Q Case Discussion 15: Netflix Netflix, headquartered in Los Gatos, California, is an America media-services provider focusing on its subscription-based streaming media service which offers online streaming of a library of films and television programs, including some that Netflix produces in-house. The company was co-founded in 1997 by Reed Hastings, Netflix’s current CEO. As of October 2018, the company has about 5400 employees and over 58 million subscribers in the U.S. (with 137 million worldwide … everywhere except mainland China, Syria, North Korea, and Crimea). Netflix is known for its high performance standards and radically (some might say brutally) transparent company culture in which employees are encouraged to give brutally honest performance feedback to each other online, in person, and over meals. Some teams have dinners or lunches in which coworkers take turns bluntly criticizing each other while sitting at the table in “real-time 360” performance evaluation settings. Workers use a software called “360” for annual reviews, which allows them to review any employee in the company (including the CEO), and some executives choose to disclose their 360 evaluations to their teams. Netflix applies what it calls the “keeper test”, described as follows on its webpage: “We focus on managers' judgment through the ‘keeper test’ for each of their people: If one of the members of the team was thinking of leaving for another firm, would the manager try hard to keep them from leaving?” According to Netflix, anyone who fails the keeper test is “promptly and respectfully given a generous severance package so we can find someone for that position that makes us an even better dream team.” CEO Reed Hastings, who is described “unencumbered by emotion”, even used the keeper test to fire his product chief and friend who had been with Netflix for 18 years. Netflix managers report feeling pressured to use the keeper test fire workers so as not to look “soft”, which would put themselves at risk for falling victim to the keeper test. 1. If you had to design a compensation system that would work well at Netflix, given its company culture, what would that system look like? 2. According to an article in The Wall Street Journal in October 2018, many attendees at a meeting of Netflix public-relations executives in the spring of 2018 said they feared losing their jobs every day they came to work. The same article reported that in 2017, Netflix's involuntary departure rate was 8% rate, which exceeds the 6% U.S. average. But Netflix reports that it had an 11% annual turnover rate, which is lower than the 13% average for tech companies. Netflix also disagreed with characterizations of its culture as harsh and mentioned that it ranked second on Comparably’s “Happiest Employees 2018” list. How can the preceding facts all be mutually consistent and correct? Explain. 3. The degree of discretion or autonomy that workers have over the decisions they make has implications for the design of the compensation system, and vice versa (see Chapter 9). “We believe strongly in maintaining a high performance culture and giving people the freedom to do their best work. Fewer controls and greater accountability enable our employees to thrive, making smarter, more creative decisions, which means even better entertainment for our members.” © Jed DeVaro 2020 How would you design a compensation system for Netflix that fits both with its performance culture (as you explained in Question #1) and with its approach to delegating workers decision-making authority (as described by Netflix in the preceding quote)? Explain how each of the following 3 components are interrelated: 1) the compensation system, 2) the Netflix performance culture of radical transparency, 3) the extent to which workers are granted decision-making authority at Netflix. 4. What are the advantages and disadvantages of 360-degree performance evaluation in general (in which everyone at the company can evaluate everyone else), and how do these advantages and disadvantages differ (if at all) if the particularly extreme form of 360-degree evaluations that Netflix adopts is used? 5. Is there anything specific to Netflix’s products and services that makes its approach to performance evaluation (and delegation of decision-making authority to workers) particularly appropriate (or inappropriate)? In what other industries, or for what other products or services, would Neflix’s approach worker particularly well, or poorly? 6. If you were a high-level manager at Netflix, are there any changes you’d recommend in the area of compensation design, work culture, or delegation of authority? With your job on the line because of the “keeper test”, explain how you would convince CEO Reed Hastings that these proposed changes (that obviously he hasn’t already thought of and implemented) would improve Netflix’s bottom line. Note: This case is based on the following two articles about Netflix from Business Insider: “Netflix CEO Reed Hastings Reportedly Routinely Performs a ‘Keeper Test’ – and Used it to Fire His Product Chief and Longtime Friend After 18 Years” (by Travis Clark, October 25, 2018), and “At Some Netflix Team Dinners, Employees Go Around the Table and Criticize People’s Work to Their Face.” (by Myelle Lansat, October 26, 2018).