In late 2001, Netflix had about 120 employees and was planning to go public. Then the dot-com bubble burst and the September 11 attacks happened. The IPO was put on hold and a third of the staff were laid off. “It was brutal,” wrote Patty McCord, Netflix’s chief talent officer from 1998 to 2012.
Then, a bit unexpectedly, DVD players became the hot gift that Christmas. By early 2002 the DVD-by-mail business was growing fast, and the company had far more work to do with 30% fewer people.
One day McCord was talking with one of the company’s best engineers. Before the layoffs he had managed three engineers. Now he was a one-man department working very long hours. She told him she hoped to hire some help for him soon.
He said there was no rush. “I’m happier now.”
McCord had not seen that coming. He had realized something: the engineers who had been let go weren’t spectacular. They were merely adequate, and he had spent too much time riding herd on them and fixing their mistakes. “I’ve learned that I’d rather work by myself than with subpar performers,” he told her.
A few months after the IPO, in 2002, came a harder conversation. The company’s bookkeeper had built the system Netflix used to track movie rentals so it could pay the right royalties. Everyone liked her. But a public company needed CPAs, and her skills were no longer enough. McCord sat her down, explained the situation, and offered her “a spectacular severance package.”
In 2009, Reed Hastings, McCord and some colleagues put what they had learned into a PowerPoint deck and posted it online. It was blunt. “We’re a team, not a family,” one slide said. “We’re like a pro sports team, not a kid’s recreational team.” Another gave managers a test: “Which of my people, if they told me they were leaving, for a similar job at a peer company, would I fight hard to keep at Netflix?” The rest, the next slide said, “should get a generous severance now, so we can open a slot to try to find a star for that role.”
The same deck took rules away. There was no vacation policy and no tracking. “There is also no clothing policy at Netflix, but no one comes to work naked.” When a talented person did something dumb, managers were told not to blame them but to ask what context they had failed to set.
In 2013, Sheryl Sandberg, then Facebook’s chief operating officer, told GQ: “It may well be the most important document ever to come out of the Valley.” By early 2014, McCord wrote, it had been viewed more than 5 million times.
Hastings later told Harvard Business Review which idea in the deck had been the hardest sell with Netflix’s own employees. It was one line: “Adequate performance gets a generous severance package.”