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companies required to give time off? If not, can’t we just handle it informally and skip the

accounting rigmarole?” I did some research and found that, indeed, no California law

governed vacation time.

So instead of shifting to a formal system, we went in the opposite direction: Salaried

employees were told to take whatever time they felt was appropriate. Bosses and

employees were asked to work it out with one another. (Hourly workers in call centers

and warehouses were given a more structured policy.) We did provide some guidance. If

you worked in accounting or finance, you shouldn’t plan to be out during the beginning

or the end of a quarter, because those were busy times. If you wanted 30 days off in a

row, you needed to meet with HR. Senior leaders were urged to take vacations and to let

people know about them—they were role models for the policy. (Most were happy to

comply.) Some people worried about whether the system would be inconsistent—

whether some bosses would allow tons of time off while others would be stingy. In

general, I worried more about fairness than consistency, because the reality is that in any

organization, the highest-performing and most valuable employees get more leeway.

We also departed from a formal travel and expense policy and decided to simply require

adultlike behavior there, too. The company’s expense policy is five words long: “Act in

Netflix’s best interests.” In talking that through with employees, we said we expected

them to spend company money frugally, as if it were their own. Eliminating a formal

policy and forgoing expense account police shifted responsibility to frontline managers,

where it belongs. It also reduced costs: Many large companies still use travel agents (and

pay their fees) to book trips, as a way to enforce travel policies. They could save money

by letting employees book their own trips online. Like most Netflix managers, I had to

The company’s expense policy is five words long: “Act in Netflix’s best interests.”

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ANOTHER TAKE

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have conversations periodically with employees who ate at lavish restaurants (meals that

would have been fine for sales or recruiting, but not for eating alone or with a Netflix

colleague). We kept an eye on our IT guys, who were prone to buying a lot of gadgets. But

overall we found that expense accounts are another area where if you create a clear

expectation of responsible behavior, most employees will comply.

Tell the Truth About Performance

Many years ago we eliminated formal reviews. We had held them for a while but came to

realize they didn’t make sense—they were too ritualistic and too infrequent. So we asked

managers and employees to have conversations about performance as an organic part of

their work. In many functions—sales, engineering, product development—it’s fairly

obvious how well people are doing. (As companies develop better analytics to measure

performance, this becomes even truer.) Building a bureaucracy and elaborate rituals

around measuring performance usually doesn’t improve it.

Traditional corporate performance reviews are driven largely by fear of litigation. The

theory is that if you want to get rid of someone, you need a paper trail documenting a

history of poor achievement. At many companies, low performers are placed on

“Performance Improvement Plans.” I detest PIPs. I think they’re fundamentally

dishonest: They never accomplish what their name implies.

One Netflix manager requested a PIP for a

quality assurance engineer named Maria,

who had been hired to help develop our

streaming service. The technology was new,

and it was evolving very quickly. Maria’s job

was to find bugs. She was fast, intuitive, and

hardworking. But in time we figured out

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how to automate the QA tests. Maria didn’t like automation and wasn’t particularly good

at it. Her new boss (brought in to create a world-class automation tools team) told me he

wanted to start a PIP with her.

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.

When we stopped doing formal performance reviews, we instituted informal 360-degree

reviews. We kept them fairly simple: People were asked to identify things that colleagues

should stop, start, or continue. In the beginning we used an anonymous software system,

but over time we shifted to signed feedback, and many teams held their 360s face-to-

face.

HR people can’t believe that a company the size of Netflix doesn’t hold annual reviews.

“Are you making this up just to upset us?” they ask. I’m not. If you talk simply and

honestly about performance on a regular basis, you can get good results—probably better

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ones than a company that grades everyone on a five-point scale.

Managers Own the Job of Creating Great Teams

Discussing the military’s performance during the Iraq War, Donald Rumsfeld, the former

defense secretary, once famously said, “You go to war with the army you have, not the

army you might want or wish to have at a later time.” When I talk to managers about

creating great teams, I tell them to approach the process in exactly the opposite way.

In my consulting work, I ask managers to imagine a documentary about what their team

is accomplishing six months from now. What specific results do they see? How is the

work different from what the team is doing today? Next I ask them to think about the

skills needed to make the images in the movie become reality. Nowhere in the early

stages of the process do I advise them to think about the team they actually have. Only

after they’ve done the work of envisioning the ideal outcome and the skill set necessary

to achieve it should they analyze how well their existing team matches what they need.

If you’re in a fast-changing business environment, you’re probably looking at a lot of

mismatches. In that case, you need to have honest conversations about letting some

team members find a place where their skills are a better fit. You also need to recruit

people with the right skills.

We faced the latter challenge at Netflix in a fairly dramatic way as we began to shift from

DVDs by mail to a streaming service. We had to store massive volumes of files in the

cloud and figure out how huge numbers of people could reliably access them. (By some

estimates, up to a third of peak residential internet traffic in the U.S. comes from

customers streaming Netflix movies.) So we needed to find people deeply experienced

with cloud services who worked for companies that operate on a giant scale—companies

like Amazon, eBay, Google, and Facebook, which aren’t the easiest places to hire

someone away from.

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Our compensation philosophy helped a lot. Most of its principles stem from ideals

described earlier: Be honest, and treat people like adults. For instance, during my tenure

Netflix didn’t pay performance bonuses, because we believed that they’re unnecessary if

you hire the right people. If your employees are fully formed adults who put the

company first, an annual bonus won’t make them work harder or smarter. We also

believed in market-based pay and would tell employees that it was smart to interview

with competitors when they had the chance, in order to get a good sense of the market

rate for their talent. Many HR people dislike it when employees talk to recruiters, but I

always told employees to take the call, ask how much, and send me the number—it’s

valuable information.

In addition, we used equity compensation much differently from the way most

companies do. Instead of larding stock options on top of a competitive salary, we let

employees choose how much (if any) of their compensation would be in the form of

equity. If employees wanted stock options, we reduced their salaries accordingly. We

believed that they were sophisticated enough to understand the trade-offs, judge their

personal tolerance for risk, and decide what was best for them and their families. We

distributed options every month, at a slight discount from the market price. We had no

vesting period—the options could be cashed in immediately. Most tech companies have a

four-year vesting schedule and try to use options as “golden handcuffs” to aid retention,

but we never thought that made sense. If you see a better opportunity elsewhere, you

should be allowed to take what you’ve earned and leave. If you no longer want to work

with us, we don’t want to hold you hostage.

We continually told managers that building a great team was their most important task.

We didn’t measure them on whether they were excellent coaches or mentors or got their

paperwork done on time. Great teams accomplish great work, and recruiting the right

team was the top priority.

Leaders Own the Job of Creating the Company Culture

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After I left Netflix and began consulting, I visited a hot start-up in San Francisco. It had 60

employees in an open loft-style office with a foosball table, two pool tables, and a

kitchen, where a chef cooked lunch for the entire staff. As the CEO showed me around, he

talked about creating a fun atmosphere. At one point I asked him what the most

important value for his company was. He replied, “Efficiency.”

“OK,” I said. “Imagine that I work here, and it’s 2:58 PM. I’m playing an intense game of

pool, and I’m winning. I estimate that I can finish the game in five minutes. We have a

meeting at 3:00. Should I stay and win the game or cut it short for the meeting?”

“You should finish the game,” he insisted. I wasn’t surprised; like many tech start-ups,

this was a casual place, where employees wore hoodies and brought pets to work, and

that kind of casualness often extends to punctuality. “Wait a second,” I said. “You told

me that efficiency is your most important cultural value. It’s not efficient to delay a

meeting and keep coworkers waiting because of a pool game. Isn’t there a mismatch

between the values you’re talking up and the behaviors you’re modeling and

encouraging?”

When I advise leaders about molding a corporate culture, I tend to see three issues that

need attention. This type of mismatch is one. It’s a particular problem at start-ups, where

there’s a premium on casualness that can run counter to the high-performance ethos

leaders want to create. I often sit in on company meetings to get a sense of how people

operate. I frequently see CEOs who are clearly winging it. They lack a real agenda.

They’re working from slides that were obviously put together an hour before or were

recycled from the previous round of VC meetings. Workers notice these things, and if

they see a leader who’s not fully prepared and who relies on charm, IQ, and

improvisation, it affects how they perform, too. It’s a waste of time to articulate ideas

about values and culture if you don’t model and reward behavior that aligns with those

goals.

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The second issue has to do with making sure employees understand the levers that drive

the business. 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.

The third issue is something I call the split personality start-up. At tech companies this

usually manifests itself as a schism between the engineers and the sales team, but it can

take other forms. At Netflix, for instance, I sometimes had to remind people that there

were big differences between the salaried professional staff at headquarters and the

hourly workers in the call centers. At one point our finance team wanted to shift the

whole company to direct-deposit paychecks, and I had to point out that some of our

hourly workers didn’t have bank accounts. That’s a small example, but it speaks to a

larger point: As leaders build a company culture, they need to be aware of subcultures

that might require different management.

Good Talent Managers Think Like Businesspeople and Innovators First, and Like HR People Last

Throughout most of my career I’ve belonged

to professional associations of human

resources executives. Although I like the

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people in these groups 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). At a recent conference I met someone from a company that had

appointed a “chief happiness officer”—a concept that makes me slightly sick.

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.

Instead of cheerleading, people in my profession should think of themselves as

businesspeople. What’s good for the company? How do we communicate that to

employees? How can we help every worker understand what we mean by high

performance?

Here’s a simple test: If your company has a performance bonus plan, go up to a random

employee and ask, “Do you know specifically what you should be doing right now to

increase your bonus?” If he or she can’t answer, the HR team isn’t making things as clear

as they need to be.

At Netflix I worked with colleagues who were changing the way people consume filmed

entertainment, which is an incredibly innovative pursuit—yet when I started there, the

expectation was that I would default to mimicking other companies’ best practices (many

of them antiquated), which is how almost everyone seems to approach HR. I rejected

those constraints. There’s no reason the HR team can’t be innovative too.

A version of this article appeared in the January–February 2014 issue of Harvard Business Review.

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Patty McCord is the founder of Patty McCord Consulting and the former chief talent officer at Netflix.

Related Topics: A S S E S S I N G P E R F O R M A N C E | TA L E N T M A N A G E M E N T | O R G A N I Z AT I O N A L C U LT U R E

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