Netflix Backs Away From Free-for-All Pay Policy
Netflix has long prided itself on giving managers the ability to pay what they see fit to attract and retain top talent. Now, as it grapples with stalled growth, it’s reining in that freewheeling practice.
The streaming company is establishing a new hierarchy of internal seniority levels and associated pay as it is looking to better control costs, according to people with knowledge of the work. It is in the early stages of creating formal salary bands like those big entertainment companies widely use, starting with staff in technical roles and working its way through other positions over time, the people said.
THE TAKEAWAY
• Netflix is creating new internal seniority levels and associated pay
• Streaming giant is under pressure to control costs after subscriber loss and stock drop
• Netflix managers historically had freedom to pay whatever was necessary to nab talent
During the yearslong boom in streaming subscribers, Netflix lured talent with large compensation packages that gave it an edge on hiring over other companies. But that approach can contribute to pay disparities that can become costly and controversial to fix, compensation consultants say.
It also led to outsize and in some cases unpredictable costs. As recently as a few weeks ago, Netflix raised one product employee’s salary $100,000 to keep her from joining a competitor, said a person familiar with the discussions.
The overhaul of Netflix’s compensation structure comes as the streaming giant is facing a slowdown in subscriber growth that has cast a cloud over its long-term growth prospects. Last month, Netflix posted its first quarterly decline in subscribers in over a decade, and it said it expects a further decline in the second quarter. The slowdown has sent Netflix shares falling nearly 70% so far this year.
As Netflix’s streaming business took off, its workforce exploded in size, with employee numbers rising from 2,189 at the end of 2014 to 11,300 at the end of December. To attract people, Netflix offered pay packages to some recruits that were far above what they could make at rival companies and inconsistent with what some other staff with similar experience or scopes of work in other parts of the company might make, according to current and former employees and recruiters.
One senior product manager at Netflix, for instance, makes around $700,000 to $750,000, while a senior product manager at Disney, which does have compensation bands, typically makes around half of that, according to people familiar with the situation. Netflix’s human resources staff typically has had limited oversight over managers’ hiring decisions, a person familiar with Netflix’s changes said.
No Pay Cuts
While the introduction of the compensation bands won’t mean employees will have to take pay cuts, it could cap how much they are able to make. Netflix, though, seems keen to send the message that its generous compensation practices aren’t going to change. At a recent employee town hall, in response to questions about compensation, Netflix executives assured employees the company would continue to offer top-of-the-market pay.
And according to a person close to the company, once the new bands are introduced, managers will still be able to pay beyond the ranges set if they can make a point as to why they should do so. Netflix is hoping that by establishing bands, it will make it easier for the company to compare what it pays employees with those doing the same thing elsewhere, the person said. They added that the compensation bands are not being implemented as a result of budget constraints.
Creation of the new bands is in the early stages, one of the people said. It is unclear when it will be complete or when Netflix will apply the framework to broad swaths of its workforce.
Given how aggressively Netflix has grown over the past few years, it makes sense that the company would take a beat and set up compensation bands now, said James Reda, managing director of the executive compensation practice at Gallagher, a benefits consulting firm.
“It brings some discipline to hiring and probably saves some money,” he said. Establishing compensation bands can also help employees better understand their potential career progression at the company, Reda noted. “If there is no banding, it’s a bit of a free-for-all.”
Even before Netflix reported the first-quarter results, executives were warning employees to be more careful about spending and hiring. It has already taken steps to lower marketing costs, while trying to bring programming spending under control. More notably, Netflix co-CEO Reed Hastings revealed on the first-quarter earnings conference call that Netflix was exploring adding a tier carrying ads to the service, reversing his long-standing opposition to that option.
Value of Freedom
In the past, Hastings has also championed Netflix’s free-for-all compensation strategy. In his 2020 book, “No Rules Rules,” he stressed the need to remove controls and give staff broad freedom. “The costs from overspending are not nearly as high as the gains that freedom provides,” he wrote.
In the book, Hastings described his decision, with then–talent head Patty McCord, to ensure that the company offered “the most attractive methods of compensation.” That included putting more resources into salaries than bonuses and committing to pay whatever was necessary to hire and keep the best employees.
The compensation changes could make Netflix a less appealing place to work. The sharp drop in Netflix’s stock price has already hurt staff morale, given that stock option grants have long been a key feature of their compensation. Unlike many other Silicon Valley and publicly traded companies that hand staff a mix of cash and equity that vests over time, Netflix allows staff to decide how much of their pay they want to receive as options and how much as cash. It grants the options monthly and they vest immediately.
While Netflix’s compensation policy gave employees a chance to make lots of money while the stock was soaring, it’s a different story now. Netflix’s current stock price of about $195 is far below the average value of options outstanding. Options granted since 2018 are worthless at the current price.
After Netflix’s April stock drop following a surprisingly bad earnings report, some employees asked leaders to consider issuing extra option grants to offset value lost in the decline, The Information reported.