Taking Money Off the Table: What We Can Learn From Netflix

Photo by istockphoto.com
Photo by istockphoto.com

In my  last few posts about Taking Money Off The Table survey (Part 1 and Part 2), we’ve been looking at the particular pay philosophy which holds that the best way to maximize employee performance and productivity is to pay them a high enough base wage/salary to “take the issue of money off the table” – as opposed to using variable pay programs to influence their behaviors and results.

How much more would you need to take the issue of money off the table? Through the results of a survey designed to discover the answer to this question, we discovered that the answer, on average across everyone who responded, is about 30 percent, but that the answer also can vary dramatically from person to person, for a host of different reasons.

This question goes to the heart of the membership model of compensation – which also happens to be the approach advocated by Drive’s Dan Pink as an alternative to incentives and other “contingent” rewards. And so I’d like to complete this series by considering the lessons of our survey in that light.

The Netflix rewards approach

In doing research for a client over the past few weeks, I had opportunity to learn more about the pay policies and practices of Netflix (a partial list of the articles I read is highlighted at the bottom of this post, for readers’ reference). While the company’s current crisis in the aftermath of a price increase and bungled attempt to spin-off its DVD business is dominating headlines at the moment, Netflix has garnered attention and praise for its talent management programs – not the least of which is its unique rewards approach.

It became clear to me, in looking specifically at its rewards approach, that Netflix has something akin to the membership model in place. From its successful experience (at least a successful one as far as I am aware, with no apparent link to its current troubles), I believe we can draw out some helpful lessons about what it takes to make this particular approach work effectively.

Netflix, according to HR staff quoted in the articles listed below, positions its salaries at the 90th percentile of the market. Interestingly, my survey finds that (on average) a 30 percent premium is required to remove money as an issue – a figure that I believe may fall somewhere between the 75th and 90th percentiles of a typical survey population.

In the membership model, employees are motivated by the chance to hold membership in an exclusive workplace. Employees who meet the membership criteria (typically a high performance level) are rewarded with premium base salary levels. Attention is not paid to differentiating rewards by individual performance; rather, all members are considered to have proven themselves to be top performers.

What you need to make this model succeed

As these statements suggest, successful execution of the membership model has some critical requirements. Netflix has a distinct set of HR practices which – I believe – showcase the criteria that are absolutely essential for success in this model of compensation:

  • Premium pay. As noted above, Netflix salaries are targeted at the 90th percentile and annual adjustment decisions focus on keep employees at a highly competitive level of pay.
  • Relentless commitment to (their own style of) performance management and showing mediocre employees the door. Netflix’s annual “keep test” (a process that strikes me as a kindler, gentler version of the infamous GE “rank and yank”) identifies employees who are not meeting membership criteria and the organization wastes no time in moving them out. The number of people who fail the “keep test” each year is typically in the double digits, among the Netflix population of about 500 salaried employees.
  • Critical competencies in recruiting and in engineering amicable departures. Netflix relies on an in-house recruiting function to ensure it is bringing in the right employees. Netflix has also become expert at executing “no fault divorces.”
  • Careful avoidance of “incentives to stay.” Netflix foregoes any reward programs or elements which might interfere with the need to move an employee out quickly. These include vesting schedules for its stock options (they vest immediately) and any other retention or “golden parachute” type of plan.

A lot of possibilities for organizations

So any organization pondering the membership model must first ask itself whether it is prepared to execute on the requirements and criteria described above. Without a relentless commitment to assessing employee performance, the absolute discipline to usher non-performing employees out the door without hesitation and the competencies, processes and leadership support necessary to execute speedy “no fault divorces,” all you will accomplish is to raise the lion’s share of your organization’s fixed business expenses by 30 percent or more. And with no ability to ensure any return on that significant additional investment.

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Not likely a career enhancing achievement, my friends.

It’s been interesting to learn more about what it takes to move the issue of money off the table for employees and to explore the possibilities of the membership model of pay – which has this question as its centerpiece – by drawing lessons from the Netflix experience. I do think this model of pay offers a lot of possibility to organizations willing to step up to the plate and meet the criteria for success, particularly those focused on R&D and for whom innovation (and the risk-taking that accompanies it) is a bedrock requirement.

I also think that there are a lot of HR people out there looking at this model and the simplistic (but undeniably attractive) notion of just paying people enough to take money off the table, and thinking it gets them (and their cadre of managers) out of the hard work of defining and assessing employee performance when, in fact, it ultimately raises the stakes for performance management.

Your takeaway?

Sources:

  1. Grossman, Robert J. Tough Love at Netflix. HR Magazine (Apr 2010): 36-41
  2. Fuoco-Karasinski. Netflix Bucks Traditional Total Rewards, WorldatWork workspan (8/07)
  3. Goldfarb, Jeffrey, & Holding, Reynolds. Incentives Play Role in Success of Netflix. The New York Times (May 8, 2011

This was originally published on Ann Bares’ Compensation Force blog.

Ann Bares is the Managing Partner of Altura Consulting Group. She has over 20 years of experience consulting in compensation and performance management and has worked with a variety of organizations in auditing, designing and implementing executive compensation plans, base salary structures, variable and incentive compensation programs, sales compensation programs, and performance management systems.

Her clients have included public and privately held businesses, both for-profit and not-for-profit organizations, early stage entrepreneurial organizations and larger established companies. Ann also teaches at the University of Minnesota and Concordia University.

Contact her at abares@alturaconsultinggroup.com.

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1 Comment on “Taking Money Off the Table: What We Can Learn From Netflix

  1. Comprehensive post, Ann. The rules of social business demand that companies connect and listen to their own employees. With the right automated tools, they can collect and analyze data on sales performance to figure out what motivates their employees. Successful businesses use this information to create more effective incentive compensation plans.

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