A conversation with the CEO of Zappos

Question: Why did you consider your first business, LinkExchange, such a failure? 

Tony Hsieh: From the outside, the first company, LinkExchange, that I co-founded seemed like a success. It was actually a pretty sad thing selling the company. Most people don’t actually know the reason why we ended up selling the company. It’s because the company culture just went completely downhill. I remember when it was just five or 10 of us; it was kind of like your typical dot-com back in the day. This was 1996, and we were working around the clock, sleeping under a desk, had no idea what day of the week it was, but it was a lot of fun. But we didn’t know any better to pay attention to company culture. 

So, by the time we got to 100 people, we hired all the people with the right skill sets and experiences, but not all of them were culture fits. And when we got to 100 people, I remember I myself dreaded getting out of bed in the morning to go to the office. And that was kind of a weird feeling because this was a company that I co-founded and if I felt that way, then I wondered how all the other employees must have felt. So, we ended up selling the company. And with Zappos I wanted to make sure that I didn’t make the same mistake again. So from the beginning culture has always been really important and to this day, culture is actually the number one priority in the company. And our whole belief is that if we get the culture right, then most of the other stuff, like delivering great service, or building a long-term enduring brand will just happen naturally on its own. 

Question: Why was the culture at LinkExchange lacking? 

Tony Hsieh: So, I guess my definition of whether a culture would be a right fit for me personally, would just be; would I want to hang out with these people if we weren’t forced to work together? And at LinkExchange the answer was, no. And at Zappos the answer is yes. In fact, most employees when they leave the office we go hang out with other Zappos employees and we spend our weekends together. And so that’s probably the criteria I use for whether a culture is right for me. 

Question: Why is culture so important in building a company? 

Tony Hsieh: Our whole belief is that, if you get the culture right then most of the other stuff will happen naturally out of it. But it really depends on, you know, what the culture is. So, it’s a big "if." For us we’ve really kind of formalized the definition of our culture into our 10 core values. So if you do a Google search for Zappos' core values, you’ll see what those 10 are. And I think it’s inherent in those 10 needs to be stuff that is relevant to business. 

For example, one of our core values is to embrace and drive change. I think that’s really important for business. Another one is about being adventurous, creative, and open-minded. And another one is to do more with less. And so I definitely think that the core values need to incorporate business concepts, but they don’t necessarily need to sound business-y. For example, other companies might say, “Increase company efficiencies,” which is exactly what "do more with less" means. We are just less formal about it in terms of the actual wording. 

Question: How do you create culture? 

Tony Hsieh: Creating culture isn’t something that can really be dictated top down. It’s really more about having it come from the employees. And that’s literally what we did to figure out our core values. I emailed all of our employees—this was about five years or so into it—and asked them "What should our core values be?" And got back a whole bunch of different responses. And it actually is a pretty hard thing to do. It’s been about a year going back and forth, and we eventually came up with our final list of 10 core values at Zappos. 

And you know, a lot of companies have things, they may call them "core values" or "guiding principles," but the thing we wanted to come up with was a list of committable core values. And by committable, meaning that we were willing to hire, or fire people based on whether they were living up to those core values independent of their actual specific job performance. 

And so we’ve actually passed on a lot of really smart, talented people that we know could make an immediate impact on the top or bottom line, but if they’re not a culture fit, if they don’t live up to our core values, then we won’t hire them. And ultimately what we try to do is actually take care of it on the front end. When we hire people, we do two sets of interviews. The hiring manager and his or her team will interview for the standard fit within the team: relevant experience, technical ability, and so on. But then our HR Department does a separate set of interviews purely for culture fit. And they have to pass both in order to be hired. 

So for example, one of our core values is, "be humble." And there are a lot of really smart, talented people out there that are also really egotistical. And it’s not even a question, we just won’t hire them. Whereas, probably the conversation at most companies would be, "Well this person might be kind of annoying and rub you the wrong way a lot of times, but he can add a lot of value to the company, therefore we should hire him." And I think, that one hire won’t necessarily bring the company culture downhill, but if you keep making compromises like that over and over and over again, I think that’s why most large companies don’t have great cultures. 

Question: How can you tell that potential employee won’t fit the company's culture? 

Tony Hsieh: So, our recruiting team over time has gotten actually pretty go at figuring out whether somebody is going to be a culture fit or not. And we actually have interview questions for each and every one of the core values. And it's not necessarily what they say, but how they say it a lot of times. And, over time, our recruiting team has really developed their gut in terms of whether what the right call is for a candidate. 

We actually last year had over 25,000 people apply to work at Zappos and we only hired 250 of them, so about 1%. I think I heard the stat that it's actually harder to get into Zappos than into Harvard. So I'd say our recruiting team does a good job of screening on the front end. And, yes, it is true, they are not perfect and there are times when people do make it through the process, but then everyone that’s hired goes through a four-week training program. The same training program that our Call Center Reps and it’s pretty hard to fake something for four weeks. And so we also use the training program as part of... it’s almost like an extended interview. 

Question: Do you end up training many people who are not eventually hired?

Tony Hsieh: It really varies. It used to be really bad, it used to be that within the first month or so half the people that were accepted in were no longer employed by the end of the first month. But now the vast majority do make it through. But we still get cases where, for example, we had someone that was actually a pretty senior technical hire, and because we are based in Las Vegas, a lot of the technology people we actually have to relocate from other places. And this was a candidate that relocated... we paid to relocate from L.A. to Vegas and he started the first four weeks of training and by the end of the first week, it was pretty clear that his attitude was that customer service was beneath him and that really he was just waiting to make it through the program so he could start the actual job he was hired for. But we actually ended up letting him go during the training program—even though what he was doing in the training program didn’t have anything to do with the actual job function—because, for us, that’s how strongly we believe in the importance of culture and in making sure that we are hiring people whose personal values match the corporate values. 

Question: How do you encourage communication among employees? 

Tony Hsieh: There’s lot of ways of communicating with employees. But for us, really, we think the best communication is not communication from the top down, but it’s communication that happens naturally amongst friends. And so that’s why we encourage 10% to 20% of people's time, especially if you are a manager, to be spent outside the office hanging out with other employees and people that you work with. Sometimes when we do the new manager orientations and we encourage them to spend 10% to 20% of their time outside the office, if they’re someone new, then the reaction we get is, "Well isn’t that wasting time? We’re not really working." But then we ask people that have done it "How much more efficient is your team because there’s higher levels of trust?" Communication is better, people are willing to do favors for each other because they are doing favors for friends instead of co-workers and the answers we get back range anywhere from 20% to 100%. So, kind of worst-case scenario, you break even, but you’re having more fun. 

Question: What’s the least painful way to fire someone? 

Tony Hsieh: Well, so there's different ways of firing employees and firing, you know, in some cases may be even too strong a word. For example, during the training program, at the end of the first week, we make an offer to everyone. And the offer is that we’ll pay them for the time they’ve already spent training, plus a bonus, or $2,000 to quit and leave the company right then. And that’s actually a standing offer until the end of training. And we’ve extended it even a couple of months after that. 

So, technically, it’s the employee making their own choice on whether this is the right company for them. And in Las Vegas, starting pay for a call center rep is $11.00 per hour. There’s plenty of other call centers. So, $2,000 is a pretty significant amount of money. So we want to make sure that we get employees that are, really believe in the long-term vision of the company, want to be a part of that, and really believe that this is the company that is right for them from the culture perspective. And you know, we do occasionally have people who take that offer, and I actually think it’s a win-win for both sides. 

Question: How did you go about laying off 8 percent of your staff in 2008? 

Tony Hsieh: So, in late 2008, we had to lay off about 8% of our staff and that was actually a pretty tough thing to do. We were actually still growing year-over-year, but this was during the whole financial crisis and we had planned for much more growth than we actually had and so we had hired into that. And then we realized that we weren’t going to be making our numbers. So we ended up laying off about 8% of our staff. But we wanted to do it in a pro-active way. Most companies were waiting until they were forced to lay off employees when they couldn’t make payroll any more or they would lay off employees and give them maybe two weeks of severance. For us, we wanted to make sure we took care of our employees and we actually gave everyone at least two months of severance and on top of that, anyone who had worked with the company for more than two years, we gave them one month for every year they worked at Zappos. And then we also covered their COBRA payments for six months after that. 

And it was really more about making sure that we were pro-active in taking care of our employees and we were very transparent in why we had to make that decision and emailed that, not only out to our employees, but posted it publicly on our blogs as well. And so, I think for us, one of our core values is about being open and honest and we tried to be as open and honest with all of our employees and made sure that we weren’t backed into a corner, because we could have actually waited a few more months. But we wanted to make sure that they got a decent amount of severance instead of doing what most other companies seemed to be doing which was just letting them to with very little severance. 

Recorded on May 27, 2010
Interviewed by Victoria Brown