What is an expense reimbursement policy and why do companies have them? How did Netflix get rid of its policies for reimbursing travel and expenses?
An expense reimbursement policy is a set of rules for what a company will and will not pay for when its employees are on official business or travel. At Netflix, Reed Hastings moved away from a traditional policy and just set general guidelines while allowing employees to exercise their judgment.
Keep reading for more about the change to the expense reimbursement policy at Netflix.
Eliminate the Travel and Expense Reimbursement Policy
After seeing the success that came from eliminating the vacation policy, Hastings was reluctant to put any additional policies in place, including travel and expense approval processes. In Netflix’s early years, the staff was small enough that travel and expenses could be addressed on a case-by-case basis, but as the company grew, it reached a point where some kind of policy had to be put in place. Hastings wanted to give employees the freedom to use their judgment, but he needed to safeguard against abuse and overspending.
First, Hastings implemented a policy that simply asked employees to spend company money as if it were their own. However, it soon became apparent that everyone’s spending habits varied greatly—taking business class for a short flight might seem reasonable to some and frivolous to others. Wording the policy this way punished frugal, conscientious employees while giving others a free pass to spend lavishly.
Hastings learned from the misstep and came up with a well-worded policy that he reinforced with context, safeguards, and transparency.
New Expense Reimbursement Policy: Act in the Company’s Best Interest
Netflix’s new travel and expense reimbursement policy was to simply act in the company’s best interest. Typically, blanket policies are too inflexible to fit the nuances of real life—for example, a policy that requires employees to fly economy class for business trips seems straightforward, until someone has to take a redeye to present at a conference first thing in the morning. In that case, it would be in the company’s best interest for the employee to take a business class flight so that she can get some rest on the plane and be alert for her presentation. Asking employees to act in the company’s best interest builds in enough flexibility for any scenario, and it gives employees the freedom to use their best judgment.
Context: Employees Understand What’s Appropriate and Inappropriate
Without strict guidelines around the expense reimbursement policy, employees need to understand the context of what their bosses consider appropriate and inappropriate, so that they can make wise decisions. For example, a manager may explain to an employee that expensing a pricey dinner and nice bottle of wine with a client is in the company’s best interest, but ringing up a high bill for a department dinner meeting is over the line. At the most basic level, employees should feel that they could confidently justify their purchase to their boss—because they may have to.
Safeguards: Managers Periodically Check Employees’ Expenses
While employees exercise their freedom to make travel plans and expense costs without pre-approval, they must know that there’s always a chance that their bosses could be watching. This means that managers must regularly check at least a sampling of employees’ expenses. At Netflix, employees make a purchase, take a picture of the receipt, and submit it for reimbursement—no questions asked. On the back end, managers can safeguard against overspending in one of two ways:
- Managers can review their department’s receipts monthly and, if they find any problematic expenses, they can discuss it with the employee directly. In these conversations, the managers should set more context to help the employee understand why the expense was inappropriate. These conversations empower employees to make better decisions while also letting them know that their bosses are watching. After one or two of these discussions around the expense reimbursement policy, employees typically tighten up their spending.
- Managers can defer to the company’s internal auditing department’s annual audit of 10 percent of all expenses. If the auditing department finds that an employee is overspending, the employee is fired on the first offense. This option radically increases both freedom and responsibility.
Transparency: Everyone Knows When Someone Is Fired for Overspending
To reinforce the threat of getting caught, managers must tell their employees when someone is fired for overspending. Although they don’t need to share the fired worker’s name, this kind of transparency is a critical ingredient for the freedom of abolishing travel and expense approvals. Research shows that most people will cheat for their own gain if they think they won’t get caught, so employees must know that there is a very real possibility of getting caught—and that, if they do, there are very real consequences.
Despite managers’ efforts to explain context and outline the consequences of overspending, some people will still try to abuse the system. When this happens, company leaders must resist the temptation to revert to rules and policies—instead, simply deal with the individual, and let everyone else know about it.
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Here's what you'll find in our full No Rules Rules summary:
- 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