Editor’s Note: This story contains one of our Best Business Lessons of 2014. Check out the full list here.

advertisement

advertisement

Back in 1997, before it was streaming a billion hours of Internet television a month, Netflix was a startup. They had a fairly standard vacation policy: 10 vacation days, 10 holidays, and a handful of sick days per person. Rather than formally tracking these days, they opted for an honor system, with employees tracking their own off days and informing their managers when appropriate. Then, in 2002, Netflix went public. “(O)ur auditors freaked,” former Netflix chief talent officer Patty McCord writes in HBR. They thought that Sarbanes–Oxley, the accounting reform legislation, required that time off was carefully accounted for. “Many HR people dislike it when employees talk to recruiters,” McCord says, “but I always told employees to take the call, ask how much, and send me the number–it’s valuable information.” Netflix thought about putting an official system into practice–until founder Reed Hastings came up with an intriguing question: “Are companies required to give time off? If not, can’t we just handle it informally and skip the accounting rigmarole?” McCord’s realization: no California law said you had to institute vacation time.

advertisement

So instead of shifting to a formal system, they went in the opposite direction, McCord says. “Salaried employees were told to take whatever time they felt was appropriate. Bosses and employees were asked to work it out with one another.” Doing the common sense thing and treating people like adults are at the heart of Netflix’s breakthrough HR policy. McCord believes that most companies fall into a trap of having 97% of their employees doing great work and not needing HR to hold their hands, while 3% of employees absorb HR’s time, money, and energy. Netflix’s approach: they simply don’t hire those people. While hourly workers have a more structured system, salaried employees are merely guided by HR on how to take time off. For example, accounts are asked not to be out at the beginning or end of the quarter, since those are the busy periods. If employees have to be away for more than 30 days, they would talk it over with HR. And senior staff are encouraged to take vacations since they serve as role models. Netflix implements similar systems when it comes to their formal travel and expense policies: employees are encouraged to act in Netflix’s best interests. This means they shouldn’t eat at an expensive restaurant with a colleague, but it might make sense in sales. And they don’t need to go through travel agents for flights, so that’s another expense gone. “(O)verall we found that expense accounts are another area where if you create a clear expectation of responsible behavior, most employees will comply,” McCord says.

advertisement

Perhaps most radical is their approach toward compensation. For one, Netflix doesn’t distribute performance-based bonuses–they’re unnecessary if you hire the right people. They also emphasize market-based pay. To get an understanding of the rate for their talent, Netflix interviews competitors when given the chance. “Many HR people dislike it when employees talk to recruiters,” McCord says, “but I always told employees to take the call, ask how much, and send me the number–it’s valuable information.” Hat tip: HBR