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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How can a company as big as Netflix have such a lenient expense policy? How can Netflix enforce such subjective rules?
Netflix’s expense policy basically states that all employees must “act in the company’s best interest” when it comes to travel expenses such as flights, hotels, and dinners. The problem is that each person may have a different idea of what is acceptable and what is extravagant.
Here’s how Netflix ironed out the kinks in their expense policy.
Eliminate Travel and Expense Policies
After seeing the success that came from eliminating the vacation policy, Netflix CEO Reed 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 Netflix expense 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.
|Clearly Communicate Expense Policies (or Non-Policies)|
Whether you have a non-policy like Netflix initially did or a formal policy like most companies, it’s important to communicate your approach to expenses with employees to avoid issues like those Hastings describes. Experts say that a lack of clarity leads to a host of other issues such as slow processing and an increased risk of fraud, so let your employees know what’s acceptable and unacceptable spending by:
Making the guidelines easily accessible: Employees should know where they can find your policies for easy reference. If you’re making changes or updates to the policies, send a message through various channels—email, newsletters, the company intranet, messaging apps, and in meetings—so that employees are more likely to read them.
Having a summary: Not everyone will read through a multi-page handbook, so put the highlights in a summary sheet.
Finding champions: Tap leaders and employees who are in-house influencers to inform employees about policies.
Letting them have a say: Welcome ideas from employees, especially those with roles that require them to regularly use company money, to improve systems and processes.
Policy: Employees Must Act in the Company’s Best Interest
Hastings writes that Netflix’s new expense policy for travel and expenses 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 limits how much employees can spend on lodging seems straightforward until someone has a meeting in an unusually expensive location where the only decent hotels are very pricey. In that case, it would be in the company’s best interest for the employee to pay up for a good hotel so that she can get some decent rest and be alert for her meetings.
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.
|Be Aware: “Best Interest” Is Subjective|
While Hastings’s “acting in the company’s best interest” policy makes room for flexibility, keep in mind that your definition of “best interest” may differ from your employees’, and it’s thus arguably unfair to penalize them for doing what they think is best—even if their “best” option isn’t what you would do.
As an example of how vague “best interest” policies can go wrong if people are unfairly penalized, the state of Montana previously didn’t have an explicitly stated numerical speed limit. Instead, the law simply stated that motorists should drive at a speed that was “reasonable and prudent.” However, police could ticket motorists, at their own discretion, for speeding—in effect, penalizing motorists for driving at the speed they felt was best.
The Montana Supreme Court eventually struck down the law, saying it was unconstitutionally vague, and that it was unfair to cite motorists for speeding when there weren’t specified limits to begin with. The immediate impact of this was Montana having no laws policing speeding: arguably an untenable and dangerous situation.
Context: Employees Understand What’s Appropriate and Inappropriate
Without strict guidelines, 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 a 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, Hastings says, employees should feel that they could confidently justify their purchase to their boss—because they may have to.
(Shortform note: Some employees may disagree with the company’s idea of what’s appropriate and inappropriate—for example, they may think they “deserve” a pricey meal if they’re asked to work out of town on a weekend. To resolve any disagreement with your company’s policies, try using some negotiating tactics. For example, in Never Split the Difference, Chris Voss suggests the strategy of showing the other person how helping you achieve your desired solution will satisfy their own wants. In the case of the pricey meal, you can explain how the extra expense eats into the budget for the venue of the company’s summer outing.)
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. On the back end, managers can safeguard against overspending in one of two ways:
1) Managers can review their department’s receipts monthly and, if they find any problematic expenses, they can discuss them with the employee directly. After one or two of these discussions, employees typically tighten up their spending.
(Shortform note: Regularly reviewing receipts can take up a lot of time and resources, especially if you’re taking the time to discuss expenses with your employees. Manually sifting through receipts increases operational costs by as much as 43 percent. Give yourself the most time possible to explain problematic spending to your employee and come up with solutions by automating the system. Use tools like cloud-based software that’s a virtual one-stop-shop for all things expense-related—aside from allowing employees to upload receipts and enabling managers to set spending limits, you can include a copy of the expense policy for easy reference.)
2) 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 autonomy and accountability.
(Shortform note: One U.K. study found that only 18 percent of employees who’ve padded their expense reports have ever been caught. To minimize expense fraud, be aware of the tactics employees typically use to inflate their business travel expenses, such as overstating gas expenses (by as much as 40 percent) or out-of-pocket expenses like restaurant tips and reimbursing expenses twice with two separate supervisors.)
Transparency: Everyone Knows When Someone Is Fired for Overspending
Despite managers’ efforts to explain context and outline the consequences of overspending, some people will still try to abuse the system. Meyer cites research 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.
(Shortform note: It’s easy to think that no one in your company is the type of person to abuse the system, but people who cheat for their own gain aren’t necessarily bad people. They may have just found themselves in situations where people in general are more likely to cheat. Research shows that these situations include: being less connected to the cheating—for example, employees may be more willing to put a pricey dinner on a company’s tab because they aren’t actually stealing money; underestimating how much incentives can affect your judgment; and being too tired to resist temptation.)
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.
(Shortform note: Even though Hastings and Meyer say that you should publicize these firings, there are certain things you should do as a manager to protect the dignity of the person being fired. Research suggests that making the effort to do so has a positive effect on the employee’s reaction—if they’re made to feel shame, they might view the firing as unfair and lash out by badmouthing the company. Allow them to leave with their dignity intact by not sharing the fired employee’s name to save them from embarrassment, and by not making a spectacle of the firing. Give them a chance to quietly pack up their belongings when other employees aren’t around.)
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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