Taking Money Off the Table: Survey Says... Part 3, What It's All About & the Netflix Connection

In the last few posts (Part 1 and Part 2), we’ve been looking at the particular pay philosophy which holds that the best way to maximize employee performance and productivity is to pay them a high enough base wage/salary to “take the issue of money off the table” – as opposed to using variable pay programs to influence their behaviors and results. 

How much more would you need to take the issue of money off the table?  Through the results of a survey designed to discover the answer to this question, we discovered that the answer, on average across everyone who responded, is about 30%, but that the answer also can vary dramatically from person to person, for a host of different reasons.

This question goes to the heart of the membership model of compensation – which also happens to be the approach advocated by Drive’s Dan Pink as an alternative to incentives and other “contingent” rewards.  And so I’d like to complete this series by considering the lessons of our survey in that light.

In doing research for a client over the past few weeks, I had opportunity to learn more about the pay policies and practices of Netflix (a partial list of the articles I read is highlighted at the bottom of this post, for readers' reference).  While the company's current crisis in the aftermath of a price increase and bungled attempt to spin-off its DVD business is dominating headlines at the moment, Netflix has garnered attention and praise for its talent management programs – not the least of which is its unique rewards approach.  It became clear to me, in looking specifically at its rewards approach, that Netflix has something akin to the membership model in place.  From its successful experience (at least a successful one as far as I am aware, with no apparent link to its current troubles), I believe we can draw out some helpful lessons about what it takes to make this particular approach work effectively.

Netflix, according to HR staff  quoted in the articles listed below, positions its salaries at the 90th percentile of  the market.  Interestingly, my survey finds that (on average) a 30% premium is required to remove money as an issue – a figure that I believe may fall somewhere between the75th and 90th percentiles of a typical survey population.

In the membership model, employees are motivated by the chance to hold membership in an exclusive workplace.  Employees who meet the membership criteria (typically a high performance level) are rewarded with premium base salary levels.  Attention is not paid to differentiating rewards by individual performance; rather, all members are considered to have proven themselves to be top performers.  As these statements suggest, successful execution of the membership model has some critical requirements.  Netflix has a distinct set of HR practices which - I believe - showcase the criteria that are absolutely essential for success in this model of compensation:

Premium pay.  As noted above, Netflix salaries are targeted at the 90th percentile and annual adjustment decisions focus on keep employees at a highly competitive level of pay. 

Relentless commitment to (their own style of) performance management and showing mediocre employees the door.  Netflix’s annual “keep test” (a process that strikes me as a kindler, gentler version of the infamous GE “rank and yank”) identifies employees who are not meeting membership criteria and the organization wastes no time in moving them out. The number of people who fail the “keep test” each year is typically in the double digits, among the Netflix population of about 500 salaried employees.  

Critical competencies in recruiting and in engineering amicable departures.  Netflix relies on an in-house recruiting function to ensure it is bringing in the right employees.  Netflix has also become expert at executing “no fault divorces.”

Careful avoidance of “incentives to stay”.  Netflix foregoes any reward programs or elements which might interfere with the need to move an employee out quickly.  These include vesting schedules for its stock options (they vest immediately) and any other retention or “golden parachute” type of plan.

So any organization pondering the membership model must first ask itself whether it is prepared to execute on the requirements and criteria described above.  Without a relentless commitment to assessing employee performance, the absolute discipline to usher non-performing employees out the door without hesitation and the competencies, processes and leadership support necessary to execute speedy “no fault divorces”, all you will accomplish is to raise the lion’s share of your organization's fixed business expenses by 30% or more.  And with no ability to ensure any return on that significant additional investment. 

Not likely a career enhancing achievement, my friends.

In summary, it’s been interesting to learn more about what it takes to move the issue of money off the table for employees and to explore the possibilities of the membership model of pay - which has this question as its centerpiece - by drawing lessons from the Netflix experience.  I do think this model of pay offers a lot of possibility to organizations willing to step up to the plate and meet the criteria for success, particularly those focused on R&D and for whom innovation (and the risk-taking that accompanies it) is a bedrock requirement.  I also think that there are a lot of HR people out there looking at this model and the simplistic (but undeniably attractive) notion of just paying people enough to take money off the table, and thinking it gets them (and their cadre of managers) out of the hard work of defining and assessing employee performance when, in fact, it ultimately raises the stakes for performance management.

Your takeaway?

Sources:

1. Grossman, Robert J. Tough Love at Netflix. HRMagazine (Apr 2010): 36-41
2. Fuoco-Karasinski. Netflix Bucks Traditional Total Rewards, WorldatWork workspan (8/07)
3. Goldfarb, Jeffrey, & Holding, Reynolds. Incentives Play Role in Success of Netflix.  New York Times (May 8, 2011)

Comments

[Chris Greenhalgh]

Ann, I've enjoyed your analysis over this series of posts but I'm left scratching my head. When Pink says take the issue of money off the table is he really expecting a 75th percentile or above solution? That's not the vibe I get. Or is the problem that he makes it sounds so simple it couldn't possibly mean adding 30% to your paybill? Because if your rough and ready survey is anywhere near representative, well, surely that takes his solution off the table for most companies.

[Ann Bares]

Chris:

I realize it isn't the vibe people get from Pink - which is part of my issue, because as someone who doesn't actually design or manage pay programs, I'm not sure the question even occurred to him.

Also, what I take away from my "rough and ready" survey is that, while 30% is an average response (and potentially a conservative one compared to the Netflix example), the reality is that it could vary from substantially below that amount to substantially above that amount, based on a lot of factors. To me, that suggests that we need to take a careful look at a specific organization situation to answer the question in a more accurate manner.

What we also know, from the Netflix example and available research on the membership model, is that the "taking money off the table" approach to pay cannot succeed in a vacuum, but must be part of a coordinated and disciplined talent management approach that also encompasses staffing, performance management, and employee separation. For the right organization (but obviously not all organizations), this approach could prove to be a very effective way of rewarding their staff.

Thanks - as always - for the thoughtful comment!

[Chris Greenhalgh]

"I'm not sure the question even occurred to him."

I fear you are correct.

[E James (Jim) Brennan]

Intrinsic motivation won't put food on the table or pay the rent. When there is no competition from pressing economic demands or other basic psychological needs, creativity can be more easily unleashed. Since most people are better at spending than they are at earning, guess which approach is generally considered more important? Those with lots of money or secure academic positions are not troubled by such mundane needs. Every value component should be squeezed out of every mechanism possible, as Ann has summarized.