What are the issues, key problems, and Netflixs present situation and HR strategic issues?

What is your analysis of key change drivers and the underlying HR issues at Netflix?

What recommendations, solutions, and/or plans of action do you have for Netflix? Use specific data or facts to support your analysis and evaluation of Netflix. What recommendations do you have for management? What alternatives should management consider that are not in the case study?

EQUITY COMPENSATION CASE STUDY Netflix First, Netflix changed how America rents movies. employees with the freedom to choose annually how much Now it is revolutionizing how companies manage of their compensation they want in cash vs. stock. their employees. Reed Hastings is Netflix's How does the program work? Each November, employees have their performance evaluations and are notified of their innovative CEO leading the charge. Netflix salaries for the next year. Then, in December, each employee employees are treated very well-high salaries, makes an election to receive a portion of compensation in unlimited vacation, and empowerment to structure stock options. 2007 is the first year that employees have their compensation packages. been allowed to choose 100% salary. In the previous three years in which this program has been in place, employees were allowed to choose between 5% and 50% of their In return for these perks, employees are expected to work hard, not play gamesthere are no ping pong tables or compensation in the form of stock options. This is the first Friday beer bashes. In addition to the favorable vacation year where the company has not had 100% participation and compensation packages, Netflix offers the other basic in the stock option plan. In December 2006 only 60% employment benefits-medical, dental, etc. However, the of the employees chose to receive a percentage of their philosophy is that the employees are adults, they know compensation in the form of stock option grants. However, when to work, they know when to play, and they do not this figure does not take in to account the employees who need someone to tell them when and how to do either. participate in the appealing employee stock purchase plan, Hastings calls this approach "freedom and responsibility." which allows a 15% discount from the beginning or ending The Netflix environment is a high-performance driven work stock price over a six-month period. place, so while employees are given a lot of freedom, the Since Netflix sees grants and salary as an employee's underlying culture is one in which each person is responsible total compensation, the company has taken the more for growing the business. Steve Swasey, director of corporate conservative route in viewing that in taking the stock communications, recently was quoted as saying, Netflix has option grant in lieu of cash salary, an employee is actually changed a consumer behavior, and every department deferring compensation. This is why the employees make contributes to that." their stock vs. cash elections in December to comply with To this end, there are no "key employees" or "president's Internal Revenue Code Section 409A. The philosophy that clubs," where employees are classified into groups that both grants and cash are compensation fits with the matter and those that do not. All Netflix employees are revision of accounting standard FAS 123 into FAS 123(R), seen as key employees. Further, Netflix embraces turnover. which forces employers to expense stock compensation If an employee is just a so-so performer, rather than getting against net income. Netflix was an early adopter. an okay review and basic cost-of-living increase, the person There are a couple other areas with its stock option is shown the door. To further treat all employees like adults, grants where Netflix has strayed from the norm. Rather any laid-off workers are allowed to leave with their dignity than granting all of the options on one day, the company intact and given a healthy severance payment. This policy grants them monthly so the employee has the benefit of also helps managers, who might otherwise feel too guilty to dollar cost averaging. This minimizes some of the risk let someone go. that the employee will receive his or her entire grant for the year at the highest (or lowest) price for the period. Further, Let Them Eat Cake (or just a cupcake) since these grants are seen as a deferral of compensation, Compensation at Netflix is neither tied to performance there is no vesting scheduleall stock options are 100% reviews nor limited to a set dollar amount but rather to the vested at grant. In the Netflix's employment model, if an job market. Historically, stock option grants were viewed employee does not want to be there and contribute fully, as a way for companies to engender a feeling of ownership. Netflix does not want them to staythe company does Adding in vesting schedules, they can also act as an not want golden-handcuff employees. enticement to stay with a company. Most companies base This unique program empowers the employees to make grant size on performance evaluations, like a raises or their choice based on what is best for them, their lifestyle, bonuses. But given the Netflix philosophy of hiring the best, risk tolerance, and stage of life. With the challenges of an letting the ones who do not fit leave, and paying at the top increasingly competitive marketplace, Hastings believes of the market, where do stock option grants fall in the that the Netflix culture will continue to boost the compensation package? The answer is that Netflix empowers company's market share and competitive advantage