Good morning everyone,
Thanks for your patience as I turn the knobs on the Marketing BS podcast. This week features a two-part episode with Nick White (head of marketing at Osano).
For today, I planned to write about the Optimizely exit, but I pivoted to cover some news that hit upon two perennial Marketing BS topics. I’ll share my thoughts on Optimizely next week.
Employees in real life
At Marketing BS, I regularly argue that the path to success involves doing simple things well. A focus on trendy “shiny objects” in the marketing industry often distracts employees from performing vital tasks — like answering the phone when customers call. In most cases, you don’t need new ideas and concepts in order to successfully grow your business.
But over the past 16 months that I’ve been writing these essays, I have developed — with some great feedback from readers — two relatively original ideas:
Marketing to employees. People assume that marketing is aimed at consumers, but a lot of marketing is actually intended for employees. Customers don’t care about your company culture, values, or belief systems — but your employees do. If you cultivate a powerful company culture, you increase your ability to attract high-quality employees. Here’s my deeper explanation of this concept.
“Real Fidelity.” The term fidelity refers to the formats we use to communicate sounds, images, or experiences. Fidelity plays a fundamental role in the effectiveness of a marketing strategy. For instance, video can deliver a message more effectively than audio. And a video played on a large, high-definition screen is more impactful than one played on a small, low-quality screen. The most powerful fidelity is “real life.” A live presentation in an auditorium (usually) holds people’s interest better than a YouTube video of the event — a phenomenon that many parents discovered this year, while watching children struggle with Zoom-style classes. Here’s the essay on Real Fidelity.
Last week, two pieces of news directly resonated with themes of marketing to employees and Real Fidelity:
Netflix CEO Reed Hastings elaborated on the company’s culture.
Various tech companies offered parental support to remote employees.
On September 7, the Wall Street Journal published an interview with Netflix CEO Reed Hastings, reflecting on the ideas from his new book, No Rules Rules (co-written with Erin Meyer). The book extends the philosophy behind an (in)famous document — “Netflix Culture: Freedom & Responsibility” — that the company shared publicly in 2009.
Netflix’s success — as both a draw for subscribers and a magnet for talent — motivated many other tech companies to copy elements from their culture document. Today, you would be hard pressed to find a progressive technology organization that does not share one or more of the core policies popularized by Netflix.
Some of the most famous ones include:
Candor: Attack ideas not people. Employees of all levels should “tell it like it is,” without worrying about people’s feelings.
Unlimited Vacation: Employees should take as much vacation time as they want. People are evaluated on impact, not face time.
No expense policy: Employees should spend the money needed to grow the business. People should focus on achieving results and hitting budgets, not managing specific line items.
Hire 10x employees: Top employees are 10 times more productive than average employees. Attract the best and pay them accordingly.
Notice that few companies copy some of Netflix’s less popular beliefs:
Companies are a “professional sports team” — not a “family.”
When a person is no longer pulling their weight, they should be (respectfully) asked to leave. Case in point, Patty McCord — Hastings’s partner in growing Netflix from its humble origins into a global tech colossus AND the author of the original culture document — was “asked to leave” when it became clear that her skill set was no longer sufficient for reaching Netflix’s next set of ambitions.
Company culture is a tricky thing. It relies on the subtle interplay between many elements that come together — or don’t — as a whole. Too often, executives look at successful companies and think “if we emulate their policies, then we can achieve the same results.” But they usually replicate the obvious features like free lunches and foosball tables. The executives rarely consider that flashy workplace perks only work at a particular company — if they do at all — due to “scaffolding” that exists around the programs. Netflix can implement an unlimited vacation policy because employees are judged on output not input; the failure to deliver meaningful output will result in being “asked to leave.”
Do you know who else has unlimited vacation time? People who run their own business. But business owners know the implications of taking vacation — less time to build and grow the company. Netflix has structured their culture and incentives to make their employees behave like business owners — not only in terms of autonomy and responsibility, but also the consequences.
Take any of Netflix’s popular philosophies in isolation. You can easily see how they could be subverted at a different company:
Candor: A culture of “telling it like it is” could empower assholes to say anything without recourse. Even worse, the company could enable rampant harassment.
Unlimited Vacation: People might become afraid to take any vacation, due to the signal it sends (input versus output). Resentment could fester due to unequal vacation lengths.
Hire 10x employees: Boasting that employees are 10 times as productive as others can lead to an entitlement culture where people think they are better than their peers. Have you ever been in a meeting where every person assumed they were the smartest one in the room?
Netflix’s package of policies and cultural elements work as a whole for Netflix. I would argue that the publication of those policies is an example of “marketing to employees.” The letter inspires existing employees, who now believe they work at a special place (which also decreases their desire to leave). Plus, the Netflix culture document attracts a certain type of potential employee — the ones that Hastings wants to recruit.
Company culture involves a unique combination of elements. If you pull out one or more of the pieces, things may collapse. Netflix, for instance, is struggling with the transition to work-from-home realities.
Here’s an enlightening section from the WSJ interview:
WSJ: What elements of the Netflix culture are tougher to maintain now that so many employees are working from home?
Mr. Hastings: Debating ideas is harder now.
WSJ: Have you seen benefits from people working at home?
Mr. Hastings: No. I don’t see any positives. Not being able to get together in person, particularly internationally, is a pure negative. …
WSJ: Do you have a date in mind for when your workforce returns to the office?
Mr. Hastings: Twelve hours after a vaccine is approved.
Let’s think about the relationship between a performance-based company culture and the impact of working from home. Pay inequality has increased over the last few decades; despite some tabloid-style articles, executive compensation is not the primary driver. In other words, pay inequality within a company is not the main issue. Instead, the upward trend of pay inequality results from differences between companies.
This 2015 paper from the National Bureau of Economic Research illustrates that the rise in pay inequality from 1978–2012 can be mostly attributed to differences between employers. The research concludes that “pay differences within employers have remained virtually unchanged.”
One possible explanation for greater pay inequality could be the “O-ring” model of economic development — the idea that performance is often bottlenecked by the least efficient person working on a task. The O-model emphasizes the value of “assortative matching,” which involves collaboration between people with similar levels of skill. In the real world, assortative matching means that highly productive people gravitate toward other highly productive people, which naturally leads to high wage employees clustering in the same companies (and lower wage people clustering at different companies).
Take a look at the MEDIAN (2017) salaries for these tech companies:
In The Diff newsletter, finance writer Bryne Hobart argues that, “The value of in-person interactions is highly dependent on the median person encountered.” Netflix designed their entire business model around ensuring that the median employee is exceptional. When those median employees lose the opportunity for in-person conversations — including both boardroom debates and spontaneous hallway encounters — the relative performance of the company drops much faster than an organization that does not have such exacting standards.
The rebellion of the childless
As we’ve all seen, the pandemic disrupted world economies in unprecedented ways. Many analysts anticipate a “K-shaped” recovery. Some parts of the economy — like the tech sector — will bounce back quickly, while other industries will struggle for a long time. For retail, service, and hospitality workers, the COVID crisis upended their employment situation. Tech workers, on the other hand, transitioned to a work-from-home setup with relative ease.
In May, Twitter announced that employees can choose to work from home, permanently. At first, many pundits explained that remote working was a simple reaction to the pandemic. More recent comments, though, have highlighted an underlying reason that tech companies implemented flexible work-from-home guidelines for employees: the possibility that COVID will force more shutdowns of schools (and daycares).
This idea brings us to the second piece of news from last week. A September 8 article in the New York Times profiled the parental benefits that have been offered by some larger tech companies. Here are a few examples:
In March, Facebook, Google, and Microsoft provided ten weeks of paid leave to any parent whose children’s school or daycare facility had been closed.
In late August, Salesforce offered 6 weeks of paid leave to all employees with children living at home — even if schools have opened.
Facebook recently announced the cancellation of performance reviews for H1 2020.
Speaking as someone at home with three children under the age of six, I understand the challenges facing parents. In response to stressful times, these companies tried to “do the right thing” for their employees.
But as the New York Times profile points out, not every employee at these tech companies has school-age children. And many of these employees are deeply frustrated by their companies’ policies:
Two childless employees at Salesforce “complained that the policy seemed to put parents’ needs ahead of theirs.”
When Facebook COO Sheryl Sandberg hosted a company-wide video conference in August, “...more than 2,000 employees voted to ask her what more Facebook could do to support nonparents, since its other policies had benefited parents.” When the company announced that every employee would receive the bonus level reserved for “very good performance,” some childless employees were apparently “irked,” contending that “those who worked more should be paid more.”
Many tech companies have borrowed Netflix’s philosophy of recruiting and retaining high-performing employees. No one should be surprised that ambitious, career-minded people are frustrated when they see colleagues delivering less work AND receiving additional benefits.
Positive company cultures seem like they are built on a solid foundation of effective policies and employee harmony. But as we’ve seen in 2020, it doesn’t take much to destabilize a company’s operations. And when the facts on the ground quickly change, the “trying our best” approach can lead to unexpected consequences.
The restrictions caused by the COVID crisis have posed some immense challenges for company culture. Fostering a sense of “togetherness” is nearly impossible when everyone is isolated in their own homes. Some companies have launched new products to spark social interactivity. (The aptly named WaterCooler, for instance, pairs employees together to have conversations about non-work topics).
But who really wants to jump from a work-related Zoom meeting straight into a non-work-related Zoom meeting — with a random person at the company? I’m pretty sure most of us would prefer to spend that time completing more work, dealing with children, or squeezing in a Peloton workout.
Some companies were built — from day one — with a distributed team (Automattic is a good example). Because those companies were remote by design, they have effective tools for project collaboration and social interactions. But when a company with an “optimized” in-person culture abruptly switches to working from home, the result can be unpredictable (or maybe “too predictable”). These newly remote companies can function for a while on the social capital that was previously established. However, without all the integrated elements and “scaffolding” designed around a work-from-home situation, it is very hard to build up NEW social capital.
Quite simply, it’s easier to develop animosity toward a co-worker who you don’t see face-to-face every day.
Remote work can be freeing. For projects that are solitary and measurable, data shows that working from home increases productivity. But when outcomes are harder to measure, effort actually decreases at home. Even NBA players — known for their disciplined exercise regimens — struggled with the shift to working out at home.
One of my friends has access to productivity data for employees from a wide variety of companies. Historically, he found that work-from-home employees in his dataset were more productive than those on-site. But everything changed in March, as people who had been working in corporate offices relocated to their living rooms. Part of the decline was clearly explained by parents who tried to juggle their work tasks with childcare. That said, he also noticed dramatic drops in productivity for childless workers — working from home provides lots of distractions, like Netflix, naps, and artisanal bread.
If you are continuing to do what you have always done, then going remote may not cause much disruption; in fact, you might even increase your productivity by removing any workplace distractions (and your commute). But doing something NEW — especially a task that requires coordination with other people — is much harder without Real Fidelity.
The companies that are most ABLE to work from home (tech companies like Facebook and Google), are also the companies that are most dependent on innovation (which is why they have such high R/E multiples). In the short term, these companies will be fine, but if they can’t find a way to get their high-performing employees together in person OR to remotely collaborate on innovation-centric projects, then their long-term prospects may not be as rosy as the market seems to believe.
And the companies seem to understand the risks of long-term remote work. Despite the public rhetoric that firms will “work from home as long as needed,” they are simultaneously buying up real estate:
Facebook leased all of the office space in Penn Station.
Alphabet CEO Sundar Pichai announced that Google would NOT be going 100% remote.
Amazon has invested in additional real estate in six different cities.
Micrsoft CEO Satya Nadella said he was “on the lookout for what was lost.” He claimed that productivity improved after going remote, but “that isn’t something to overcelebrate. … One of the things I feel is, hey, maybe we are burning some of the social capital we built up in this phase where we are all working remote. What’s the measure for that?”
It’s notoriously difficult to measure long-term impact. But when anecdotes and data disagree, be very careful about what you are measuring.
Keep it simple,