How Netflix pays its employees

Last updated on: August 30, 2010 at 5:00 am by Gene Veith

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How Netflix pays its employees 2010-08-30T05:00:19-04:00 Gene Veith

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Have you heard about the compensation system at Netflix?:

The online movie service, which today launched an iPhone app for subscribers to watch TV and movies on the go, has no vacation policy at all.

That doesn’t mean Netflix doesn’t allow vacation. Rather, operating under the idea that its engineers and professionals should be treated as adults, Netflix allows salaried employees to take as much vacation as they’d like.

In story in Britain’s Daily Telegraph last week, Dan Pink, author of the excellent leadership book Drive, shares the scoop on Netflix’s flexible vacation rules. If they don’t get their work done, or simply turn in mediocre performance, the company is candid about their fate: “adequate performance,” reads a slide presentation on the company’s web site, “gets a generous severance package.”

That slide deck made its way around the Internet last summer, as out-of-work techies salivated over Netflix’s generous and flexible benefits and pay. But while most of the attention at the time–it was August, after all–centered on the company’s hands-off approach to vacation, Netflix’s way of compensating its employees is just as radical, if not more so.

The Los Gatos, Calif.-based company takes a market-based approach to pay, believing that to get the best employees, it must pay above-market rates. Rather than setting a new staffer’s salary against what his internal peers make–an approach many companies take–Netflix carefully studies what that person could earn at other companies in combined salary and bonus, and then sets their pay a notch higher. Then, end of the year cash and stock incentives are not paid.

While that’s a highly unusual approach, what’s really radical is what comes next. Employees get to choose how much of their total pay comes in cash versus equity. Risk-averse employees can take the safe route, requesting the entire sum in cash. Those who want to tie their fortunes to Netflix’s can take half of it in equity, or other combinations of cash and stock. “If you have a high performance team, with fully formed adults,” asked Netflix’s Chief Talent Officer Patty McCord when I interviewed her recently, “why are we being paternalistic about compensation?”

What Netflix is doing with both its vacation and pay policies is to make its in-demand engineers feel like rational, thinking adults. The company trusts them to make decisions, and to act in the best interests of both their company and themselves.

But by not paying an annual bonus, it’s also fostering the sort of environment that doesn’t encourage outsized risk-taking by employees doing whatever they can to meet their annual goals. That hardly means the company doesn’t wave any sticks: Netflix’s zero tolerance for mediocrity means employees are incentivized to keep their jobs at a company that pays them above-market salaries and treats them like the professionals they are.

via PostLeadership: Netflix vacation policy is only the tip of a radical compensation iceberg – Jena McGregor.

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