Netflix CEO on paying sky-high salaries: ‘The best are easily 10 times better than average’

In the first few years of Netflix, we were growing fast and needed to hire more software engineers. With my new understanding that high talent density would be the engine of our success, we focused on finding the top performers in the market.

In Silicon Valley, many of them worked for Google, Apple, and Facebook — and they were being paid a lot. We didn't have the cash to lure them away in any numbers. But, as an engineer, I was familiar with a concept that has been understood in software since 1968, referred to as the "rock-star principle."

The rock-star principle is rooted in a famous study that took place in a basement in Santa Monica, California. At 6:30 a.m., nine trainee programmers were led into a room with dozens of computers. Each was handed a manila envelope, explaining a series of coding and debugging tasks they would need to complete to their best ability in the next 120 minutes.

The researchers expected that the best programmer would outperform his average counterpart by a factor of two or three. But it turned out that the most skilled programmer far outperformed the worst. He was 20 times faster at coding, 25 times faster at debugging, and 10 times faster at program execution than the programmer with the lowest marks.

This study has caused ripples across the software industry since it was published, as managers grapple with how some programmers can be worth so much more than their perfectly adequate colleagues.

With a fixed amount of money for salaries and a project I needed to complete, I had a choice: Hire 10 to 25 average engineers, or hire one "rock-star" and pay significantly more than what I'd pay the others, if necessary.

Over the years, I've come to see that the best programmer doesn't add 10 times the value. He or she adds more like a 100 times.

Bill Gates, whom I worked with while on the Microsoft board, purportedly went further. He is often quoted as saying, "A great lathe operator commands several times the wages of an average lathe operator, but a great writer of software code is worth 10,000 times the price of an average software writer."

In the software industry, this is a known principle (although still much debated).

I started thinking about where this model applied outside the software industry. The reason the rock-star engineer is so much more valuable than his counterparts isn't unique to programming. The great software engineer is incredibly creative and can see conceptual patterns that others can't.

She has an adjustable perspective, so when she gets stuck in a specific way of thinking, she has ways to push, pull, or prod herself to look beyond. These are the same skills needed in any creative job. Patty McCord, who at the time was the chief of talent, and I started to look at where exactly the rock-star principle might apply within Netflix.

We divided jobs into operational and creative roles.

If you're hiring someone for an operational position, say an ice-cream scooper, the best employee might deliver double the value of the average. A really good scooper can probably fill two or three times the number of cones an average one could. But there's a cap on how much value one ice-cream scooper can deliver. For operational roles, you can pay an average salary and your company will do very well.

At Netflix, we don't have a lot of jobs like that. Most of our posts rely on the employee's ability to innovate and execute creatively. In all creative roles, the best is easily 10 times better than average. The best publicity expert can dream up a stunt that attracts millions more customers than the average one.

In 2003, we didn't have much money but we had a lot to accomplish. We had to think carefully about how we'd spend the little we had. We determined that for any type of operational role, where there was a clear cap on how good the work could be, we would pay middle of market rate.

But for all creative jobs we would pay one incredible employee at the top of her personal market, instead of using that same money to hire a dozen or more adequate performers. This would result in a lean workforce. We'd be relying on one tremendous person to do the work of many. But we'd pay them tremendously.

This is the way we have hired the majority of employees at Netflix ever since. The approach has been remarkably successful. We have exponentially increased our speed of innovation and our output.

I've also found having a lean workforce has side advantages. Managing people well is hard and takes a lot of effort. Managing mediocre-performing employees is harder and more time consuming. By keeping our organization small and our teams lean, each manager has fewer people to manage and can therefore do a better job at it.

When those lean teams are exclusively made up of exceptional-performing employees, the managers do better, the employees do better, and the entire team works better — and faster.

Reed Hastings is an entrepreneur who has revolutionized entertainment since co-founding Netflix in 1997, serving as its chairman and CEO since 1999. His first company, Pure Software, was launched in 1991 and acquired just before Netflix was launched. Reed is also the co-author of "NO RULES RULES: Netflix and the Culture of Reinvention." Follow him on Twitter @reedhastings.

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This is an adapted excerpt from "NO RULES RULES: Netflix and the Culture of Reinvention," by Reed Hastings and Erin Meyer. Courtesy of Penguin Press.