The Scoop: Netflix’s historic introduction of levels for software engineers - exclusive

Originally published on 1 Sep 2022 as an exclusive to all Pragmatic Engineer subscribers. Publications have taken over the details shared here weeks or months later - such as sharing a subset of the below details 3 weeks later. To be the first to hear about changes like this, subscribe to the newsletter.

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In April of this year, I covered how Netflix intended to introduce levels for software engineers in The Scoop #9:

Netflix is considering the following leveling system:
- Engineer 1
- Engineer 2
- Senior
- Staff
- Principal

The details of the system are still being worked out, and a proposal has been circulated within engineering. The proposal, understandably, has resulted in lots of questions, especially around whether existing engineers will be getting Staff or Principal titles. The original proposal made it seem that everyone would stay Senior, and with promotions, they could get to the next levels.

Why would the company introduce levels if it got on just fine without them for the past 25 years, growing to close to 2,000 software engineers with all of them senior software engineers? I suggested there are problems with the system:

The first cracks in the “one level across all of engineering” started to show about a year ago, when Netflix formalized the hiring of new grads in 2021. These engineers were not senior engineers by any means and were given the title of Software Engineer.

A problem Netflix faced was defining the career path for these new grads. A possible approach could have been to have a Software Engineer level and a Senior Software Engineer one. The problem with this approach is it can take a long time for new grads to grow into the senior role. Instead of waiting years, many are more likely to leave.

For Netflix to retain new grads, it would have been sensible for them to create a “mid-level” career position, which most companies call Software Engineer 2. This is a position most engineers realistically reach in about 2 years. In a further 2-3 years, they then grow into the Senior role.

Another challenge Netflix had with its leveling was consistently attracting above-senior talent. As everyone is a Senior Software Engineer, Netflix typically receives less interest from staff-and-above engineers in Big Tech. This is not to say it cannot hire from this group and it has done so. Thanks to paying top-of-the-market compensation, they have poached staff engineers from the rest of Big Tech.

Still, lacking a formal “Staff” level or similar, many Staff+ engineers in Big Tech tend to assume Netflix either doesn’t need or doesn’t reward Staff-and-above people. This is somewhat different to Facebook, where everyone has the Software Engineer external title, but internally, Facebook has granular levels, from E3 all the way up to E10. I covered Facebook's engineering culture - including levels and career progress at Facebook - in this two-part article.

Netflix has since clarified to engineers why it made these changes to levels. In an internal document, leadership shared:

Netflix has evolved and grown in terms of members, employees and overall complexity. While the business has changed and our organization has grown, we have not evolved the way we build our engineering teams. We believe that additional structure is required to evolve team composition to maximize the impact of our people-cost budget, facilitate more consistency and transparency of our compensation practices, and create clarity to guide and recognize growth. We aim to provide the innovative technical solutions required to support business innovation and Netflix’s long-term success, at a cost commensurate without business growth.

To help achieve these goals, we plan to introduce an IC career pathway. In Engineering, the levels being introduced will apply to the job families including Software Engineer, Security Engineer, Test Engineer, Technical Program Manager, etc.

In a shorter update, leadership outlined the reason a bit more concisely:

Introducing an IC career pathway solves some of our key challenges by allowing us to:

1. Evolve team composition to maximize the impact of our people cost budget

2. Improve consistency, rigor and transparency of compensation practices

3. Create clarity to guide and recognize career growth”

The main driver behind Netflix’s new levels seems to be cost. It just was not efficient to pay everyone as a senior engineer, on what would sometimes be a staff engineer or principal engineer budget at another Big Tech firm. I talked with senior software engineers in Latin America making $150,000/year, one in the US making $425,000/year, another making $525,000/year and another making $800,000/year. Before these changes, everyone’s expectations were the same. Still, one of them was paid in what’s likely to be a senior-level band, and another paid in what might be a staff or principal band.

Those paid in higher bands will now be held to higher expectations, and I’d expect there to be fewer openings for the higher positions.

Here is what the new leveling system looks like:

  • E3: Software engineer
  • E4: Software engineer 2
  • E5: Senior software engineer
  • E6: Staff software engineer
  • E7: Principal software engineer

On Wednesday, 10th August, the ‘great reveal’ happened. This was the day when the corporate directory was updated, and everyone was able to see the levels of everyone else. Before this, people were told what their level was, and they shared this information with close colleagues.

The levelling process has had its tensions over the past few months. I talked with an engineering manager who wanted to get all their reports into the E6 position, as all these folks are long-tenured engineers with the work impact to justify it. Their director was not supportive in the least. In the end, this manager was able to get only 20% of their team to the E6 level. The rest stayed as E5.

The typical distribution between levels looks something like this. It comes from the levels of a Netflix organization with about 150 engineers:

Most software engineers were re-levelled as E5 (Senior engineer) as part of the recent changes. Some got E6 (Staff). Very few got E4 (Engineer 2) and E7 (Principal) was the rarest levels of all.

Lots of tenured software engineers left Netflix during the past few months, as the re-levelling project moved ahead. In many cases, the reason for leaving was they were not happy with how they were to be levelled as E5 in the new levelling system, and not the higher level they felt was appropriate.

Many departing engineers had joined Netflix from another Big Tech company where they were a staff or principal engineer. When joining, they gladly accepted the Senior Engineer title, understanding that everyone had it. Many preferred this setup, where titles no longer carried weight. However, with the new levelling, several of those engineers who were Staff or Principals before, were now levelled as E5 (Senior), which prompted them to look for a job with the title they were accustomed to.

In an internal survey on Netflix’s anonymous Blind channel, only 24% of respondents who answered the question “E5 folks: Now that levels are out, how many of you are leaving” indicated they plan to stay. In another survey which asked, “Are you happy with the level you are recognized with?” 68% responded as “No” and 32% as “Yes.”

I would treat surveys on Blind carefully, as they tend to over-index on negative emotions. However, the discontent with getting an E5 title is clear.

The biggest worry software engineers have in getting levelled as E5 level, has to do with compensation. Right now in the US, those levelled as E5 make between $400,000 to $800,000 in total compensation. Clearly, the higher end of this range will be E6 or E7 levels. So, what will happen to those earning on the higher end?

Netflix employees will find out soon, because the annual compensation review has started. The annual compensation review runs from 22nd August to 21st October. This is when the compensation numbers – and the raises – are decided. Between 24th October and 11th November, managers will communicate the new numbers to all employees.

The vast majority of Netflix employees expect that those making above the band they are in, will see their compensation frozen until they move up to the next band. This is the most likely – and most sensible – approach Netflix can take. Cutting compensation encourages attrition and I’d be very surprised to see them do this.

The introduction of levels also likely marks the end of Netflix matching external offers and encouraging people to interview. When Netflix had no levels, the company would encourage employees to find out their market value and to interview; but only if they shared the numbers they got to Netflix, so the company could adjust it.

With levels in place, and these having internal budgets, I expect this novel approach to become a thing of the past.

Netflix introducing levels marks the end of the longest policy of “one level” for everyone. I’m impressed the company was able to scale to close to 2,000 software engineers with one, single level, and no internal levels, for so long. While it’s not uncommon for companies to operate with a single level up to around 100 software engineers, Netflix was able to run this setup successfully for far longer.

It’s worth reflecting on the benefits Netflix got out of having a single level:

  • Hiring. It was able to hire people attracted to the idea of a “flat” hierarchy, at least levels-wise.
  • A unique culture. While there are several companies without external levels – like at Facebook – they do have internal ones. Thanks to the absence of internal levels, Netflix created a unique culture, unseen anywhere else at this scale.
  • Always paying the top of the market. By encouraging employees to interview externally, and matching external offers, Netflix kept paying the top of the market. It’s an open secret in the industry that to get the highest cash-only total compensation, you should interview with Netflix. Well, at least until now. This truism may also be a victim of the change.

And here are my takes on why this single level was bound to break down, sooner or later:

  • Cost. Netflix was overpaying by a good amount for the folks it hired, without setting explicit, high expectations of them. Of course, setting expectations doesn’t matter when there’s intrinsic motivation. That’s why this setup can work well with small groups. That intrinsic motivation will slowly fade as a small startup becomes a massive enterprise.
  • Inability to hire less experienced engineers. With a single level in place, Netflix was never a place that hired junior software engineers. This also likely impacted the culture. Most of Big Tech relies on the intern and new grad hiring pipelines to grow talent in-house. Netflix just bought this talent, paying a premium for skills picked up elsewhere. This also relates to the cost aspect.
  • Unclear expectations. When people with different experiences and different skill levels are given the same expectations, this leads to some level of confusion. This is true both for performance reviews, but also the day-to-day job. The same expectations that stretch an engineer with four years of experience, might just be coasting for an experienced engineer with twenty years on their CV.

This was one out of the five topics covered The Scoop #23. A lot of what I share in The Scoop series is exclusive to this publication, meaning it’s not been covered in any other media outlet before and you’re the first to read about it. Subscribe to the newsletter and get exclusives like this in your inbox.

The Scoop #23 additionally covers:

  • Large pay raises – but still some discontent at Shopify. The company announced inflation-beating pay adjustments, with software engineers getting some of the highest raises. Still, people are grumbling and upset about some draconian policies. What is happening at the company formerly known for its transparent culture? Exclusive.
  • Friction on compensation at Microsoft. The company is giving more generous stock awards to its graduates, than it does to industry hires. This is causing friction among L61-62 team members, whose total compensation can be less than new L59-60 engineers make. Exclusive.
  • Shopify’s updated governance structure. In April, most small investors and several Shopify employees voted against changes to ‘lock in’ the current Shopify CEO ‘for life.’ Yet this change still passed approval. A summary of what happened and a comment from a current Shopify employee on why they opposed it.
  • Business back to normal at Oracle. The layoffs that were never announced to start nor to end seem to be over, according to software engineers I talked to, and raises were communicated. I checked in with current employees on how things are going at the company. Exclusive.

Read The Scoop #23 here.

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