Netflix King Of Comp $NFLX

This is a follow-up article to some recent blog posts about HR practices in high tech, fast-growing corporations. And this one specifically focuses on some HR brilliance from Netflix ($NFLX).

One can slice-and-dice their dazzling growth based on so many different performance metrics, but the company performance message remains consistent… the people at Netflix obviously know how to attract and retain talented people, leading to stellar growth.

Take a closer look at the small collage above.  The graphs all reflect a rapidly-growing company. A pretty picture.  Happy long investors.  Profitable.  Except... maybe, for the image bottom right. The header is "Bandwith Hog." A by-product of their rapid growth, perhaps less desirable?  Not perfect then?

(1) Regardless, let’s explore some messaging from Reed Hastings and his people leaders:

“Titles are not very helpful”

Lots of people have a title like “Major League Pitcher” but they are not equally effective.  This is no different to groups of people who are Directors, Vice Presidents, etc.

“Compensation is not dependent on Netflix success”

Whether Netflix is prospering or floundering, they pay at the top of the market.  This is similar to a professional sports team, where a team with a losing record still pays the market rate.  In the latter example – if they were to cut payroll – the team will likely end up doing worse!  Most important on this topic is that employees (not managers) decide how many Netflix stock options they want to hold.

“When top of the market comp is done right…”

Netflix never has to counter with higher comp, because they lead by paying at the top of the market for the skills they want to retain.

(2) For tech companies that issue stock options to employees as a part of their pay, here’s # 2, this time related to deferred compensation:

Employees receive a top of the market salary, and can then request to trade salary for stock options. Some people take all in cash, and some request as much as 50% of their compensation in stock options. Either choice is okay.  Hastings classes this as “consistent with freedom and responsibility.”  It also allows employees to determine their risk/reward tolerance.

Netflix stock options (a summary of the program, and purpose):

- All stock options are fully vested and offer 10 years to exercise, regardless of tenure (or how long one stays at Netflix)

- Fully vested options are granted monthly at the (then) current stock price, so that employees can benefit from price-averaging

- Options are paid for with pre-tax income, meaning the stock option cost may be half of the typical cost in the open market – a great deal!  Options become valuable only if the stock price goes up.

- Managers don’t “own people,” which is why all compensation is fully vested.  Employees are obviously free to leave anytime, without penalty, but nearly everyone stays.

- Employees stay because they are passionate about their work, well paid… and not because of some deferred compensation system

Where does your company fit in the HR paradigm that includes attracting, recruiting, and retaining talented employees, and everything related to these three business requirements? 

Is your corporation losing talent and retaining process-driven bureaucrats?  Maybe it’s time to consider Netflix-style, wholesale change?

Disclosure: No position $NFLX

Holacracy

On Monday this week I published a blog post on the subject "HR vs. Innovation."  My intent was to start drawing comparisons between current, but outdated Human Resource Management practices, and the rapidly changing, fast-moving technological revolution that we are currently witnessing and experiencing.

Most documented HR ‘Best Practices’, HRMS/HRIS technology, and almost all HR management teachings provided by academic institutions… are no longer relevant!  In very simple terms, one of the primary reasons is that "work is not where you are, but what you do."

Exceptions to the above are limited to bureau-style processes that haven’t changed much over time, albeit that they have become more automated, like gross-to-net calculation technology engines (e.g. payroll), compensation, pension and benefit enrollment/tracking systems, etc.  Commonly outsourced processes!

Just a few days after I had posted the blog article referenced above, the Huffington Post published an article with a similar message, entitled “2014: The Year Of Workplace Reinvention.”

The new HR buzz word is Holacracy.

John Bunch, spearheading this initiative at Zappos, explains:

“Research shows that every time the size of a city doubles, innovation or productivity per resident increases by 15 percent. But when companies get bigger, innovation or productivity per employee generally goes down. So we're trying to figure out how to structure Zappos more like a city, and less like a bureaucratic corporation. In a city, people and businesses are self-organizing. We're trying to do the same thing by switching from a normal hierarchical structure to a system called Holacracy, which enables employees to act more like entrepreneurs and self-direct their work instead of reporting to a manager who tells them what to do.”

During a career spanning two decades as a sales manager, with some success achieved along the way, I used to tell ‘new recruits’ as first order of business, that I viewed them as a “franchisee.”   I - as the franchisor - had delivered a turnkey business opportunity for the mutual benefit of both parties.  Then, I allowed them to manage their franchise.  After all... both parties had made a significant investment!

I obviously knew what my budgeted cost was on a per-employee basis.  I would be required to equip them with the tools required for success, and then empower them to deliver against our expected return on investment.  I was acutely aware of the fact that once fully loaded, the lost opportunity cost of absenteeism, under-performance, etc., was as much my problem as theirs.  Hiring is more expensive than firing!

However, as mentioned in my previous post, adequate performance should be rewarded with a generous severance package.  Unfortunately today, hiring managers are often bureaucrats at the top of a pyramid that the corporation should be severing ties with!  This is especially true if a modern-day manager still thinks that his/her role is to manage people (as per Bunch: "...tells them what to do")... instead of working!

Additionally, it’s important for managers to understand that once they become a manager, they have agreed to work for their employees, and not the other way around.  Both parties work for the corporation.  The manager’s primary responsibility is to remove the barriers and obstacles that may prevent their direct reports from achieving success.  In this equation, think carefully: “Who is working for whom?”

My direct reports and I were like foot soldiers, representing the company.  Every day we would go out, conquer, and bring back some bounty… new sales orders, business development opportunities, competitive knowledge, new talent we should hire, industry requirements/changes, etc.

Holacratic organizations are organized in circles. Workers are members of several circles, depending on what they are working on at the time.  Decision authority is distributed throughout the organization, with everyone focused on the core purpose and strategy.

Earlier in my career I wasn’t aware of holacracy… who knew?  I must admit though, it feels great to be ahead of the curve, albeit occasionally!  Feel free to connect directly if you would like to arrange a workshop for your HR team, or if you need help transforming your organization.

HR vs. Innovation

Most corporate Human Resources Management/Information Systems (HRMS/HRIS) and processes haven’t kept up with the rapidly, ever-changing tech business environment.

I am always gob-smacked that corporations will lose talented people without even inquiring why they left.  And annual performance reviews as we knew it, are utterly useless! They serve no purpose, other than to allow managers to create little groups of people that fit into some bureaucratically determined salary or bonus tier.

Have you ever noticed how your best employees always know their market value, often seek other opportunities, and leave… as in, leaving their process-driven, under-performing peers behind?

Talking of market value; the new world requires you to pay your employees at “Top of the Market” rates for their skills.  Otherwise, they will leave. 

This should not be a challenging concept for business leaders.  Just ask yourself these three questions:

- What could my superstar earn elsewhere, should they decide to leave?

- What is my cost of replacement?

- What would I pay to keep that person? … and then, pay them, while you still can!

The keeper test is even simpler.  If someone said they were leaving, how hard would you fight to retain them?  The new 360° feedback is also simple:  Employees should ask their managers: “If I said I was leaving, how hard would you fight to retain me?” If uncertainty exists, sever ties professionally, amicably, with dignity, and move on!

In this new world, adequate performance should always be rewarded with a generous severance package!

You see, in this new world, people - and not the corporations they work for - will manage their own career growth.  And, employee economic security is entirely based on their skills and reputation!

Their reputations are based on their great work.  Notice, I didn’t say hard work… but great work.  No-one will be counting hours in the future, with employees connected virtually 24/7; checking emails, calling peers and taking calls from clients at all hours, working whenever there is work that has to get done.

The industrial revolution and it’s 9-5, everyone-in-one-place for the working day is beyond its best before date.  We're not building widgets anymore, but creating and innovating.  As a direct result, hard work - as measured in hours - is increasingly irrelevant.  Great work is preferred.  No… required!

While on the subject of the new world, deferred compensation is also dead, finished!  In the near future all employee benefits should be part of his or her salary, always fully vested.  And that includes stock options, a subject I actually do have a little knowledge of based on my own recent, past experience.

Managers no longer ‘own’ people.  Your employees will stay because they are passionate about their work, well paid… and not because of some deferred compensation plan.  If you believe that deferred comp is a retention strategy, you're toast!

For more on this subject, or to arrange a hands-on workshop with your HR team, contact me.  I will help drag your corporation - sometimes while kicking and screaming - into the new HR world of high-tech innovation and creativity!