After reading about the way Tony Hsieh developed the culture at Zappos, I wanted to delve further into the subject of culture building. Netflix is well known for its culture and in this book, Reed Hastings and Erin Meyer provide a ten-step framework for building a culture of freedom and responsibility within a company.
Step 1. First Build-Up Talent Density: A Great Workplace is Stunning Colleagues
For context, Netflix launched in May 1998 as the first online DVD rental store. After a tough period in 2001, they had to make layoffs. This experience taught them that that talent density (talent per person) is crucial to performance and culture, because performance is contagious. Even one underperformer on a rockstar team can bring down the overall contribution of a team. Leaders should look to hire stunning colleagues, who are able to accomplish significant amounts of work.
Step 2. Increase Candor: Say What You Really Think (with Positive Intent)
Once you have a team of high performers, the next step in optimizing performance is to have frequent and candid feedback. This can exponentially magnify the speed and effectiveness of a team. To set the stage for candor, build feedback into regular meetings. Coach employees to give and receive feedback effectively using the 4A guidelines:
Leaders should set the stage by soliciting feedback frequently and making sure to get rid of jerks as the culture of candor is being instilled.
Step 3A. Now Begin Removing Controls: Remove Vacation Policy
The value of creative work should not be measured by time. To this extent, seek to remove vacation policy. In doing so, managers must set the context – copious discussion should take place setting the scene for how each team and employee should approach vacation.
Step 3B. Continue Removing Controls: Remove Travel and Expense Approvals
Travel & expense policies are the next to go. Set context as these are being removed. Some controls will be needed to prevent abuse, so finance will need to audit a portion of receipts annually. If people abuse the system, fire them and speak about it openly.
Some expenses may increase with freedom, but the costs from overspending are not nearly as high as the gains that freedom provides. The freedom also allows for quick decisions to be made, which can provide the company with a competitive advantage.
Netflix’s Expense Motto: Act in Netflix’s Best Interest.
Step 4. Fortify Talent Density: Pay Top of Personal Market
Divide the workforce into creative and operational employees, and pay creative workers top of market. In some cases, this may mean hiring one exceptional individual instead of 10 adequate people. Also, don’t pay performance-based bonuses – put that money directly into salaries instead.
To make sure you are paying top of market, teach people to get to know their own worth. This might even mean that they should speak with recruiters or interview at other companies. Adjust salaries accordingly to always be paying top dollar.
Step 5. Pump Up Candor: Open the Books
To instigate a culture of transparency and candor, it is important for leadership to consider the symbolic messages they are sending. Examples of bad messages include closed offices and locked spaces. On the financial side, open up the books, teach employees to read the P&L, and share strategic information.
When making decisions that affect employee wellbeing (reorgs, layoffs) – open up to the workforce early. This might cause some anxiety, but the trust built will outweigh the disadvantages.
Follow this general guideline for transparency: if the information is about something that happened at work, choose transparency and speak candidly. If it is about someone’s personal life, it is not your place to share.
For leaders – as long as you’ve shown yourself to be competent, talk openly about your own mistakes and encourage others to do the same. This will build trust, goodwill and result in innovation.
Step 6. Now Release More Controls: No Decision-Making Approvals Needed
“Don’t seek to please your boss. Seek to do what is best for the company.”
With high talent density, ownership of critical, big-ticket items should be dispersed across the workforce at all different levels, not allocated according to hierarchical status.
Tell new employees that they have a handful of metaphorical chips that they can make bets with. Some gambles will succeed, others won’t. Performance will be judged on the collective outcome of these bets, not on the results from one instance. To help people make good bets, encourage them to farm for dissent, socialize their ideas, and for big bets – run some tests.
When a bet fails, employees should sunshine it openly by summing up the situation and presenting key learnings.
Step 7. Max Up Talent Density: The Keeper Test
Reed has an interesting take on this. He says that a family is about staying together regardless of performance and that a high talent density work environment is not a family. For a high-performance group, a professional sports team is a better metaphor than family. You want commitment and camaraderie whilst making sure the best player is manning each post.
For managers to be in touch with performance, use the Keeper Test: “Which of my people, if they told me they were leaving for a similar job at another company, would I fight hard to keep?”
For reviews, avoid stack ranking systems as they can create internal competition. If an employee is not performing, do not waste time by putting them on a Performance Improvement Plan (PIP). Give them a generous severance package instead.
To prevent employees from feeling fearful, encourage them to use the Keeper Test prompt with their managers: “How hard would you work to change my mind if I was thinking of leaving?”
Step 8. Max Up Candor: A Circle of Feedback
Performance reviews are not the best mechanism for a candid work environment – feedback usually goes only one way (down) and comes from only one person (the boss). Written 360 reviews are good, but don’t anonymize them or make them numeric. This increases transparency without creating competition. Also, don’t link results to raises / promotions.
Live 360 dinners are the most effective. Use several hours away from the office and give clear instructions. This includes using the 4A guidelines, and using the “Stop, Start, Continue” method. Feedback should be 25% positive and 75% developmental.
Step 9. Eliminate Most Controls: Leading with Context, not Control
In order to lead with context, you need high talent density and your goal needs to be innovation, not error prevention. You also need to be in a loosely coupled system. A loosely coupled organization should resemble a tree, not a pyramid. The boss is at the roots holding up the trunk of senior managers who support the outer branches where decisions are made.
If you have these, instead of telling people what to do, get in lockstep alignment by providing and debating all the context needed for them to make good decisions. When someone does something dumb, don’t blame them. Ask yourself what context you failed to set. When your people are moving the team in the desired direction by using the information they have received from you, to make great decisions – you know you are successfully leading with context.
Step 10. Bring It All To The World
If you are at the envious stage of expanding globally, map out your corporate culture and compare it to the culture of the countries you are expanding into.
In less direct countries, implement more formal feedback mechanisms and put feedback on meeting agendas more frequently, because informal exchanges will happen less often. With more direct cultures, talk about cultural differences openly so that feedback is understood as intended.
Make “Adaptability” the 5th “A” of the candor model – as both sides must work together to understand how candor can be brought to life.