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Netflix vacation policy is only the tip of a radical compensation iceberg

It's late August, a week before Labor Day, and just about everyone you know is on vacation. But since you've already used up your paltry two weeks of vacation earlier this year, you're there, hard at work, surfing the Web and, ahem, reading this blog.

If only you worked at Netflix. The online movie service, which today launched an iPhone app for subscribers to watch TV and movies on the go, has no vacation policy at all.

That doesn't mean Netflix doesn't allow vacation. Rather, operating under the idea that its engineers and professionals should be treated as adults, Netflix allows salaried employees to take as much vacation as they'd like. In story in Britain's Daily Telegraph last week, Dan Pink, author of the excellent leadership book Drive, shares the scoop on Netflix's flexible vacation rules. If they don't get their work done, or simply turn in mediocre performance, the company is candid about their fate: "adequate performance," reads a slide presentation on the company's web site, "gets a generous severance package."

That slide deck made its way around the Internet last summer, as out-of-work techies salivated over Netflix's generous and flexible benefits and pay. But while most of the attention at the time--it was August, after all--centered on the company's hands-off approach to vacation, Netflix's way of compensating its employees is just as radical, if not moreso.

The Los Gatos, Calif.-based company takes a market-based approach to pay, believing that to get the best employees, it must pay above-market rates. Rather than setting a new staffer's salary against what his internal peers make--an approach many companies take--Netflix carefully studies what that person could earn at other companies in combined salary and bonus, and then sets their pay a notch higher. Then, end of the year cash and stock incentives are not paid.

While that's a highly unusual approach, what's really radical is what comes next. Employees get to choose how much of their total pay comes in cash versus equity. Risk-averse employees can take the safe route, requesting the entire sum in cash. Those who want to tie their fortunes to Netflix's can take half of it in equity, or other combinations of cash and stock. "If you have a high performance team, with fully formed adults," asked Netflix's Chief Talent Officer Patty McCord when I interviewed her recently, "why are we being paternalistic about compensation?"

(More from PostLeadership, Reining in CEO pay, finally)

What Netflix is doing with both its vacation and pay policies is to make its in-demand engineers feel like rational, thinking adults. The company trusts them to make decisions, and to act in the best interests of both their company and themselves.

But by not paying an annual bonus, it's also fostering the sort of environment that doesn't encourage outsized risk-taking by employees doing whatever they can to meet their annual goals. That hardly means the company doesn't wave any sticks: Netflix's zero tolerance for mediocrity means employees are incentivized to keep their jobs at a company that pays them above-market salaries and treats them like the professionals they are.

At a time when it's not a stretch to say that poorly designed financial incentives imperiled the world's economy--Wall Street's greed played a big role in the housing bubble that precipitated our current crisis--more corporations would do well to examine Netflix's approach. Despite what many leaders seem to believe, money isn't the only carrot that motivates employees. Trust, flexibility and freedom each go a long way toward keeping employees happy, engaged, and sticking around. Even if they take a couple extra weeks of vacation.


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By Jena McGregor

 |  August 26, 2010; 11:51 AM ET |  Category:  Corporate leadership , Culture , Goal Setting , Pop Culture Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
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Netflix allows salaried employees to take as much vacation as they'd like.
Which can actually act as a deterrent to take any vacation at all. If someone would like to take four weeks a year, would you be less valued than someone who takes a week - and you both achieve the same level of production?

Posted by: mooncusser | September 3, 2010 2:09 PM

rannrann, there is nothing in Netflix polciy that says their employee can take all cash. Your rant and rave reflects your bias and cynicism, and is not based on any facts, inferred or otherwise, in the article.

Good luck looking for a good employer, with that kind of attitude!

Posted by: Rockville3 | August 29, 2010 11:27 PM

Yes I agree.

Posted by: maddymappo | August 29, 2010 5:25 PM

Netflix will bite the dust so I hope the employees are taking cash and not equity.

It is one thing not pay a bonus if one is making a better than average salary for their job performance and telling employees to take the vacation time they think they need or desire but to give the employees the choice of whether to accept all cash or investing in the Company's equity is another matter.

A company should be paying all cash upfront and then allowing employees to make a private choice as to how much of their hard-earned money they want and can invest in their company's equity.

The idea that Netflix is promoting rational thinking adults is bull and a total crock.

Their policy has nothing to do with trust, flexibility or freedom.

Let us be clear when it comes making money as a corporation or earning money as an employee nothing is free, there can only be so much fexibilty, and trust goes only so far for either party.

So, say, I am one of Netflix's "in-demand" engineers and I decided that I want all cash and no equity? What does that say about me as an employee to my employer that I choose not to invest in my company for whatever reason. I wonder how long I would have a job?

Their policy shows creativity and a willingness to try a new approach in the relationship between employee and employer and that is all.

Poorly designed financial incentives did not destroy our economy. Outright deception by Wall Street and the banking industry did. The biggest mistake made in the recovery process was not making individuals in both Wall Street and the Banking Industry accountable for their deceptions. The excuse that "no one" knew what would become of these mortgates is absurd.

Posted by: rannrann | August 29, 2010 9:12 AM

SO many CEO's & other Elitist WALLster / CORPsers are SO over-Paid! - The tp 3%,- for decades have stolen $Trillions from the 'Workers'! - It has Nothing to do with Transfer of $Wealth,- unless WE consider giving back what was unjustly & immoraly Taken from the Worker/Creators of Production, Manufacturing, & Creation of actuals Goods! -- ENOUGH of the undeserving privelidged Elitists- exploiting the WORKERS!! -- And for many WALLster Money-people,-- they do NOTHING to create or make anything!- They just manipulate, speculate, and USE the People & Economy - for phoney, useless, theft & rape of OUR Economic System. -- Over 80% of All Wealth in America is owned and/or controlled by the Top .3 of 1%!!! -- That is out-right Criminal & Thievery!! -- Trillions that the top 3% have Stloen needs to be given back to the rightful earners / Workers!!!

Posted by: jward52 | August 29, 2010 6:19 AM

I certainly hope Netflix employees are doubly cautious about taking too much compensation in equity. We've seen too many times when a company takes a nosedive (Worldcom, Enron, Lucent....)

Posted by: nuzuw | August 27, 2010 12:48 PM

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