It’s been viewed online nearly 7 million times. Sheryl Sandberg calls it one of the most important documents ever to come out of Silicon Valley. And it was created by the company whose stock increased in 2013 more than any other’s in the S&P 500—up nearly 350%.

“It” is a 126-slide PowerPoint called “Netflix Culture: Freedom & Responsibility,” and it outlines Netflix’s approach to just that—culture—although it has primarily been interpreted as a “reinvention” of HR, as this Harvard Business Review article puts it.

Going through the entire PowerPoint (I have) is valuable in and of itself; if nothing else, you’ll see how very well done PowerPoints can be, for a change. But the HBR article, written by the former head of HR at Netflix itself, distills their approach to talent into five tenets based on two key insights into how people actually feel about performing their jobs…

The first insight came nearly a dozen years ago when Netflix had been planning an IPO but after 9/11 not only put it on hold but laid off about one-third of their 120 employees; a “brutal” time, as the former HR head describes it. The insight came from a conversation with a head of engineering who’d lost all three employees who used to report to him, and who was now a one-man band working very long hours. The HR head said she hoped to have some more help for him soon and he replied that there was no rush: “I’m happier now.”

What? Turns out the laid-off employees weren’t great and they were more of a burden to manage than they were worth: Between arbitrating personality conflicts and redoing subpar work, it wasn’t worth it.

Lesson #1: Hire only A team people.

The second insight took place a year later, a few months after the delayed IPO. Netflix’s bookkeeper had been very important to the firm’s early growth, “bright, hardworking, and creative [but] now as a public company we needed CPAs and other fully credentialed, deeply experienced accounting professionals—and [she] had only an associate’s degree from a community college.” And here comes the brutal news, folks: Rather than trying to jury-rig a new role for her, they let her go. The saving grace, if you can call it that, was “in light of her spectacular service, we would give her a spectacular severance package.” The lesson a la Netflix? “If we wanted only “A” players on our team, we had to be willing to let go of people whose skills no longer fit, no matter how valuable their contributions had once been.”

Lesson #2: Cull to keep only the A team.

So here are the five tenets I promised:

Hire, reward, and tolerate only fully formed adults

You may think this comes with the territory, working at a serious-minded law firm, but the Netflix credo is driving at something different than maturity defined in geriatric terms. They’re talking about people with sound firm-spirited judgment.

97% of your employees will do the right thing. Most companies spend endless time and money writing and enforcing HR policies to deal with problems the other 3% might cause. Instead, we tried really hard to not hire those people, and we let them go if it turned out we’d made a hiring mistake.

I like to call managing for the 3% “managing for failiure.” And the concept isn’t limited to personnel decisions, believe me. Do not, please, manage for failure.

A very specific example at Netflix is their vacation/time-off policy. They launched with 10 vacation days, 10 holidays, and some sick days, based on the honor system. But after Sarbanes-Oxley kicked in (Netflix was now public, recall), they were required to account for time off. Rather than comply with formalities, they decided to tell salaried employees to take whatever time off they felt appropriate, just work it out with your colleagues.

Same thing with T&E reporting: Netflix’s entire expense policy is five words:

Act in Netflix’s best interest.

Can it be abused? Sure; and you’ll catch it in a heartbeat. Don’t manage for failure.

Tell the truth about performance

Formal reviews are ritualistic and perfunctory Kabuki dances. Kill them.

And don’t worry about creating a paper trail to avoid litigation, documenting poor performance; if somebody isn’t cutting it, they know it and you know it.

I know, I know, you’re objecting with every litigator’s bone in your body, so here’s the story of one manager who thought what you’re thinking and wanted to get rid of “Maria” with a series of increasingly harsh performance reviews for the record:

I replied, “Why bother? We know how this will play out. You’ll write up objectives and deliverables for her to achieve, which she can’t, because she lacks the skills. Every Wednesday you’ll take time away from your real work to discuss (and document) her shortcomings. You won’t sleep on Tuesday nights, because you’ll know it will be an awful meeting, and the same will be true for her. After a few weeks there will be tears. This will go on for three months. The entire team will know. And at the end you’ll fire her. None of this will make any sense to her, because for five years she’s been consistently rewarded for being great at her job—a job that basically doesn’t exist anymore. Tell me again how Netflix benefits?

“Instead, let’s just tell the truth: Technology has changed, the company has changed, and Maria’s skills no longer apply. This won’t be a surprise to her: She’s been in the trenches, watching the work around her shift. Give her a great severance package—which, when she signs the documents, will dramatically reduce (if not eliminate) the chance of a lawsuit.” In my experience, people can handle anything as long as they’re told the truth—and this proved to be the case with Maria.

Managers own the job of creating great teams

This means your partners. Don’t let them pass with the complaint that the associates or non-equity partners they have aren’t great. Nonsense. It’s up to them to change those people. Former Secretary of Defense Donald Rumsfeld famously remarked that you go to war with the army you have, not the army you wish to have—but he could as well have added that you can shape it into the army you wish to have with foresight and discipline.

In other words, the army (the team) you have is a given: It advances nothing to complain about it. Your job as a manager/partner is to fix it. And yes, this includes having frank conversations with people who are mismatched where they are.

This also has enormous implications for compensation: At Netflix, there’s no such thing as a performance bonus. Radical? (By now, you should be getting the feeling that a lot of what they’re doing is radical in terms of how rank-and-file HR views the world.)

But they eliminated bonuses because they believed in paying market-based pay and didn’t think that the “fully formed adults” they hired would be motivated to work harder or smarter by an annual bonus. Now, if you’re in a world where firm-by-firm, blow-by-blow annual associate bonuses are fodder for untold barrels of online ink, this might strike you as suicidal—and many of you are in that world. But the philosophy remains refreshing, and true, you have to admit.

Another unconventional idea: Rather than discourage people from taking recruiters’ calls, they told employees it was smart to interview with competitors in order to get a sense of the market for their talent. Just promise to send the compensation numbers under discussion back to your own firm’s people, as valuable market intelligence.

Make sure people understand what metrics drive your business

At Netflix, the issue was software engineers who didn’t understand finance; with you, it’s lawyers (all the way up and down the food chain) who don’t understand finance. For example, how many of your lawyers know that not all revenue is good revenue? Here’s Netflix story:

I recently visited a Texas start-up whose employees were mostly engineers in their twenties. “I bet half the people in this room have never read a P&L,” I said to the CFO. He replied, “It’s true—they’re not financially savvy or business savvy, and our biggest challenge is teaching them how the business works.” Even if you’ve hired people who want to perform well, you need to clearly communicate how the company makes money and what behaviors will drive its success. At Netflix, for instance, employees used to focus too heavily on subscriber growth, without much awareness that our expenses often ran ahead of it: We were spending huge amounts buying DVDs, setting up distribution centers, and ordering original programming, all before we’d collected a cent from our new subscribers. Our employees needed to learn that even though revenue was growing, managing expenses really mattered.

Good HR people think like businesspeople first and HR people last

Here’s something I never thought I’d hear an HR person say:

Although I like [other HR people] personally, I often find myself disagreeing with them. Too many devote time to morale improvement initiatives. At some places entire teams focus on getting their firm onto lists of “Best Places to Work” (which, when you dig into the methodologies, are really based just on perks and benefits).

During 30 years in business I’ve never seen an HR initiative that improved morale. HR departments might throw parties and hand out T-shirts, but if the stock price is falling or the company’s products aren’t perceived as successful, the people at those parties will quietly complain—and they’ll use the T-shirts to wash their cars.

Now then, what do we think of all this?

Netflix has clearly gone from the conventional HR assumptions, that people need rules of the road and guardrails and double yellow lines and ubiquitous police cruisers, to the opposite extreme, of (more or less) “use your best judgment.” This has tremendous intuitive appeal, particularly when we all know that we ourselves are fully-formed adults who would never take advantage or cut corners.

Risk #1 is that as organizations grow larger and larger, “trust” as a management technique has to morph into “trust, but verify.” There’s a newish theory circulating among the thoughtful critics of our recent Big Bank missteps that “too big to fail” also necessarily entails “too big to manage.” I think there’s a lot to that.

Floyd Norris recently wrote a thoughtful column in the NY Times that JP Morgan Chase didn’t fail to catch Bernie Madoff’s shenanigans (Chase was his bank during all the years of the Ponzi scheme) because people were tempted into looking the other way when questions arose about an enormously profitable client, but because reality was obscured in the blizzard of paperwork. Here’s the “you can’t make this stuff up” story revealing just how true that probably is:

My favorite disclosure in the documents is that JP Morgan had a requirement that a “client relationship manager” certify every year that each client complied with all “legal and regulatory-based policies.” This was no doubt viewed as a tiresome and routine requirement, both by the bankers who did the certifying and by the people in the compliance department who collected the certifications.

“In March 2009,” we are told in a “statement of facts” agreed to by the bank and prosecutors, the Madoff relationship manager “received a form letter from JPMC’s compliance function asking him to certify the client relationship again.”

Evidently, whoever sent out that letter did not read it after a computer generated it. Or perhaps that person had somehow missed the report that Mr. Madoff had been arrested on Dec. 11, 2008. That would not have been easy. In the month after the arrest, The New York Times printed 15 front-page articles on the Madoff fraud, and it received exhaustive coverage everywhere else as well.

Similarly, last week the Times ran a feature on Dominic Barton, the global managing director of McKinsey, who is out to “change the culture of the firm that shaped him” in the wake of the Rajat Gupta and Anil Kumar insider-trading scandals. McKinsey had always relied on its trust-based, values-driven partnership culture for rectitude, but Barton has decided a bit more is needed, so in 2010 he introduced a new personal investment policy forbidding employees and their family members from trading in securities of any of McKinsey’s clients, and requiring consultants to complete a few online tutorials.

We shouldn’t be surprised there was pushback:

“How childish it is that we have to pass a test,” Mr. Barton recalls one colleague saying to him. “Is that what adults do?” Mr. Barton held firm, but says that the partner didn’t back down, either, saying: “You are reminding me of what it was like in Eastern Germany when the Stasi was checking.”

But Barton has held firm, so that “when values fail, at least there are now rules.”

Risk #2 is that Netflix’s “take whatever vacation you need” is actually interpreted by employees as something quite different. Among the many many online comments to the HBR article a clear thread emerges that Netflix is not actually the greatest place to work. Here’s a typical remark: “Netflix has a reputation for being a sweatshop where people work long hours for decent compensation. The joke I have heard there is “take as long a vacation as you like, just don’t come back” when it comes to their vacation policy.”

You can also wonder whether the extreme talent culling is sensible or effective (we’re not even asking about humane). “Rebecca” sums up this point of view:

I see a lot of good things in here however, I wonder at constantly getting rid of good people who’s technical skills fall behind. Whatever happened to developing talent? There’s an acknowledgement that they were good employees who’ve proved their commitment to the company but instead of spending a little time – and some of that money that would’ve gone into severance – on training, the answer seems to be to exit them. How’s that good talent management?

Others seemed to thrive in the free-form environment, such as “Barry:”

As an eleven year former employee at Netflix I can say without a doubt this approach allowed Netflix to scale without bloated headcount. I can’t speak to other areas of the company but in my department, there was no culture of fear. I didn’t have a job. I got to wake up everyday and work on interesting problems with smart people. That’s how I felt. The culture also meant that wasting time on internal politics was at an absolute minimum. Again, I am speaking from my experience but I know a lot of others who feel the same way.

My bottom line?

Apologies in advance to any HR professionals in the audience, but over the course of my career I’ve observed a steady, now slower, now faster, slide in the direction of more rules, more constraints, more paperwork, and more perfunctory but content-free hoops to be jumped through—by HR, by management, by employees, by everyone. Some is no doubt due to increasing regulation (broadening antidiscrimination regulations and cultural expectations, the Americans with Disabilities Act, etc.), admirable to be sure but which must be complied, yet most of it, I believe, is attitudinal.

From the notion of “zero tolerance” in our schools to police defaulting to SWAT teams when one patrol car of backup used to suffice, to cordons sanitaire around every major and many minor public events, the inexorable logic of compliance seems to be that more is better and less is inexcusable, lest something slip through the cracks—and then there will be h*&# to pay.

The problem is that benefits come with costs. Resources are not infinite, and opportunity costs are real.

Enough is often, well, enough.

So I warmly applaud Netflix’s reinventing HR. Don’t worry for a moment that it could be taken too far, because I have news for you: At the moment, we are at undetectable risk of that.


This is the latest installment in a series from Bruce MacEwen and Janet Stanton of Adam Smith Esq. and JDMatch. “Across the Desk” takes a thoughtful look at recruiting, career paths, professional development, human capital, and related issues. Some of these pieces have previously appeared, in slightly different form, on AdamSmithEsq.com.


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