How Netflix pays its employees

Have you heard about the compensation system at Netflix?:

The online movie service, which today launched an iPhone app for subscribers to watch TV and movies on the go, has no vacation policy at all.

That doesn’t mean Netflix doesn’t allow vacation. Rather, operating under the idea that its engineers and professionals should be treated as adults, Netflix allows salaried employees to take as much vacation as they’d like.

In story in Britain’s Daily Telegraph last week, Dan Pink, author of the excellent leadership book Drive, shares the scoop on Netflix’s flexible vacation rules. If they don’t get their work done, or simply turn in mediocre performance, the company is candid about their fate: “adequate performance,” reads a slide presentation on the company’s web site, “gets a generous severance package.”

That slide deck made its way around the Internet last summer, as out-of-work techies salivated over Netflix’s generous and flexible benefits and pay. But while most of the attention at the time–it was August, after all–centered on the company’s hands-off approach to vacation, Netflix’s way of compensating its employees is just as radical, if not more so.

The Los Gatos, Calif.-based company takes a market-based approach to pay, believing that to get the best employees, it must pay above-market rates. Rather than setting a new staffer’s salary against what his internal peers make–an approach many companies take–Netflix carefully studies what that person could earn at other companies in combined salary and bonus, and then sets their pay a notch higher. Then, end of the year cash and stock incentives are not paid.

While that’s a highly unusual approach, what’s really radical is what comes next. Employees get to choose how much of their total pay comes in cash versus equity. Risk-averse employees can take the safe route, requesting the entire sum in cash. Those who want to tie their fortunes to Netflix’s can take half of it in equity, or other combinations of cash and stock. “If you have a high performance team, with fully formed adults,” asked Netflix’s Chief Talent Officer Patty McCord when I interviewed her recently, “why are we being paternalistic about compensation?”

What Netflix is doing with both its vacation and pay policies is to make its in-demand engineers feel like rational, thinking adults. The company trusts them to make decisions, and to act in the best interests of both their company and themselves.

But by not paying an annual bonus, it’s also fostering the sort of environment that doesn’t encourage outsized risk-taking by employees doing whatever they can to meet their annual goals. That hardly means the company doesn’t wave any sticks: Netflix’s zero tolerance for mediocrity means employees are incentivized to keep their jobs at a company that pays them above-market salaries and treats them like the professionals they are.

via PostLeadership: Netflix vacation policy is only the tip of a radical compensation iceberg – Jena McGregor.

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • Digital

    As a tech guy I have noticed this becoming more and more prevalent. We are starting to get to the point where workplaces are treating their employees as humans. Now not everyone is of a mind that infinite vacation time would work well. But there is a point in which you are a seasoned professional and have proven value. It is incredibly inefficient to expect a professional to work within the confines of 8-5 and a set vacation schedule. So places of employment that understand that we have families, other obligations, and lives are causing a brain drain to the rest of the businesses out there.
    How are these companies doing? Very very well, it is often argued in the IT community that 1 $150K programmer is worth 10 $30K programmers. But you have to attract these guru’s aside from cash, you have to make an environment that allows them the freedom that they want. Unfortunately in the US we are still stuck in an industrial way of thinking. We are getting there though.

  • Digital

    As a tech guy I have noticed this becoming more and more prevalent. We are starting to get to the point where workplaces are treating their employees as humans. Now not everyone is of a mind that infinite vacation time would work well. But there is a point in which you are a seasoned professional and have proven value. It is incredibly inefficient to expect a professional to work within the confines of 8-5 and a set vacation schedule. So places of employment that understand that we have families, other obligations, and lives are causing a brain drain to the rest of the businesses out there.
    How are these companies doing? Very very well, it is often argued in the IT community that 1 $150K programmer is worth 10 $30K programmers. But you have to attract these guru’s aside from cash, you have to make an environment that allows them the freedom that they want. Unfortunately in the US we are still stuck in an industrial way of thinking. We are getting there though.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    I am not sure this is such a new thing. The best workers have generally been able to get the most money and best working conditions as compared to other workers. My husband’s company has golden handcuffs as they like to call them. They also have frequent large scale layoffs.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    I am not sure this is such a new thing. The best workers have generally been able to get the most money and best working conditions as compared to other workers. My husband’s company has golden handcuffs as they like to call them. They also have frequent large scale layoffs.

  • Digital

    I don’t know sg. I have known good people who work for a company because they don’t think they can do any better or don’t know what else is out there.
    Sometimes, such as in the area where I live, the progressive thought companies really haven’t come to the area yet. I have actually been told in interviews that to expect a good benefits package such that the state has is impractical…Those companies get a nice “thank you for your time” from people like myself. I have worked in some fantastic places in my region and I know that I could get even better benefits by leaving and heading to the more competitive areas. But that would involve me leaving behind almost everything that makes extra benefits worthwhile :)
    I think that eventually the average for companies will change and you will see these “no vacation policy” and “Golden Hancuff” practices more often. I have always said that you can give a new employee $5K in benefits and they will take $10K less in salary.

  • Digital

    I don’t know sg. I have known good people who work for a company because they don’t think they can do any better or don’t know what else is out there.
    Sometimes, such as in the area where I live, the progressive thought companies really haven’t come to the area yet. I have actually been told in interviews that to expect a good benefits package such that the state has is impractical…Those companies get a nice “thank you for your time” from people like myself. I have worked in some fantastic places in my region and I know that I could get even better benefits by leaving and heading to the more competitive areas. But that would involve me leaving behind almost everything that makes extra benefits worthwhile :)
    I think that eventually the average for companies will change and you will see these “no vacation policy” and “Golden Hancuff” practices more often. I have always said that you can give a new employee $5K in benefits and they will take $10K less in salary.

  • http://lutherama.blogspot.com Dr. Luther in 21st Century

    On paper it looks great but the unwritten expectations could be a killer. Sure you’re free to set your hours but to obtain a good review you better be clocking 70+ hours a week.

  • http://lutherama.blogspot.com Dr. Luther in 21st Century

    On paper it looks great but the unwritten expectations could be a killer. Sure you’re free to set your hours but to obtain a good review you better be clocking 70+ hours a week.

  • Stephanie

    I am personally aquainted with at least 3 Netflix employees (former co-workers all of them). They do like the benefits. They work hours comparable to those they have worked at other Internet / software companies (closer to 50 hours than 70, well, except for RK who takes work home with her all the time but she’s done that as long as I’ve known her). Having worked with them, I cannot imagine any of them getting bad reviews. They do take vacation. And at least one of them was more excited by the ‘well behaved dogs are welcome’ policy than anything else when she got the job.

    The place where we worked together was a start up which offered unlimited sick time. (And it didn’t affect your salary at all.) I took a total of 5 sick days during the 8.5 years I worked there. Because mostly, I wasn’t sick. When I moved to a company that offered a set amount of sick time? I felt almost offended. It was like going back to school and being told you couldn’t chew gum. I know there was a reason for it when you were a student, but having been treated like an adult? It was a minor shock to the system to suddenly be seen as untrustworthy.

  • Stephanie

    I am personally aquainted with at least 3 Netflix employees (former co-workers all of them). They do like the benefits. They work hours comparable to those they have worked at other Internet / software companies (closer to 50 hours than 70, well, except for RK who takes work home with her all the time but she’s done that as long as I’ve known her). Having worked with them, I cannot imagine any of them getting bad reviews. They do take vacation. And at least one of them was more excited by the ‘well behaved dogs are welcome’ policy than anything else when she got the job.

    The place where we worked together was a start up which offered unlimited sick time. (And it didn’t affect your salary at all.) I took a total of 5 sick days during the 8.5 years I worked there. Because mostly, I wasn’t sick. When I moved to a company that offered a set amount of sick time? I felt almost offended. It was like going back to school and being told you couldn’t chew gum. I know there was a reason for it when you were a student, but having been treated like an adult? It was a minor shock to the system to suddenly be seen as untrustworthy.

  • Digital

    70+ hours seems bad but it isn’t if half of it is spent just being on call at home :)

  • Digital

    70+ hours seems bad but it isn’t if half of it is spent just being on call at home :)

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    Dr. Luther,
    In my very limited experience, the unwritten expectations aren’t so much hours as they are contribution, innovation, creativity and taking the initiative to notice and solve problems without being told. The best employees have other interests in life and can bring those skills to work in various ways. My husband often gets awards and special bonuses for helping various departments at work in creative ways that he suggests all on his own. Meanwhile his employer is flexible about letting him off to do volunteer work in the community. However, he rarely works long hours. I think it is genuinely about productivity and quality. They don’t care so much about how many hours. They care about how much is actually accomplished.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    Dr. Luther,
    In my very limited experience, the unwritten expectations aren’t so much hours as they are contribution, innovation, creativity and taking the initiative to notice and solve problems without being told. The best employees have other interests in life and can bring those skills to work in various ways. My husband often gets awards and special bonuses for helping various departments at work in creative ways that he suggests all on his own. Meanwhile his employer is flexible about letting him off to do volunteer work in the community. However, he rarely works long hours. I think it is genuinely about productivity and quality. They don’t care so much about how many hours. They care about how much is actually accomplished.

  • http://lutherama.blogspot.com Dr. Luther in 21st Century

    I am afraid my experiences have left me rather jaded about the hour expectation. I pretty much lost a job because I refused to “work off the clock.” I agree things needed to be done but this particular position paid hourly and I wasn’t going to give them my time for free. I admit that particular place was a toxic work environment, average employment length was 6 months. I was there for a little over a year and during that time I saw 5 different counselors come and go.

  • http://lutherama.blogspot.com Dr. Luther in 21st Century

    I am afraid my experiences have left me rather jaded about the hour expectation. I pretty much lost a job because I refused to “work off the clock.” I agree things needed to be done but this particular position paid hourly and I wasn’t going to give them my time for free. I admit that particular place was a toxic work environment, average employment length was 6 months. I was there for a little over a year and during that time I saw 5 different counselors come and go.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    ” I admit that particular place was a toxic work environment, average employment length was 6 months. I was there for a little over a year and during that time I saw 5 different counselors come and go.”

    So, they forced people to find something better. ;-)

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    ” I admit that particular place was a toxic work environment, average employment length was 6 months. I was there for a little over a year and during that time I saw 5 different counselors come and go.”

    So, they forced people to find something better. ;-)

  • http://lutherama.blogspot.com Dr. Luther in 21st Century

    “So, they forced people to find something better. ”

    I guess that would be putting it in the best light possible. ;)
    My thoughts were the admin were a bunch of “pointy hairs” who didn’t understand the realities of their own business.

  • http://lutherama.blogspot.com Dr. Luther in 21st Century

    “So, they forced people to find something better. ”

    I guess that would be putting it in the best light possible. ;)
    My thoughts were the admin were a bunch of “pointy hairs” who didn’t understand the realities of their own business.

  • Digital

    Ya I worked in a place like that once, and that was enough for me. No sick or vacation time your first year, poor health, and really really bad coffee. Turnover was so high that when I looked around 80-90% of the individuals were college grads just trying to get experience. Long term employee was someone who was there 2 years. I spent 3 weeks there staring at a wall trying furiously to find something to do.
    Eventually I had a company call me because they heard I was on the market and wanted me to come work for them, name my salary and starting date. Wasn’t a moment too soon, I felt slightly guilty leaving but wow, they do it to themselves.

  • Digital

    Ya I worked in a place like that once, and that was enough for me. No sick or vacation time your first year, poor health, and really really bad coffee. Turnover was so high that when I looked around 80-90% of the individuals were college grads just trying to get experience. Long term employee was someone who was there 2 years. I spent 3 weeks there staring at a wall trying furiously to find something to do.
    Eventually I had a company call me because they heard I was on the market and wanted me to come work for them, name my salary and starting date. Wasn’t a moment too soon, I felt slightly guilty leaving but wow, they do it to themselves.

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