Zappos CEO Tony Hsieh’s rather unusual lifestyle has often raised eyebrows. Despite a net worth of $840 million, he lives in a trailer (albeit a nice Airstream one) in the middle of downtown Las Vegas with his dog and two pet alpacas. And the shoe magnate personally owns only four pairs of shoes.

But one of the most unusual things about Hsieh is how he runs his business. Credited with taking the company from nearly nothing in 1999 to the multi-billion-dollar household name it is today, Hsieh has organized Zappos as a holacracy. A quick Google search will tell you holacracy involves removing power from management and spreading it across the firm; creating self-organizing teams, and the like. But how does this play out among real people, within the walls of one of the most successful internet companies in America?

Author of the New York Times bestseller Delivering Happiness (which he reputedly wrote in only two and a half weeks), Hsieh shared an inside look at Zappos’ management and hiring practices at the recent Wharton People Analytics Conference. Interviewing Hsieh was Adam Grant, a Wharton professor of management author of the bestsellers Give and Take: A Revolutionary Approach to Success and Originals: How Non-Conformists Move the World.

Remember, Be Nice to the Shuttle Driver

Hsieh emphasized the importance of Zappos’ 10 core values, which he called “a formalized definition of our culture.” According to the company’s website, the values are to “deliver ‘WOW’ through service; embrace and drive change; create fun and a little weirdness; be adventurous, creative, and open-minded; pursue growth and learning; build open and honest relationships with communication; build a positive team and family spirit; do more with less; be passionate and determined; be humble.”

Job candidates are asked interview questions related to each value, according to Hsieh, and need to achieve “10 out of 10 for us to hire them.” Grant asked if it were true that it was harder to get a job at Zappos than to get accepted to Stanford. Hsieh replied, “I think it’s a single digit percentage but I don’t know exactly.”

Another pitfall that candidates face is if they treat the airport shuttle driver discourteously on the way to their interview, they will find themselves being sent home again. “One of our values is to be humble, and another one is about family spirit, so if they aren’t nice to the shuttle driver… it’s in violation of those values,” said Hsieh.

“Now that people know about this though, do you worry that they’re becoming better fakers?” asked Grant. Hsieh pointed out that hiring is followed by a five-week training program of answering customer phone calls. “And that’s before they start the actual job that they were hired for. So we think of it almost as an extended interview process… It’s pretty hard to fake your way through the entire five weeks.”

Job candidates are asked interview questions related to each company value, according to Hsieh, and need to achieve “10 out of 10 for us to hire them.”

What about existing employees: How does the company ensure they continue to live up to the Zappos values? Rather than “the culture police coming after you,” said Hsieh, employees are expected to monitor their own behavior as well as their colleagues’. “It’s in our written employee agreement that part of everyone’s job is to live and inspire the culture in others. It’s not just one person’s job.

“You can be fired for core value violations even if your specific job performance is totally fine,” he continued. “And one employee can call another employee out for not being in line with our core values. It’s basically an accountability, like anything else in your job description.”

One way in which Hsieh himself lives the culture is to help with customer calls during the holiday season. Like every other employee, he puts in 10 hours of phone time. “I think it’s always good for every employee to have a more direct connection with our customers… And it just goes back to team and family spirit, and getting back to what is our purpose at Zappos.”

Grant questioned Hsieh on the dangers of hiring largely on culture fit. He quoted research showing that culture fit might inadvertently mean (referring to his own appearance), “Who are the other white, bald dudes that I can go have a beer with?” The risk is toward too much homogeneity, not only demographically but in expertise and worldview, he said.

Hsieh responded that it makes a difference what the company values actually are. He pointed to Zappos’ “create fun and a little weirdness” value as one of the most important ones. “Which is our way of saying — it’s a fun way of saying — we want diversity. So I think those types of things are actually baked into the values.” He added, “Our belief is, everyone’s a little weird somehow.”

What’s a Holacracy?

Asked how holacracy works at Zappos, Hsieh said that many people misunderstand the concept, thinking it means eliminating all hierarchies within the business. But as he described it, “instead of being a hierarchy of people, it’s a hierarchy of purpose.”

He said it starts with something called the general company circle, the purpose of which is the same as the business’s purpose statement. Within that circle are sub-circles and roles. “And then it cascades from there for each sub-circle.”

“You can be fired for core value violations even if your specific job performance is totally fine.”

A key difference from traditional companies is that an individual can fill multiple roles throughout the organization. “At Zappos we have about 1,600 employees and about 500 circles in this hierarchy of purpose.” Moreover, anyone can resign from any role at any time, and are “free to float around.” Only about five people in the organization have the authority to fire someone. Hsieh contrasts this with conventional management structure, in which if your direct supervisor decides you’re not a good fit, you typically leave the company.

He also noted a difference from the traditional concept of the org chart. “At most companies, the way I think about it, there’s three different org charts.” He identified these as the official org chart people are given when they’re hired; the unofficial one that includes “politics, friendships, and so on,” and the “ideal org chart that the organization wants to be,” which will help it become more productive and innovative. “One of the things I really like about holacracy is that the goal is to actually merge those three, and make the implicit explicit.”

He elaborated, “It’s not just the CEO or a few senior people saying here’s the new org chart, but every employee is actually empowered to participate in a governance process where the org chart at Zappos literally changes probably 50 times a day. And it’s all updated in real time.” He said he sees these as 50 incremental improvements toward bringing the company closer to its purpose.

Hsieh also addressed reports that holacracy doesn’t seem to work for a lot of businesses. In his view, what people misunderstand is that holacracy is not a pre-packaged solution but a platform. He compares it to an iPhone that has the latest operating system but no apps. “So what we’re doing is a lot of experimentation, which is the hard work of ‘building the apps.’ Some work out great and some don’t, and we just keep iterating.”

Ultimately, said Hsieh, holacracy is the only business model that will enable a company to survive long-term. He stated that of the businesses on the Fortune 500 list when it was first published in 1955, 88% no longer exist.

“[But] the data shows that self-organization works,” said Hsieh. He compared a holacratic organization to a city. “Cities have stood the test of time; they’re self-organized; the mayor of the city doesn’t actually tell its residents what to do, where to live. They’re resilient. There are statistics like every time the size of a city doubles, innovation and productivity increase by 15%.”

“Every employee is actually empowered to participate in a governance process where the org chart at Zappos literally changes probably 50 times a day. And it’s all updated in real time.”

Acquiring Superpowers

Grant asked Hsieh how, in this environment, Zappos handles issues of promotions, ascensions and formal leadership roles.

“That’s been a big area of experimentation for us,” noted Hsieh. “What we are moving toward is this idea of badging.” He explained that with badging, individuals could earn various “superpowers” or badges which would represent the potential they bring to the organization and upon which their compensation would be based. “I want to have employees clearly move around the organization without having to worry about, ‘is this going to change my comp,’ or ‘is this going to add budget to this circle.’”

Increasingly, Hsieh wants his employees to demonstrate an entrepreneurial spirit, which he defines as being comfortable with ambiguity, having a strong sense of curiosity and having emotional intelligence. He said Zappos is adjusting its hiring and coaching processes to develop these kinds of individuals rather than “people [who] want to know, if I do exactly steps one through 10, I’ve done a good job.”

The goal, he said, is “a much more entrepreneurial culture where you think of those 500 circles each as its own mini-startup, and think of each employee with self-management and self-organization like a mini-entrepreneur.”

Grant said, “Let me just be clear: you want a bunch of entrepreneurs running around ruining your organization?”

“Um… yes,” answered Hsieh, to laughter from the audience.

Overall, Hsieh feels that Zappos’ holacratic approach is often “painted in the press that we’re doing this radical experiment.” But to him, he said, transitioning to self-organization and self-management is not a radical experiment but “the future of work.”