Patty McCord spent 14 years as Netflix’s chief talent officer, helping lead the company through its early days to its current streaming dominance, and building a hugely influential corporate culture. That influence is epitomized by the company’s “culture doc,” a PowerPoint presentation that Facebook COO Sheryl Sandberg says may be “the most important document to ever come out of the Valley.”
The culture doc, created by McCord, CEO Reed Hastings, and others at the company, is still evolving and is used by the company to this day. It has also been the starting point for many other companies, some of which have created their own, similar documents.
The concepts laid out in the presentation have spread beyond Silicon Valley. In a recent article in the Harvard Business Review, McCord laid out some of the most important lessons she’s learned in transforming culture, and what too many traditional HR leaders get wrong.
Here are the key points.
Hiring only “A” players is “a perk better than foosball or free sushi.”
When people are working alongside other excellent people, they’re fundamentally happier and more productive. Ask them to manage or work on a project with people who are simply adequate or worse, and they spend far too much time fixing their mistakes.
McCord illustrates this point with a story of an engineer in the company’s early days. Netflix had intended an IPO, but as the tech bubble burst, it had to cut people instead. Unexpectedly, DVD players got hot, as did the company’s DVD-by-mail business.
One engineer who had been managing three people before the layoffs was now a one-man team working late into the night. When McCord let him know that the company would be staffing up soon, he told her, “There’s no rush — I’m happier now.”
It was better to work by himself than with people who were subpar.
Logic and common sense work better than formal policies.
According to McCord, they work a great deal better, and end up being cheaper. It starts with hiring people who can put the company first.
“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,” she says.
And it means only hiring and keeping people who can act like adults.
Adult-like behaviour means talking openly about issues with bosses, colleagues, and subordinates. It means recognising that even in companies with reams of HR policies, those policies are frequently skirted as managers and their reports work out what makes sense on a case-by-case basis.
The most prominent example is the company’s vacation and expense policies, where the guiding rules are to take what vacation you feel you need and “act in [the company’s] best interests.”
Get rid of formal reviews.
The issue with formal reviews as practiced by most companies is that they’re “too ritualistic and too infrequent,” McCord argues.
People aren’t candid enough, issues that need to be dealt with sooner rather than later get put off, and negative feedback ends up making people feel resentful. The better option is to have frequent feedback as it’s needed.
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.
Regular and informal feedback works far better than rigid and scheduled reviews, she says.
Performance improvement plans (PIPs) never work.
“I detest PIPs,” McCord writes. “I think they’re fundamentally dishonest: They never accomplish what their name implies.”
When underperforming employees get put on notice, they get objectives they can’t meet because they lack the skills. Time gets sucked up by meetings where their manager is miserable because they have to outline somebody’s shortcomings, and the employee is miserable because they’re being criticised.
Neither party sleeps before their weekly meeting, the person ends up getting fired in the end, the whole team hears about it, and nobody benefits at the end of the day.
These plans are usually put in place due to fear of litigation, to have some documentation in case of a lawsuit. McCord believes that telling the truth — that somebody’s job simply doesn’t exist or that their skills aren’t right anymore — and giving a generous severance package reduces or eliminates the likelihood of a lawsuit and wastes less time.
“In my experience, people can handle anything as long as they’re told the truth,” McCord writes.
Rethink compensation policies to recruit people who already have great jobs.
Netflix’s shift to streaming video was dramatic and quick, and required a massive amount of storage and expertise to reliably let people access movies. That meant headhunting cloud services people from elite companies like Amazon, eBay, Google, and Facebook.
According to McCord, a major factor in prying them away was the company’s compensation philosophy. It didn’t pay performance bonuses, for example.
“If your employees are fully formed adults who put the company first, an annual bonus won’t make them work harder or smarter,” McCord writes.
It also encouraged talent to talk to recruiters and interview with competitors to get a sense of the market rate for their talent.
Equity was also vastly different. Employees could pick how much of their compensation would be in equity versus salary.
“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,” she says.
Additionally, there were no “golden handcuffs,” the sort of four-year vesting schedule for options often used to aid retention.
“We never thought that made sense,” McCord says. “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.”
Make sure people know what “high performance” means.
Too often performance is poorly defined and not based on real business goals, and people don’t know how to work toward it.
“Here’s a simple test,” McCord writes. “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.”
The best HR people don’t behave like cheerleaders, throwing parties and giving out T-shirts. They know what’s good for the business and help people work toward it. Parties can’t improve morale if the company isn’t doing well.