It’s been a while since the stars aligned and I wasn’t reading a book when a very much hyped business book was just coming out. Everything aligned in September when No Rules Rules was released. No Rules Rules is by Reed Hastings (Founder and Co-CEO of Netflix) and Erin Meyer (writer of The Culture Map) – and let me start by saying a lot of people will comment on some of the unorthodox views as being the driver of how much attention this book has gotten. While I agree that probably helped popularize the book I do want to point out I actually found the reasoning behind the “unorthodox” culture at Netflix to be a relief rather than just clickbait. A company had finally figured out how to explain a bunch of things I’ve had a hunch about for years but could never really explain.
Honing in on one idea that caught my attention there was this interesting piece of Reed’s philosophy on pay at Netflix – no bonuses. Knowing Netflix is a company of high-achievers this “no bonus” ideology may be baffling especially compared to counterparts such as Google headquartered also in Silicon Valley. So what gives?
To really understand how not having bonuses came about at Netflix we have to back up a bit and understand a few other unique characteristics of Netflix Culture.
In the book, Reed references a famous study that happened in a basement in Santa Monica (in the way that all deeply profound things do, a very average setting). In short, nine-trainee programmers were given a prompt of coding and debugging tasks to complete over the course of 2 hours. At the end the researchers learned that the most skilled programmer far outperformed the worst of the nine programmers specifically 20 times faster at coding, 25 times faster at debugging, and 10 times faster at program execution than the programmer with the lowest marks. Isn’t that crazy? This study supports a principle called the “rock-star” principle in programming which Reed then applied at Netflix recognizing the parallels between the creative skill sets in his workforce and programmers.
Okay, so why does this principle matter? This helped convince Netflix it was better to spend what budget the company had on hiring 1 really good person (a rockstar) for any creative roles even if it meant there would be no others in the department because 4 other employees could not be hired. That one person would perform at a high level, and to keep them at Netflix paying them the salary of those other 4 people in theory was worth it.
That’s the thing – if you are only hiring the best, paying top dollar and maintaining a workforce where everyone is a high performer in their field then why do you need bonuses? This is a question Reed also found himself asking at Netflix. Top performers are top performers for a reason – especially in the creative space. Especially in an environment where everyone is a top performer. There’s a study from 2017 study from the Kellogg School of Management at Northwestern that found the positive spillover to be very much a thing in workplaces – simply sitting within a 25 ft radius of a coworker who is a higher performer will improve your own performance by about 15%.
Okay so what’s the catch? It is important to note that Reed acknowledges this concept really applies best to creative roles which are very much at the center of what Netflix does. He points out many operational roles would not have as drastic a difference between a bottom and top performer so it may not make sense to apply there. Also – addressing the elephant in the room this no bonus focus probably would not work well for some salespeople (but it would be an interesting study).
Bonuses have bothered me because too often I have seen them destroy workplaces – specifically by motivating the wrong behaviors. Rather than doing a good job always people pour themselves into certain things regardless of if they are right – because that person is chasing a bonus. That is because bonuses are often decided upon and quite a bit of time passes in which that bonus set 10 months ago may no longer make a ton of sense (Reed touches on this same realization in the book).
So if you really do pay top performers top dollar giving them stability in their current role to be just that a “top performer” is that more motivating than a bonus target? Is this a win-win situation for talent and employers?