I recently read No Rules Rules Netflix and the Culture of Reinvention and it brought to focus the importance of identifying correlation vs causation.
Society has a bad track record on identifying the cause of why certain people or companies are successful. It is often easy and enticing to say that Successful Person A does X, thus X is the reason Person A is successful. Or that Successful Company B does Y, thus Y is the reason Company B is successful. And even in instances where it is not explicitly asserted that X is the reason Person A is successful or that Y is the reason Company B is successful, it is certainly implied. Why are you telling me about it if you think it has nothing to do with their success?
Some examples
- There is no shortage of #riseandgrind type tropes about some successful person being successful because they wake up at 4am to do cross fit and run a marathon before work every day. Unless you're a professional athlete or personal trainer, the time of day you exercise or if you exercise at all will not determine your professional success. However, people predisposed to the #riseandgrind mentality are more likely Type A hoorah people that #getafterit in everything they do. What professional success they have is more likely attributed to the fact that their hoorah mentality also makes them try hard, care a lot, and be competitive in their profession. It's not because they do clean and jerks at 4am.
- For decades General Electric was praised for its management process of annually firing the lowest ranked 10% of its workforce. In some Darwinian inspired spectacle of corporate chest thumping, they were very proud of themselves. And for everyone who wasn't fired, especially executives, it was further ego inflating to strut around thinking they're the cats pajamas. Meanwhile GE as a business was doing very well, primarily due to favorable macroeconomic conditions and loose financial regulations that allowed them to form GE Capital and put a lot of gains on their books in the short term while they under priced the long term risk. The market loved GE, analysts and commentators loved GE, GE loved GE. GE and its cut the bottom 10% management philosophy was seen as the gold standard of leadership. Fast forward a few years and Jeff Immelt succeeds Jack Welch as CEO and starts a rather horrendous tenure in terms of both the hand he was dealt and how he played it. During Immelt's tenure, GE went from being the largest company in the world by market cap (in 2005) to what was ultimately a 90% drop in share price, tens of billions of ill-motivated debt fueled share repurchases leading to the brink of insolvency. Jeff Immelt was eventually succeeded by GE insider John Flannery, who lasted all of about a year before he was ousted. Eventually he was succeeded by an external hire from Danaher, Larry Culp, who is the current CEO. So what's my point.. GE's draconian philosophy was heralded for being a driver of its success and a breeding ground for top leaders. Yet the company was egregiously mismanaged to the point of insolvency, suffered a string of bad CEOs developed in and picked by the GE leadership framework, and eventually had to turn to an executive from outside GE to try to save it.
- Side thought: GE is proof that a strict fire the bottom X% mandate does not 1. guarantee success; 2. prevent calamitous failure; or 3. ensure capable leadership
What's the Deal, I thought this was about Netflix?
Fair point. While reading No Rules Rules Netflix and the Culture of Reinvention I kept thinking about the distinction of correlation vs causation with a GE calamity voice in my head. I'm not implying Netflix will have as embarrassing a fall as GE had, if for no other reason than Netflix is far too simple of a business to be as mismanaged as GE was. But I kept wondering if Netflix's success is caused by, unrelated to, or in spite of their HR policies.
The most obvious comparison is with their compensation philosophy. Netflix doesn't provide stock compensation to its employees, saying that if their employees want to own Netflix they can buy shares with the cash they're paid. Citing that putting all of an employee's comp in their salary is the "most motivating" form of compensation.
Conversely, Amazon says "... focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner."
Amazon and Netflix are saying exactly opposite things. Amazon is a much larger and more profitable company than Netflix, does that mean its compensation structure is better? Or would Amazon have been even more successful if it had used Netflix's compensation structure, or vice versa?
Or... stay with me here, it doesn't actually matter? Perhaps neither compensation structure is any more or less likely to cause a business to be successful? And yet both Amazon and Netflix felt compelled to publicly declare their employee compensation philosophies as drivers of their success. How about that...
Correlation vs Causation vs Just Some Rich Person Having a Personal Preference and Wanting to Tell Themselves and The World It's the Difference Maker
The Keeper Test, it's a Keeper...
Netflix uses the The Keeper Test, which I think is wonderfully powerful and practical. The Keeper Test has managers rank an employee based on how hard they would fight to keep them, if the employee said they were leaving Netflix. This is a wonderful test because it cuts through the performance management irrelevance and politics that so often infect employee ratings.
If someone says they're leaving and your stomach drops because you worry about losing everything they contribute and wonder how the team will function without them, that's a keeper. If someone says they're leaving and you're indifferent to happy, they're not a keeper. And there's no performance management review or cross calibration rating that is going to change the natural and genuine response you have to the thought of an employee leaving.
Source: Netflix Culture Document
