Many companies give a standard one-month severance to laid off employees, but streaming giant Netflix is substantially more generous.
Netflix gives a minimum of four months of severance to laid off employees. CEO Reed Hastings says that this is a deliberate decision that isn’t just helpful for the employee — they have a longer runway to find an alternative job — but also beneficial for the company.
“When you cut someone loose and with a week or two of pay, it really can be difficult for them,” Hastings says. “But our minimum is four months, and goes up from there. So even if two weeks in we realize there’s a mistake, as long as the person hasn’t lied to us or something, but we’ve made a mistake, they get a four month severance package,” he said.
“That does a couple of things,” Hastings continued. “One is it makes the person feel better about it, because they know that’s a material amount of money. Four months is the minimum,” he said.
“And two, we get a legal release in exchange for that. And so despite the fact that we’ve separated from a thousand people, we’ve never had an employee lawsuit,” he explained.
But Netflix also has a third benefit of giving away very generous packages when they get rid of employees — it makes it easier for managers to fire underperformers. “And then third, and most subtly, managers are really nice people. They’re human beings, and they’re good with people, so they don’t like doing mean things. And so you can think of the severance payment as like a bribe to the manager to do the right thing. Because it makes it easier. And without that, what they do is they put an employee on a performance improvement plan, and then the two of them go through this excruciating dance that takes two or three or four months, and then they break up, but it’s clearly documented. And that’s just a lot worse,” he explained.
“(A four-month severance package) is real money. But it’s worth it. It doesn’t really cost you any more, because you’re going to spend the three months managing the person out (through a performance improvement plan). So you’re going to end up with that hit (anyway),” he explained.
Having a four-month severance plan isn’t the only unusual HR practice that Netflix follows. Netflix also has something called a “keeper test“, in which managers are encouraged to think whether they’d like their teammates to continue working with them — if the answer is no, they’re encouraged to let go of these employees. Having a four-month severance package makes this process easier — managers don’t feel bad about asking underperformers to leave. And giving laid-off employees four months of salary could be a rare win-win in the corporate world, and a practice that many other startups and companies could end up emulating in the years to come.