This article is an excerpt from the Shortform book guide to "No Rules Rules" by Reed Hastings. Shortform has the world's best summaries and analyses of books you should be reading.
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Are you worried that another company will poach your best employees? How can you convince employees to stay with your company?
Netflix CEO Reed Hastings wrote in his book No Rules Rules that there are three ways to prevent employee poaching: paying top-of-market salaries, eliminating performance-based bonuses, and giving raises that reflect market value. Some of these methods may be difficult but it’s important to remember that good employees are investments, not tools.
Here’s an overview of each of the three methods.
Prevent Poaching
Once Hastings cultivated a high-performing workforce at Netflix, his new challenge was how to retain it— having a pool of stellar performers meant that other companies always threatened to poach Netflix’s employees. Hastings thus implemented three measures to prevent employee poaching.
1) Pay Top-of-Market Salaries
The first safeguard from poaching that Hastings implemented was to pay more than any other company offered—even if it was more than the employee asked for. By contrast, most companies count on job candidates to undervalue themselves, which allows companies to pay people below their value. However, as employees’ skills grow and they become more valuable, it’s often inevitable that they’ll get job offers with higher salaries. Even if workers love their jobs, research shows that most people will change jobs for more money. As a result, this model ultimately decreases an organization’s concentration of talent by creating an environment that encourages employees to leave for better-paying jobs.
| Other Perspectives on Determining Salaries While Hastings believes in paying top-of-market rates to retain staff, Ray Dalio of Bridgewater Associates thinks you should just pay “north of fair.” In Principles, Dalio recommends paying employees just enough so that they don’t have to worry about money and can focus on their work, but not so much that they’ll become complacent—they should still be motivated to work hard and earn more. “Just enough” may be relative, but Gravity Payments CEO Dan Price seems to have found the magic number for his employees: He cut his own salary so that he could afford to raise the minimum wage at his company to $70,000 a year, which was enough to allow employees to quit working multiple jobs and better take care of their families. Since raising Gravity Payments raised their minimum wage, the company’s revenue grew and more employees were able to pay off debts, buy homes, and start families. |
Paying Top-of-Market Is Difficult, but It’s Worth the Investment
To pay top-of-market salaries, Hastings says that managers at Netflix must know their employees’ market values. Additionally, Netflix relies on employees to know their value. Hastings and the rest of the executive staff even encourage their workers to take headhunters’ calls and interview for jobs to find out what their skills are worth. Employees are then instructed to share the information with their managers.
| What to Do When You’re Blindsided by a Resignation Few companies encourage the same level of transparency as Netflix does when it comes to employees’ other job prospects, so an employee’s resignation may come as a surprise. To deal with unexpected resignations, experts give the following tips: Don’t take it personally. Do your best to manage your emotions, then have a conversation with the employee about their reasons for leaving. While you often won’t be able to change their minds, the discussion might reveal information and options that weren’t available before—for example, you may discover that they’re resigning for personal reasons and that a flexible schedule or an extended leave will enable them to stay. Invite them back after a year. Experts say that immediately presenting a counter-offer is counter-productive because it’s difficult to trust someone who has already decided to leave. Instead of convincing them to stay, maintain a relationship with them and consider recruiting them again in a year. Communicate with other employees. Use it as an opportunity to find out if anyone else is interested in learning and taking over the resigning employee’s responsibilities, and to discuss career paths. If other team members will have an increased workload, assure them that it’s only temporary and that you’ll find a replacement as soon as possible. Wish the resigning employee well. Have a party to acknowledge the person’s contributions and to send a message to your team that they’re valued. |
Encouraging Employees to Window-Shop Promotes Transparency
It may sound risky to encourage employees to window-shop for other jobs, but fostering transparency gives Netflix an opportunity to keep its workers. Meyers writes that if managers discourage employees from talking with recruiters, employees might simply feel that they have to sneak around. Then, if an employee receives an enticing offer, she’s more likely to accept it before telling her manager that she’s leaving. By contrast, at Netflix, the employee can feel comfortable coming to her manager with another job offer, which gives the manager an opportunity to raise the employee’s salary and fight to keep her.
| How to Make Employees Stay When You Can’t Afford Top-of-Market Salaries Netflix pays top dollar so that employees won’t be lured by other companies and accept enticing offers and to ensure that it can offer raises to poached employees—but what if you can’t afford to give your star performers a big raise? Experts say that you can retain high-performing employees by: -Communicating how their work makes a difference in the company to make them feel like they’re making an impact -Providing career development support through training and mentoring -Showing your appreciation for your employees and celebrating their accomplishments -Offering other benefits aside from cash, such as better health and dental insurance -Respecting that they have a life outside of work—for example, allowing more flexibility for new parents |
2) Eliminate Performance-Based Bonuses
Hastings writes that the second safeguard from poaching that Netflix implemented was to reject bonuses and instead put that money into larger base salaries. The move paid off, as Hastings discovered that job candidates prefer guaranteed money over the possibility of earning bonuses.
Many big companies pay employees a salary and incentivize workers to achieve more by offering annual bonuses for reaching predetermined goals. However, Hastings argues that the bonus system assumes that managers can accurately predict which achievements will be most valuable to the company in the year ahead—but those metrics may change.
- For example, in one quarter, your company might be focused on launching a new product, but in another quarter, your company might find that increasing the revenue stream from an old, tried-and-tested product is more crucial.
Creating a bonus system doesn’t allow for the flexibility to chase evolving goals—rather, it incentivizes employees to pursue potentially irrelevant goals to earn their bonuses. (Shortform note: While Netflix doesn’t offer incentives to employees, it now offers bonuses to directors and actors as a means to attract the biggest names in the entertainment industry.)
Additionally, high-performing employees like the ones that fill Netflix’s offices are internally motivated to work hard, and dangling a bonus in front of them doesn’t change that. In reality, the allure of the bonus makes employees constantly aware of whether they’re on track to reach their goals, and that concern actually crowds workers’ minds and inhibits their creativity—a key component of most of the jobs at Netflix.
(Shortform note: Hastings says that high performers are more driven by intrinsic motivation rather than extrinsic rewards like bonuses. If you’re looking to improve intrinsic motivation in your organization, Daniel Pink suggests that you increase employees’ feelings of autonomy and purpose. You can do this by breaking their routines and occasionally letting them choose new projects to work on, involving them in the goal-setting process, and designing policies that show you trust them. Read more in our full guide to Drive.)
| Why Bonuses Don’t Work Hastings mentions one drawback of bonuses—that job candidates prefer guaranteed money over the possibility of a bonus—but this doesn’t give a complete picture of the flaws of the bonus system. In reality, there are many other issues with bonuses, as Paul Marciano points out. In Carrots and Sticks Don’t Work, Marciano writes that bonuses and other reward systems fail because: -They’re focused on short-term gains rather than long-term impact. -They limit performance. When an employee reaches a goal and gets the accompanying bonus, he might start to slack off. -They promote unethical behavior. Employees may prioritize the ends rather than the means, doing whatever it takes to earn a bonus. -They cover up ineffective managers. Employees may work hard simply because they’re motivated by a reward, not by a good manager. They can feel manipulative. -They don’t improve company culture. Marciano recommends replacing incentives with engagement to motivate employees—give them respect, empowerment, supportive feedback, consideration, and trust; clarify expectations; and treat them as partners. |
3) Give Raises That Reflect Employees’ Market Value
Hastings says that the third safeguard from poaching that Netflix implemented was to reject conventional methods of giving raises like raise pools (allotting a certain amount of money to divide among employees) and salary bands (putting a cap on the total salary an employee can reach through raises). As Meyer explains, these traditional raise schemes mean that you may only get a two- to five-percent raise per year, so you would be more inclined to move to another company with higher pay that’s equivalent to getting a 10-percent raise.
(Shortform note: Abandoning traditional raise schemes is more important than ever as millennials and Gen Z populate the workforce. In the past, many people stayed in their jobs for the long term because of their employer’s pension plan—the promise of a payout and comfortable retirement. However, the number of employers offering such plans has decreased dramatically in the past 30 years. As there’s no longer a financial reward for loyalty, millennial and Gen Z workers are prone to frequent job-jumping to increase their wages and develop a meaningful career.)
In contrast, Hastings says that Netflix decided to give raises based on market changes. A Netflix employee who’s performing well and whose skills are highly valuable may get a 20-percent raise one year to reflect the market—but the following year, if the market hasn’t changed, that same employee may still be doing excellent work and receive no raise. If an employee’s skill set continually increases, or if the market for those skills continues to rise, that employee may see steady raises year after year.
On the other hand, if the market for another employee’s position remains stable, that employee may not get a raise for multiple years, even if she’s performing well. (The exception to Netflix’s follow-the-market policy is that if the market for a particular position drops, Netflix generally does not decrease that employee’s salary.) Nevertheless, this raise scheme guarantees that a Netflix employee won’t find a more enticing pay increase elsewhere.
| Can Your Company Afford to Give Big Raises? Netflix has an unorthodox approach to giving raises, which means that employees can experience a windfall year after year. Some argue that this is unsustainable and that it’s impossible for other companies to follow Netflix’s lead because of economics. However, some experts suggest that raising wages is not an economic issue but a management issue. Many companies choose to invest their huge earnings in share prices rather than their employees. Companies tend to choose this route because raising wages is seen as risky—management doesn’t want to be stuck paying high salaries during the inevitable recession. But research upends this thinking: Underpaying employees actually makes it more difficult to cut pay when times are hard, while giving generous salaries can help see a company through hard times. That’s because higher pay makes people more committed to the company and more willing to do what it takes to show their support—even if it means taking a temporary pay cut for the company to stay afloat. (As an added benefit, research also suggests that paying employees higher wages results in higher profits for the company.) In short, evaluate whether your company is justifying low wages and meager raises by saying it’s a safeguard against losses during difficult times. Instead, start viewing employees as an investment that can help your company thrive in any economic condition. |
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- How Netflix achieved massive success in a short period of time
- The unusual business practices that have helped Netflix sustain its success
- Why Netflix fires adequate employees
