Empowerment at Netflix

12 April 2007 at 1:52 pm Peter G. Klein 2 comments

| Peter Klein |

Strong delegation, despite potential drawbacks, can be effective in particular circumstances. DVD-by-mail pioneer Netflix has gone this route, with apparent success:

Netflix’s time off rules — or lack thereof — are part of a broad culture of employee autonomy instilled in the company when [CEO Reed] Hastings founded it a decade ago. The executives trust staffers to make their own decisions on everything — from whether to bring their dog to the office to how much of their salary they want in cash and how much in stock options. Workers are treated, as Chief Talent Officer Patty McCord likes to say, as adults.

“We want our employees to have great freedom — freedom to be brilliant or freedom to make mistakes,” Hastings said.

Curiously, there is nothing in the news story about how output is measured, how employees are compensated, or other elements of the firm’s organizational architecture. What happens, for instance, when employees make mistakes? As argued by Brickley, Smith, and Zimmerman in their 1995 article (and textbook), decentralization works only when bundled with appropriate compensation and performance evaluation systems. Or, in the words of that great philosopher, Spider-Man’s Uncle Ben, “With great power comes great responsibility.”

Thanks to Eddie Garrett for the tip.

Entry filed under: - Klein -, Management Theory, Theory of the Firm.

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2 Comments Add your own

1. Chihmao Hsieh | 12 April 2007 at 2:49 pm

Here’s one well-publicized aspect of the Netflix organizational architecture… http://www.netflixprize.com/
2. twofish | 12 April 2007 at 5:13 pm

Something that has always impressed me about organizations is how the formal rules often differ from the informal ones. I’ve seen organizations with rigid rules that were not enforced, and those without formal rules but which had informal rules that were iron-clad.

Pretty much every software company I’ve seen had very flexible work schedules for programmers, and this worked generally to the benefit of both the company and the worker, because the time demands of the job varied wildly with the location on the release cycle. People would pull all-nighters before a major release and take the next week off, without filling out any of the paperwork that HR wanted.

Also rules can be very subtle. Because an organization has very flexible work schedule rules or not tells you nothing about the distribution of power as far as things like project planning and scheduling. The new employee might be able to bring their dog to work, but I doubt that they can write a checks from the corporate account without someone approving.

One final thing. Companies are reluctant to give formal time off because time-off is noticeable unlike salary and so it is pretty much impossible to use formal time off as form of reward/punishment or as an instrument of control, since if you give one person more time off, you pretty much have to give everyone it. This is why companies often have very flexible de-facto “under the table” time off policies with very rigid de-jure ones.