Corporate Culture

 Many banks have corporate cultures that are tangible and truly guide the company’s operations and decision making at all levels.

Netflix has a similar commitment to corporate culture, but the way it inculcates the culture and maintains it is a bit different.  As they say, “every year we try to refine our culture further as we learn more.”  As part of their commitment to doing so, every year management produces a slide deck that presents their current best thinking about maximizing their likelihood of continued success through culture, and all associates get it as a “refresher.”  I recently had the opportunity to read it and was duly impressed.  The summary of the desired culture resonated with me the most:

“[We] need a culture that avoids [the] rigidity, politics, mediocrity, and complacency that infects most organizations as they grow.”

Don’t we all?

So I explored further, and would like to share some of these underpinnings with you, since they reflect an organizational approach that I intensely support.  A word of caution before you start reading:  We both know that a beautiful culture book or a PowerPoint deck does not make a culture work.  Execution is everything!

As Netflix says, “The REAL company values, as opposed to the nice-sounding values, are shown by who gets rewarded, promoted or let go.”  In other words, the real values are the behaviors and skills we reward in our fellow associates.  Specifically, Netflix looks for the following:

• Judgment
• Communication
• Impact
• Curiosity
• Innovation
• Courage
• Passion
• Honesty
• Selflessness

Each value is accompanied by several bullets explaining what they mean.  For example, Judgment means not just wise decisions but looking for root causes, thinking strategically, willingness to articulate what you are NOT going to be and separating effectively what must be done well now and what can be improved later.

Another great example, under Courage, is questioning actions inconsistent with the values; this creates shared responsibility for value consistency, a very effective technique.

Netflix first defined its ultimate goal as growth in revenue, profits and reputation.  Again, Motherhood and Apple Pie, some might say.  They also chose to inculcate a culture that supports several conflicting goals.  For example:

• Effective teamwork of high-performance people.  They realize this creates, by definition, a dynamic tension, since most high performers are also highly opinionated.
• Rapid innovation and excellent execution.  Need I elaborate on the tension between creativity and discipline?

I’m sure Netflix’s management is aware of these inherent conflicts, but realizes that they are important to build a healthy and thriving organization.

The company’s cultural aspects wouldn’t surprise you.  What might, however, is the path they have chosen to achieving these cultural tenets, which ultimately should lead to sustainable growth in revenue, profits and reputation.

For example, the culture is particularly employee-oriented.  It starts from acknowledging that any person’s economic security is based upon their skills and reputation.  The company is then committed to let its associates manage their own career path and not rely on the corporation.  They make it an individual responsibility, like retirement planning.  They have abandoned formalized development programs because they believe that those rarely work.  Instead, says the culture, high performers are generally self-improving so long as they have outstanding colleagues and big challenges.  Ergo, they develop people by giving them the opportunity to develop themselves by surrounding them with outstanding people and giving them big challenges to work on.

Another example of the unusual approach to associates is the pay philosophy.  Netflix culture says:  “If a manager would promote an employee to keep them if the employee were thinking of leaving, why not promote them now and not wait?”  They require the next job to be big enough for the employee, and that they be superstars in their current role.  What is a superstar? Someone who could get to the next level job here (or at an outside peer firm) if applying from outside and we knew their talents well.

Netflix is supportive if a talented person chooses to leave when they can’t offer them appropriate growth opportunities.  They analogize it to baseball, where only the very talented players move to the majors.  They realize there is an element of luck in what positions open up and what the competition is; and yet, great teams keep their best talent.

Another unusual Netflix practice is their compensation philosophy.  They believe that paying top of market is core to high performance culture.  In their framework, “[o]ne outstanding employee gets more done and costs less than two adequate employees… We endeavor to have only outstanding employees.”

The company’s pay practices are based upon this philosophy.  They ask three questions:

• What could the person get elsewhere?
• What would we pay for their replacement?
• What would we pay to keep this person if they had a bigger offer elsewhere?

Their goal is to keep each employee at the top of the market for their specific talents and skills.  Compensation is unrelated to titles as well.  Annual compensation reviews are market-based, not position-based.  Essentially the company rehires each employee each year for purposes of compensation.  At annual compensation review the manager has to answer the three questions above for each of their employees.  There is no centrally administered raise pool each year.  All is determined by the market and the skill set of each individual, which means that sometimes a person’s compensation will rise rapidly, while for others it will decline if their market value has moved down.

Another potentially controversial element is the separation of compensation from Netflix’s success, much like how sports teams with losing records still pay their stars.

Netflix is specific about what they consider bad compensation ideas:

• Manager sets pat at x% of title-linked compensation data
• Manager cares about internal parity instead of external market value (fairness in compensation is being true to the market)
• Manager gives everyone a 3% raise

The Company’s compensation principles embody its overall leadership and people philosophy:

1. Reward performance, not effort.
2. Protect employee freedom.
3. Pay your employees what they deserve (no more, no less)

This program only works if you truly get high performers at every position who produce twice as much as an average producer.  I HAVE seen this work, though, among strong lending teams, and some banks actually practice this in their commercial banking line of business.

In summary, I know, as you do, that Netflix isn’t perfect.  But this article really isn’t about this specific company.  It is about corporate culture that works to achieve financial and strategic goals.  It starts from clear articulation of what matters, but it rises and falls on what’s being done, rewarded, and tolerated day in and day out in your enterprise. You may not agree with Netflix’s values, but it’s still useful to learn from their execution of them.

PS Netflix was written off several times since its inception by skeptics.  I believe its corporate culture facilitated its resurgence and long-term survival and prosperity.  I believe strong corporate culture is a necessary (but not sufficient) condition to corporate longevity and renewal.