this when people come in means the only people who are really self-confident and really skilled come in. And ultimately there's not many people at all that are let go on an absolute basis. So it's been remarkably successful for us because it attracts people who want to work with other great players.
Carlson: Unfortunately, we're running out of time. So I want to hit a few things that just are direct contradictions to what I would say conventional wisdom.
One is, no performance bonuses. You know, briefly, why not? It seems like that's a good way to motivate people to do a great job. And maybe it's also a way for a company to say, "Yeah, we'll pay them if they do great, but we're not going to commit to paying this person a lot if they do a terrible job." So why not performance bonuses?
Hastings: For us, the performance bonuses — you get a compensation adjustment for the next year. So if you're really great and you've done amazing work, then you'd get a raise for next year. So it forms that positive reward for great performance. And then, what we don't need to do is document all the things that the bonus might be based upon, because we want to be very flexible as a business.
So once you specify the criteria — you've made so many sales calls, you've done this many write ups — it's very reductionist. So we do have a reward function. It's, you know, next year's compensation.
Carlson: So the other big piece at Netflix — there's a couple others. We're going to get to this next one, which is "Candor." You know, stopping people and giving them direct feedback in the moment. And Erin Meyer, the co-author, talks about how it was very strange for her to go into Netflix and get this immediately from people.
So what is the … Netflix also has a "No Brilliant Jerks" policy. So how do you square those things up? Because it can feel like if someone's picking at you, saying things, making you cry maybe because you've got some hard feedback — I'm sure that happens. So how do you balance that?
How do you get to the point where candor is productive and not just creating people all over the place who are wrapping themselves up in the idea that it's good for the company and just really criticizing people — making it feel like a terrible place. How does it happen?
Hastings: So when we get feedback, it stimulates a flight or fear reaction. And what we want to do is when people give feedback, it's got to be with positive intent. It's trying to help the person do better as opposed to tear them down. Okay so that's the first part.
And then the second part, on the receiver side — we say it's a little like doing crunches or doing push ups. You know that it hurts and that the hurt is producing strength. And when it hurts, just recognize it's human. It's not going to go away, but it is making you better — just like hard exercise.
So on both a giver — with a positive intent — on the receiver, which is acknowledge the pain and know that it's making you stronger like exercise, through that pairing we're able to develop a highly effective communication which means that people are getting better quicker. And people love learning. They love getting better at things, and so they're willing to have some pain to be able to get better faster.
Carlson: So last question is just: Is there a deeper philosophy here at work for you and beyond helping corporate culture, is this how humans should live? Is this … Is there more to it than just, "Netflix does this?"
Hastings: This is really a good set of practices for creative companies. It's not the way you should run an airline or a safety-critical business. It's not the way you should run an industrial company where you want to produce a million laptops with no variation in quality.
This is really for the set of the economy that's really focused on innovation — where making mistakes is an inherent part of the process. And if you want to be highly innovative, you have to figure out how to manage that creativity.
Carlson: Well, Reed, thank you so much for taking some time, and congratulations on the book.
Hastings: Nich, what a pleasure, and I hope you get as much out of "No Rules Rules" as we're all hoping.
This episode of "Starting Up" was produced by Sarah Wyman, Julia Press, Carl Leibowitz, Corey Protin, and Sarah Seehafer.
Disclosure: Mathias Döpfner, CEO of Business Insider’s parent company, Axel Springer, is a Netflix board member.
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