Netflix doesn't pay employees performance-based bonuses. Co-CEO Reed Hastings explains why he thinks they hinder innovation.

  • Contrary to conventional practices, Netflix doesn't offer performance-based bonuses. 
  • Netflix co-CEO and cofounder Reed Hastings wrote in his new book that bonuses can crush innovation and creativity within an organization. 
  • The risk is they incentivize employees to focus too much on targets that can quickly become outdated.
  • Hastings told Business Insider's Nich Carlson that the streaming company rewards great work by simply paying people what they're worth, and raising their salaries over time.
  • Visit Business Insider's homepage for more stories.

Netflix credits its unorthodox corporate culture with helping it outmaneuver larger, more established rivals like Blockbuster and Disney.

The streaming company can move quickly, and pivot where necessary, because its culture fosters innovation, Netflix co-CEO and cofounder Reed Hastings wrote in his book, co-authored by Erin Meyer, "No Rules Rules: Netflix and the Culture of Reinvention."

It's the reason Netflix doesn't give performance-based bonuses. It may run contrary to conventional thinking, but Netflix believes bonuses can crush creativity.

"People are most creative when they have a big enough salary to remove some of the stress from home," Hastings wrote. "But people are less creative when they don't know whether or not they'll get paid extra. Big salaries, not merit bonuses, are good for innovation."

Hastings shared an example with Netflix's former chief marketing officer, Leslie Kilgore.

In 2003, Hastings and former talent chief, Patty McCord, were planning to link bonuses to performance goals and deciding on the metrics for various senior managers. Kilgore's bonus was to be tied to the number of new customers that Netflix signed up. But as Hastings was congratulating Kilgore on the recent wave of customers her team had signed up, she told him the more important metric for a growing company should be customer retention.

"I learned from that exchange with Leslie that the entire bonus system is based on the premise that you reliably predict the future, and that you can set an objective at any given moment that will continue to be important down the road," Hastings wrote. "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."

Employees could get bogged down in targets and fail to think about the needs of the company as it grew. Hastings wrote that changing course, as may be necessary, involves investment and could risk profit margins or stock performance.

"That's why a company like Warner or Disney may not be able to change dramatically with the times, the way we've often done at Netflix," he wrote.

Hastings told Business Insider's Nich Carlson that the streaming company rewards great work by simply paying people what they're worth, and giving raises over time. The company's policy is to pay top of market for each individual's role, or slightly more than the employee would make doing the same job at another company.

"If you're really great and you've done amazing work, then you'd get a raise for next year," Hastings said in the interview. "It forms that positive reward for great performance. And then, what we don't need to do is document all the things that the bonus might be based upon, because we want to be very flexible as a business."

Disclosure: Mathias Döpfner, CEO of Business Insider’s parent company, Axel Springer, is a Netflix board member.

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