HARI SREENIVASAN: But first: You might know retailer Zappos for the shoes it sells and its emphasis on customer service. What you may not know about is its quirky corporate culture, and why the company is banking on that for its long-term success. Our economics correspondent, Paul Solman, reports, as part of his weekly series, Making Sense, which airs every Thursday. WOMAN: Definitely the best port-a-potty experience I have ever had. PAUL SOLMAN: From its Porta Party P.R. to its campus in downtown Vegas, Zappos, the online shoe monger, is devoted to different. JASON BROWN, Zappos: Let me give you these three rules about wearing wallflowers, as we like to call them. PAUL SOLMAN: Wallflowers? JASON BROWN: Wallflowers, because you see we have got the wall? And we call them wallflowers.

PAUL SOLMAN: Front desk dress code enforcer Jason Brown gives visitors three options. JASON BROWN: First one is to take it off if it holds sentimental value to you. The next one is to wear it around your head in a bandana, John Rambo-style. And then the last one is to cut, and it becomes part of the collection. PAUL SOLMAN: Thankfully, my tie was deemed passably peculiar and thus spared a spot on the wall. Amidst decor both seasonal, lanterns for Chinese new year, and longstanding, like the ShoeZaphone. Tony Hsieh took over Zappos 17 years ago, after selling his online ad network, LinkExchange, to Microsoft for a cool $265 million. TONY HSIEH, CEO, Zappos: What a lot of people actually don't know is the real reason why we ended up selling the company. PAUL SOLMAN:

And that is? TONY HSIEH: And it's because the company culture just ended up going completely downhill. I myself dreaded getting out of bed in the morning to go to my own company. PAUL SOLMAN: History wouldn't repeat itself, Hsieh vowed. So, at Zappos, culture comes first. And that starts with hiring people who will fit. PAUL BROWN: I remember coming in, and one of the things was, we're not trying to hire based off of your education. We want to hire based off of someone I would want to go have a beer with after lunch. PAUL SOLMAN: Well, I would want to have a beer with you, and I barely know you. PAUL BROWN: Yes. I wouldn't have a beer. We could have a shot. (LAUGHTER) PAUL SOLMAN: Zappos' core values are an obsession: embrace change, be humble, create fun and a little

weirdness. Musician Tyler Williams heard it was harder to get into Zappos than Harvard. So, to be more than a face in the crowd, he sent a video valentine. And when it earned him an interview: TYLER WILLIAMS, Zappos: I think one of the craziest questions is they asked, on a scale of one to 10, how weird are you? So, I'm definitely a 10 on that scale, so I was worried I was a little too weird for Zappos. PAUL SOLMAN: Nope, Williams is now a fungineer, the brains behind company galas and other so-called experiences, like Tutu Tuesdays. TYLER WILLIAMS: We — probably at the pinnacle of its popularity, we had 50, 60 people that would wear tutus on Tuesday. PAUL SOLMAN: Another core value, build a positive team and family spirit.

TYLER WILLIAMS: So, we put these games on the elevator to hopefully … PAUL SOLMAN: Ah. TYLER WILLIAMS: That was good — to hopefully stop and play the game, have collisions, have conversations, and get off on the wrong floor, so people would visit different areas that they normally wouldn't. PAUL SOLMAN: Zappos invests lavishly in morale. Impress a colleague and H.R. will pay you Zollars to redeem for Zappos swag. Each month, employees can reward a co-worker with a $50 company bonus for going above and beyond. And company largess begets acts of random kindness. LETHA MYLES, Zappos: I took a picture of a particular bouquet that I liked, and I posted on Facebook, like, oh, I love flowers. PAUL SOLMAN: Letha Myles started in customer service nine years ago.

LETHA MYLES: The next day, there was a bouquet of flowers sitting on my desk, along with a note saying: You make us smile, so we thought we would make you smile. PAUL SOLMAN: Birthday balloons abound. Cubicle self-expression is de rigueur. But, look, what can the business rationale be for all this? Why would Amazon pay more than a billion dollars for Zappos in 2009 and then let it spend so generously for so long just to make its employees happy? TONY HSIEH: I think it's pretty hard to give great, amazing service if you're an unhappy employee. PAUL SOLMAN: Turns out Zappos' business is service. It started with shoes, as Amazon did with books, aims to branch out. TONY HSIEH: We have talked about one day there could be a Zappos airlines or a Zappos hotel that's

just about the very best customer service and customer experience. PAUL SOLMAN: Well-known service, like the 365-day free shipping return policy, managed by customer service reps who start at $14 an hour and comprise a third of all employees and above-and-beyond service. Two flight attendants told me Zappos, when asked, sent pizza to an auditorium full of new JetBlue hires. TONY HSIEH: In fact, we just had our longest phone call ever, which was well over 10 hours long. PAUL SOLMAN: Ten hours? TONY HSIEH: Yes. PAUL SOLMAN: But what were they talking about? TONY HSIEH: I wasn't there, but I think they — they bonded. PAUL SOLMAN: So, for you, to hear that somebody spent 10 hours on the phone with a customer bonding, that's a good thing, not a waste of time?

TONY HSIEH: That's an amazing thing. PAUL SOLMAN: But what's the payoff? TONY HSIEH: 2008 was the first year we hit a billion dollars in gross merchandise sales. We're doing several times that now. And the number one driver through all that history has been through repeat customers and word of mouth. PAUL SOLMAN: So, Amazon has kept hands-off, while Zappos proselytizes its happy, weird ways, offering daily tours and advising companies that want to emulate it. Now CEO Hsieh can be impish. TONY HSIEH: Rachel, do you want me to leave? Get it? Leave? PAUL SOLMAN: But he can also be seriously controversial. He's introduced a system called holacracy that, among other things, does away with bosses entirely. All Zappos' 1,500 employees now belong to some 500 self-governing teams called circles.

CHRIS PEAKE, Zappos: We're going to start like we do every holacracy meeting with a check-in round. Just call out your distractions. Get here, get ready to process some tensions today and share what you know with others. WOMAN: I'm only distracted because I have a super long day of meetings. WOMAN: I'm super, super distracted because the application window is open for intern candidates again for the summer, which means we have thousands and thousands of applicants, in the span of a week, up to like 5,000. PAUL SOLMAN: So-called tactical meetings are run by a facilitator, according to a rigid format, using holacratic lingo. CHRIS PEAKE: Let's move on to triage, you guys. You can just go ahead and yell those tensions out. And, Rachel, as our secretary, will go ahead and capture those for you.

PAUL SOLMAN: In the closing round, kudos for efficiency. CHRIS PEAKE: A ton of actions. We covered seven items in less than a half-an-hour, and we have like a zillion outputs, which is really great, but, with that, everyone have a great day. PAUL SOLMAN: Chris Peake helped with the holacracy rollout. CHRIS PEAKE: I would say the best thing about this process is the commitment to action and projects and the transparency to those. I would say probably the most challenging, with Zappos' culture, you introduced a really rigid process within meeting spaces. PAUL SOLMAN: Hsieh believes self-management is key to Zappos' longevity, allowing it to grow not like a top-down corporation, but a city. TONY HSIEH: Most companies, as they get bigger, they become less nimble, less innovative, less productive. Every time the size of a city doubles, innovation or productivity per resident increases by

15 percent. When you get more people in a relatively smaller area in a city, then you get this crossover of ideas from different creative types and entrepreneurs and businesses. PAUL SOLMAN: But self-organization wasn't for everyone. So, two years ago, Hsieh offered a liberal severance package to those not sold on the new structure, in fact, to everyone. Eighteen percent took buyouts, hiking the firm's yearly turnover rate for 2015 to almost 30 percent, though there's plenty of turnover at customer service firms and plenty in Las Vegas, period. But Letha Myles is sticking with it. LETHA MYLES: The people who stayed are pretty much saying that they're willing to commit to learning it and practicing it. You know, let's still remember, we're friends, we're family, and I think that helps us stay true to the process. TYLER WILLIAMS:

It felt like it took the humanity out of it. But we have worked that back into the process, I feel. And everybody's voice gets heard, which, usually, in the past, it was just the loudest person in the room, right? PAUL SOLMAN: Williams points out that Zappos is now canine-friendly because it was deemed safe enough to try, a key idea in holacracy. TYLER WILLIAMS: In the past, that had been shut down multiple times. And through holacracy, we were able to push that through. I know that's not a huge deal, but it's a big deal to our employees. PAUL SOLMAN: But Hsieh thinks self-management will accomplish something much bigger: saving Zappos from the fate of most large companies. TONY HSIEH: If you look at the Fortune 500 list, which I think came out in 1955 originally, something

like 85 percent, maybe more, are no longer on that list. The default fate for most companies is actually death. I want this company to still be around 500 years from now. PAUL SOLMAN: This is economics correspondent Paul Solman, still wearing my tie, reporting from Las Vegas.

Zappos is a weird company -- and it's happy that way

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