We spent hours coming up with the right performance objectives and trying to link them to pay. Patty suggested we link the bonus of our chief marketing officer, Leslie Kilgore, to the number of new customers we signed on. Before Netflix, Leslie had worked for Booz Allen Hamilton, Amazon, and Procter & Gamble. Her compensation at all these places was metric oriented, with compensation tied to achieving predefined objectives. So she seemed a good person to start with. We wrote down Key Performance Indicators (KPIs) to calculate how much extra Leslie should make if she achieved her goals. At the meeting I congratulated Leslie on the thousands of new customers we’d recently signed on. I was about to announce how this would bring her a huge bonus if she continued like that, when she interrupted me. “Yes, Reed, it’s remarkable. My team has done an incredible job. But the number of customers we sign on is no longer what we should be measuring. In fact, it’s irrelevant.” She went on to show us numerically that, while new customers had been the most important goal last quarter, it was now the customer retention rate that really mattered. As I listened, I felt a wave of relief. Thankfully, I hadn’t already tied Leslie’s bonus to the wrong measure of success. I learned from that exchange with Leslie that the entire bonus system is based on the premise that you can reliably predict the future, and that you can set an objective at any given moment that will continue to be important down the road. But at Netflix, where we have to be able to adapt direction quickly in response to rapid changes, the last thing we want is our employees rewarded in December for attaining some goal fixed the previous January. The risk is that employees will focus on a target instead of spot what’s best for the company in the present moment. Many of our Hollywood-based employees come from studios like WarnerMedia or NBC, where a big part of executive compensation is based on specific financial performance metrics. If this year the target is to increase operating profit by 5 percent, the way to get your bonus—often a quarter of annual pay—is to focus doggedly on increasing operational profit. But what if, in order to be competitive five years down the line, a division needs to change course? Changing course involves investment and risk that may reduce this year’s profit margin. The stock price might go down with it. What executive would do that? That’s why a company like WarnerMedia or NBC may not be able to change dramatically with the times, the way we’ve often done at Netflix. Beyond that, I don’t buy the idea that if you dangle cash in front of your high-performing employees, they try harder. High performers naturally want to succeed and will devote all resources toward doing so whether they have a bonus hanging in front of their nose or not. I love this quote from former chief executive of Deutsche Bank John Cryan: “I have no idea why I was offered a contract with a bonus in it because I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less.” Any executive worth her paycheck would say the same.
Tying performance to bonuses sounds good on paper, but it doesn’t usually work out for the best interests of the company. In fast-growing, fluid environments, sometimes having incentives for certain targets backfires when these targets becomes meaningless when the business focus or environment changes.
This dosen’t even include the fact that the moment any indicators become a target, employees will begin to find ways to game the system and maximize their earnings.
Unless you are able to guarantee that your targets are 100% always going to be in the best interests of your company, today and for the foreseeable future, performance bonuses might end up causing more trouble and motivate employees to the wrong goals. Nevertheless, this might not apply to sales roles, as the target and outcomes are clear.
That is why Netflix chooses to forgo performance bonuses and instead, pay top-of-market monthly wages.
