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Netflix's Major HR Innovation: Treating Humans Like People

What if instead of bureaucracy, a booming company relied on common sense?

Editor's Note: This story contains one of our Best Business Lessons of 2014. Check out the full list here.

Back in 1997, before it was streaming a billion hours of Internet television a month, Netflix was a startup. They had a fairly standard vacation policy: 10 vacation days, 10 holidays, and a handful of sick days per person. Rather than formally tracking these days, they opted for an honor system, with employees tracking their own off days and informing their managers when appropriate.

Then, in 2002, Netflix went public.

"(O)ur auditors freaked," former Netflix chief talent officer Patty McCord writes in HBR. They thought that Sarbanes–Oxley, the accounting reform legislation, required that time off was carefully accounted for.

Netflix thought about putting an official system into practice—until founder Reed Hastings came up with an intriguing question: "Are companies required to give time off? If not, can’t we just handle it informally and skip the accounting rigmarole?" McCord's realization: no California law said you had to institute vacation time.

So instead of shifting to a formal system, they went in the opposite direction, McCord says. "Salaried employees were told to take whatever time they felt was appropriate. Bosses and employees were asked to work it out with one another."

Doing the common sense thing and treating people like adults are at the heart of Netflix's breakthrough HR policy. McCord believes that most companies fall into a trap of having 97% of their employees doing great work and not needing HR to hold their hands, while 3% of employees absorb HR's time, money, and energy. Netflix's approach: they simply don't hire those people.

While hourly workers have a more structured system, salaried employees are merely guided by HR on how to take time off. For example, accounts are asked not to be out at the beginning or end of the quarter, since those are the busy periods. If employees have to be away for more than 30 days, they would talk it over with HR. And senior staff are encouraged to take vacations since they serve as role models.

Netflix implements similar systems when it comes to their formal travel and expense policies: employees are encouraged to act in Netflix’s best interests. This means they shouldn't eat at an expensive restaurant with a colleague, but it might make sense in sales. And they don't need to go through travel agents for flights, so that's another expense gone.

"(O)verall we found that expense accounts are another area where if you create a clear expectation of responsible behavior, most employees will comply," McCord says.

Perhaps most radical is their approach toward compensation. For one, Netflix doesn't distribute performance-based bonuses—they're unnecessary if you hire the right people. They also emphasize market-based pay. To get an understanding of the rate for their talent, Netflix interviews competitors when given the chance.

"Many HR people dislike it when employees talk to recruiters," McCord says, "but I always told employees to take the call, ask how much, and send me the number—it’s valuable information."

Hat tip: HBR

[Image: Flickr user Steven Guzzardi]

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  • Glenn Geffcken

    Great article Drake. I once worked at a large company that did not require receipts for expenses under $80. So one account executive had $78 client lunches every day and was eventually let go for that. The key difference though, was that the culture of this company was fraught with back stabbing, cronyism, and hierarchical privilege. So there was a lack of respect for upper leadership and the company as a whole, and in that climate there were those who would take advantage. I think placing this level of trust in team members contributes to a more positive culture, and also requires a company to have a strong culture of trust in order for it work.

  • Ulka Shukla

    Wonderful read ! in fact some of the companies in India , not so MATURED in terms of HR , (for one I was leading HR function) have same leave policies guided by common sense and a bit of structure to avoid any discrimination and play fair.Treat them like adults ad its more likely they behavior like one ..

  • Rishabh Rastogi

    Hey Ulka, can you throw some more light on that? As in, which particular companies are adopting such HR policies ?

  • Charles Covey-Brandt

    I've also noticed a lot of companies invest in stock with terrible returns. Our approach: don't invest in that stock! Works like a charm.