The Netflix Approach to Compensation - Essay Example

The Netflix Approach to Compensation, Case Study Analysis From A Managing People For Competitive Advantage Perspective Curse: Lecturer: The Netflix Approach to Compensation, Case Study Analysis From A Managing People For Competitive Advantage Perspective Reed Hastings, the founder of Netflix always emphasizes on unique management practices of managing people in an organization. Hastings employs an organization management practices that enable employees to be accountable, work hard, manage their responsibilities and take risks in an organization. He employs other management practices that will enable employees to perform effectively in the business environment. This includes motivation and compensation practices, which have outstanding features. Netflix employs a compensation model that offers employee equity based awards; thus an essential program for retaining potential employees in an organization. Netflix Compensation Program The Netflix employed compensation programs that enable them to retain employees. The founder of the organization, Reed Hastings discovered that compensation program is one of the significant management practices that will enable them to retain their employees. Thus, he introduced compensation programs of paying workers cash salaries. This was a significant idea behind the successful organizational performance. Thus, Hastings introduced varied compensation programs with different main components as indicated below; Compensation Mix The Netflix compensation policy allowed employees to make their own decisions on compensation system in every year. This system allowed employees to allocate and divide their basic salary with the total compensation as they wished. For instance, an employee earning 200 000 dollars was allowed to divide the salary; thus taking some cash amount and leaving others as a remaining stock. This compensation policy offered employees opportunities for altering their allocation for every year. Therefore, by the year 2009, about 500 employees have already joined the program and non- exempt employees working in the shipping centers were too paid in cash basis per hourly manner. Pricing The company makes option grants in a monthly basis with one-twelfth of the total annual allocation, which are granted and priced in the first day of every month. For instance, an employee who earns 24,000 dollars receives a total cash of 2000 dollars in the first day of every month. The company employs the formula of calculating the monthly allocation. This is through dividing the monthly allocation with the stock price. This is through multiplying by 25 percent to get the total number of shares. The aim of using this formula is to offer employees a generous pricing of 50% discount. This will enable the expected value of employees to increase by a certain amount of value. For instance, an employee receiving 2000 dollars per month will receive the expected grant value of 4000 dollars. Vesting The company does not attach vesting restrictions to stock option awards in the compensation strategy. The organization management believes that vesting restrictions retains employees who are not engaged to the vesting restrictions of the company. The vesting restrictions are referred as the golden handcuffs; thus the company discourages them because they contradict with the organization performance. According to Fuoco-Karasinski (2007), the employees would not be productive in case golden handcuffs exists in the company. This hinders organization from achieving their stated goals. The aim of the company is to employ employees who can perform work effectively and introduce new ideas vital for creating changes in an organization. Therefore, the company removes vesting restrictions through laying-off underperformance labor force. Termination The company employed termination restrictions that could enable employees to work towards meeting the organizational goals. The termination period takes place after the employees has covered the year term of 10 years even though they are working voluntarily or involuntarily. The company requires employees to follow the payment termination; thus the management discourage post-termination feature. This is because post terminations are regarded an ineffective despite the fact that the company opted to offer employees other options with the salaries they earned. Cash Bonuses The compensation program in the Netflix Company discouraged cash bonuses. Therefore, the company calculated the compensation in a manner that allowed employees to receive additional outstanding cash bonuses to their net salary. The restriction of cash bonus compensations strategically aligned with the high performance culture of the company with the termination of underperformance labor force. However, it is difficult for one to determine the way the company align the cash bonus restrictions with the strategic performance of the company’s culture. The Netflix approach that they employ is unique, and this approach has solved varied cultural issues including compensation of incentive value and economic inefficiency. Furthermore, the company has made efforts of fulfilling their goals of developing a program for every employee. This program ensures that the management team at all levels practices cultural and responsibility as a culture of freedom. The company’s termination policy, which is included in the compensation programs, has significantly contributed to the better performance; thus achieving organizational goals. Therefore, the company expects employees to perform their work effectively at a bonus level; they take into considerations the mount of bonuses included in the total compensation (Health, 1999). For effective understanding of the Netflix compensation policy, below are advantages that highlight fixed compensation policy features that Netflix adopt in increasing their performance. Fixed Compensation Policy Many companies employ a fixed compensation policy that attempts to establish an optimal cash mix and incentive rights in the onset of a year. This aims to attract and encourage employees to work hard toward increasing organizational performance. Many organizations make an effort of attracting valuable employees who have necessary skills vital for contributing to long-term sustainability. Larcker (2010) reveals that young executives and managers fit under these categories since they are the ones who search for risky employment opportunities that can increase their personal wealth once the organization become successful. Moreover, vesting restrictions and terminations feature enable the company to retain their employees. This is through restricting their skills by calculating their full value in case employees quit the company. The aim of stock options in the company is to encourage labor force through offering them compensation amounts to increase the total growth in the company. However, many employees do not prefer to invest in compensation amounts, in stock, since this provides the key downside of zero and they consider it as a risk investment. Employees will become a risk verse in preservation of their original values in case the stock options are valued in money. Hence, excessive wealth accumulation in an organization can discourage labor force from taking risks on behalf of the company. Therefore, Netflix Compensation plan is an effective approach since it offers employees opportunities for making decisions on the way they will make investments in stock options. Varied factors exist including job level, the ratio of supply demand and functions that determine the cash mix and equity. For instance, the awarding compensations in the stock option form would be marginal in case the motivational or incentive impact of stock option is also marginal. This is because the expected cost for grant stock options would be higher than the expected value of the employees’ stock options. In addition, other factors such as economic, demographic and behavioral may influence the way through which the labor force realizes their benefits of stock options. This is because the stock options are non- transferable and the only way for realizing the value option of employees is through exercising them. The employees who possess stock option are able to exercise them before the ten-year term; thus monetizing a vesting portion. Therefore, they will forfeit the reminder option values that would end up being significant to them. Sometimes, employees may be required to exercise stock options earlier because of involuntary or voluntary terminations from an organization; thus affecting the incentive value and economic competence of the company. The company carried out investigation on behavioral and economic issues influencing the decision made by employees in stock invests options; thus, the following section reveals such factors; Participation Determinants Netflix developed a formula of determining the demographic, behavioral and economic issues that influence the decision made by each employee towards invest stock option (Richard, 1971). First, male employees are longer tenure and are more likely to participate in stock options than employees with higher salaries or positions. The female employees are more likely to invest than male employees are. Quite numbers of female employees are likely to invest in stock options. This is because they devote their time in analyzing the significant stocks to deal with and since they do not invest higher percentage of stock, they would not be affected by loss or profits. Employees with fixed job tenure do not invest in stocks because they have fixed job period. Therefore, they understand the maximum amount they will earn at the end of every payment period. Hence, they cannot afford to take risks of stock options since they are not sure when their work will end. Individuals with fixed job tenure do not invest in stock options because their jobs are fixed for a certain period. Hence, they understand their total amount of payment they will earn until their job is finished. This is difficult for them to invest in stock option because they are not sure about their future job; thus, they cannot afford to take risks. Moreover, people who know the salary they earn have a positive relation towards investment in stock options but people with higher paying jobs invest more in stock options since they earn a high amount of salary. Therefore, they would not fear taking risks because even though they suffer losses, it would not affect them. Furthermore, the study analysis carried out on relationships between involuntary turnover and participation revealed that employees who are terminated involuntary are less likely to involve in the stock option program. The majority of employees with high salaries participate in stock option programs. The research study revealed that, in terms of exercise behaviors of employees, there is no employee who holds the entire stock option for a full ten years grant term (Larcker 2010). Thus, they exercise about 50 percent of stock option in a four years grant term when employees receives a 40 to 60 percent over the stock price. The next step reveals the Insider Trading Policy employed in the Netflix and the reasons for its use in the company. Netflix Insider Trading Policy The Insider Trading Policy takes into considerations all the required transactions, which take place in the company. This may include the common stock options and security that the company may issues where necessary such as warranties and convertible debentures. This policy is used in derivative securities, which is similar, to the stock options of the company such as exchange trade options. Larcker (2010) argue that Insider Trading Policy is applicable to all employees including managers, security officers, board of directors and many others who have potential power for accessing confidential information of the company. He further states that the policy discourages any trading type such as non-public materials of utmost significant in an organization. Therefore, there is no one in the company who should take any transactions of the company which involves a sale or buying of organization securities. They should not participate in any transactions, which offer related purchase or sales of the organizational securities. This is from the beginning an employee starts accessing information of the company until the second trading date when the company finally reveals information to the public. The senior executives and top management team should comply with the organizational obligations and conditions. This is essential because it will enable them to produce better results; thus increasing the profitability level of the company. Moreover, employees such as executive members and directors of the company should pay for or auction the securities of the company in order to increase the profits of the company. This should be done within the six months irrespective of the fact that they do not have access to the confidential issues of the organization. The aim of launching the Insider Trading Policy in the Netflix Company is to increase the security measures and promote equal opportunities. This will hamper any worker from advertising or purchasing the company’ securities when they have aces to confidential information of the company. Read More