Key Features of the Netflix Compensation Mix
A compensation program is a way of motivating an employee to perform work through a combination of monetary, tangible, and intangible rewards for work performed. Organizational compensation should be viewed as the second part of an exchange process in which an employee gives up some of his or her time, intellectual or physical abilities, and information in exchange for compensation payments. That said, in addition to being exchange-only, compensation programs have the purpose of retaining and motivating current employees, as well as attracting new ones, as indicated in the training slides. Accordingly, the richer and more evolved the employee compensation packages, the more likely the corporate culture is to thrive and employee productivity to grow.
The case study scenario presented by Larcker et al. (2010) describes the example of Netflix, a modern media giant in the market for stock video playback by subscription and production of its own shows. At the core of Netflix’s organizational operations is a compensation mix in which the employee, for his or her labor, chooses how to receive payments for himself or herself. This includes both the option to pay all compensation as salary and to split it in any ratio with a payout in company stock, but the options must not exceed 60% of the compensation. For example, an employee may want to receive the entire $100,000 in salary or split that amount any way up to the $60,000 in stock and the rest in cash. That said, Netflix developed an algorithm whereby employees could receive company stock at a significant discount from the market price, reaching about 50 percent.
In addition, the company refused to limit option holders’ rights, which means they could be exercised even on the day of receipt. The motivation for this decision, as Larcker et al. (2010) points out, lies in the desire to create an environment in which employees are not surrounded by “golden handcuffs” but realize their labor in the present. Moreover, it made it easier to fire current employees because such an algorithm did not result in a loss of potential benefits in the future.
Finally, Netflix did not have any cash bonuses in the form of compensation supplements because “a practice of no cash bonuses was consistent with its high-performance culture and willingness to terminate underperforming employees” (Larcker et al., 2010, p. 10). Not giving cash bonuses also reduces the burden of administrative responsibility for distributing them, as indicated in the slides. Thus, the compensation system at Netflix consists of self-selection, no cash bonuses, and attractive option prices, which motivates employees to increase the market value of the company by increasing productivity.
Assessing the Uniqueness and Economic Viability of Netflix’s Compensation Program
The compensation program implemented at Netflix can have several economic benefits. First, offering employees stock options to the company can motivate them to work to increase the market value of Netflix because the employee-owned stock will then grow. Second, when employees receive a portion of their compensation in the form of options, it reduces the company’s short-term financial burden. Netflix does not have to pay large sums in salaries all at once, which means the company has more available finances to pay for other organizational operations.
Third, partial compensation in the form of options helps align employee and company interests, connect employees to the corporate culture, and provide a sense of belonging to the community. Thus, the economic benefits of using such a compensation offer are a benefit to both the company and the employees. Importantly, the choice of the compensation mix is left to the employee, which also encourages the individual’s sense of meaningfulness and autonomy.
Nevertheless, it is hard to say that such a program is unique. In fact, Netflix was one of the first to launch a compensation mix project, but by now, it is not the only organization practicing it. Many Silicon Valley companies use the compensation mix to motivate productivity, market growth, and employee retention: Google and Amazon are among them (Ex-Google Recruiter, 2022; Misha, 2023). It follows that the compensation mix system is not unique and is actively supported by large companies.
References
Ex-Google Recruiter. (2022). Understanding Google’s compensation. Levels FYI. Web.
Larcker, D., McCall, A., & Tayan, B. (2010). Equity on demand, the Netflix approach to compensation. GSB Stanford Business. Web.
Misha. (2023). Insights into Amazon’s compensation philosophy & salary negotiation tactics. Carrus. Web.