Cracking the Compensation Code

By Sarah Fister Gale

Doug David’s first day in 2013 as director of sales for global education technology company Rosetta Stone Inc. was a messy one.

In particular, when David first dug into the company’s compensation data, what greeted him was a pile of knotty spreadsheets — a trove likely comprehensible only to the predecessor who created them.

Such scrappiness meant Rosetta Stone’s sales team lacked clarity into their commission structure, dulling the incentive-driven nature of those employees’ pay packages. What’s more, the sales team didn’t even have a sense of whether they were close to their quarterly and yearly targets.

“Once a month, I just sent the spreadsheet to the sales team to validate their numbers,” David said, “and they didn’t see it again until the next month.”

Such problems extended beyond sales. Managers from other departments lacked insight into how much their employees were earning, while employees couldn’t track the total value of their total compensation to stack against market standards.

This spreadsheet-oriented environment in an era of elaborate HR technology systems meant Rosetta Stone’s human resources team spent most of its time ensnared in administration, not strategic talent management.

“It was a disparate system with no transparency and a lot of manual work,” said Melissa Yates, Rosetta Stone’s senior director of HR.

But soon after David’s arrival, things started to change.

Thrust by a slew of acquisitions and an extensive business transformation, Rosetta Stone revamped how it tracked compensation by installing new technologies that allowed managers and sales employees to check targets in real time.

The new system also better aligned base pay, commission structures and pay-for-performance incentives with industry benchmarks — an important component toward ensuring that Rosetta Stone remained globally competitive. It also gave managers greater power to oversee their own annual compensation budgets, providing them with added flexibility in how they rewarded employees and paid top performers.

Now, roughly two years into the change, executives say the new system has bolstered the company’s ability to measure compensation while reigniting the sales team’s motivation.

“It is all about creating a more nimble corporate structure,” said Kristy Perry, the company’s director of global compensation.

Language Learning

Since its founding in 1992, Rosetta Stone has grown from a small business owned and operated by brothers to a company with 921 employees in offices around the world. The company offers courses in more than 30 languages — such as English, Spanish, Mandarin, Swahili, Swedish and Filipino (Tagalog).

Life as a public company has been tough for Arlington, Virginia-based Rosetta Stone, which gained popularity thanks to its software products that aim to make learning languages more accessible and intuitive than traditional teaching.

Financial results haven’t kept pace. While the company posted trailing 12-month revenue of about $260 million for the period ended Sept. 30, 2014 — the most recent period for which figures were available at publication — it reported a loss of roughly $56 million in that time. The company has reported an annual loss in each of the previous three years, according to securities filings.

The company is hopeful that 2015 will be a tipping point in the market for online language learning. In a statement released at the end of 2014, CEO Steve Swad said an influx of people taking language courses on mobile devices and evolving relations to U.S. diplomatic relations with Cuba point to promising prospects for the company.

By 2020, Rosetta Stone forecasts that more than 40 million people in the U.S. will speak Spanish. The company says English, meanwhile, is anticipated to be one of the top five languages studied by non-native speakers in the U.S. by 2020.

Such hopefulness likely started in 2013, when Rosetta Stone took steps to stir a transformation by acquiring community-based language-learning platform Livemocha Inc. and reading technology company Lexia Learning Systems Inc.

Company executives said these acquisitions represented a larger strategic transformation to a cloud-based business model that focused more broadly on education technology rather than just language learning. The moves also sparked a shift in how it organized integral employee data, including compensation.

Coinciding with David’s 2013 arrival, Rosetta Stone implemented two new software systems: Workday Inc.’s human capital management software and Xactly Corp.’s sales incentives compensation management. Both are cloud-based, which aligned with the company’s new business model and minimized upfront costs of creating a new compensation program, Yates said.

“It was more about investing in the implementation and maintenance of the software,” she said. To process the transformation of corporate data, Rosetta worked closely with the software vendors, populating multiple data import files with all employee information, including compensation details, Yates said.

The vendors also helped Rosetta build out the compensation plans and eligibility rules and salary ranges by country, which were then assigned to employees as part of the data loads. “It took approximately six months from the kickoff of the project to implement Workday in six countries,” Yates said.

Her biggest concern was making sure the data were accurate. “This was the first time that employees would have full transparency into their compensation,” Yates said. So they had to be certain everything was clean and up to date. “We had to do multiple iterations of data scrubbing and loading in addition to testing to ensure that we were rolling out an accurate system.”

Using the company’s business strategy to shape how it implements new systems to tackle HR metrics like compensation is well-advised, said Elissa Tucker of nonprofit management research firm APQC. “It’s important to define your strategy up front and tie it to human capital goals before you adopt any technology,” she said.

This includes standardizing compensation processes, establishing metrics to measure progress and creating a communication and training plan to make sure employees understand why changes were made.

Despite the perceived effectiveness of this approach, many companies don’t abide by it. Just 40 percent of HR practitioners said their organization’s compensation program is fully aligned with the business strategy, according to a 2014 compensation and benefits survey by Human Capital Media Advisory Group, the research arm of Talent Management magazine.

Starting Small

To ensure employees embraced the new system, Perry’s team launched a companywide training program for employees and managers in conjunction with the software rollout.

Specifically, the training included a mix of in-person and on-demand training as well as demos of the various features so employees could learn in the way that best suited their preferences. The topics covered basic employee self-service strategies and manager features like how to make compensation changes, do performance reviews and implement one-time payments.

The company held numerous webinars to cover the basics of navigation in both systems. It also created a knowledge base on the company intranet with videos and quick-start guides that could be referenced at any time. “The training tools have been especially successful for the new salespeople,” Yates said.

To further ease employees into the transition, Rosetta’s HR team staggered implementation of the tools. It rolled out the core Workday HCM suite in May 2013 before adding payroll, time tracking and absence tracking in January 2014.

“A key to the rollout was identifying a group of enthusiastic managers and employees who helped us test functionality and provided feedback so that we could modify configuration prior to going live,” Yates said. “They leveraged these ‘evangelists’ post-launch to help ensure broad adoption throughout the company, by getting them to talk up the tools to their teams and share success stories.”

Improvements were evident almost immediately. “Prior to Workday, there was no visibility for managers or employees into their compensation or even basic details HR had on file for them,” Perry said. “Since rolling out Workday, we’ve increased transparency 10 times.”

In one of the early demonstrations of the success of the system, Perry’s team received a large number of inquiries regarding data and requests for changes because of outdated information or discrepancies. “For the first time employees could see the true employer contributions for their benefits as well as a real-time view of their target compensation and bonus plans,” Perry said.

The combination of new technologies and more flexible compensation packages quickly benefited HR, management, employees and recruiters at Rosetta Stone.

“Having an automated system frees the HR team from spending so much time managing spreadsheets and checking for errors,” Yates said. “The system has cut administration tasks so we can prioritize more value-add tasks.” That freedom from paper pushing allowed the team to prioritize core HR issues.

Managers can now take advantage of self-service tools to see how they’re distributing their pool of resources compared with company and market trends. This helps them make better decisions about whether to build things like incentive programs or to ensure their team is falling fairly within accepted salary ranges.

The new tools also gave the company the data necessary to fully comply with corporate accounting regulations enacted after the Enron Corp. scandal of the early 2000s. The regulation requires audits of all public companies that demonstrate full financial disclosure, said Scott Olsen, U.S. HR services lead for professional services firm PricewaterhouseCoopers.

“Governance isn’t sexy, but it’s an important part of comp and benefits programs,” Olsen said.

Speaking Clearly

The technology has not only given Rosetta Stone’s management greater transparency in how compensation is structured, but also given sales employees a new level of transparency as well.

For the sales staff, Xactly provides the ability to review their compensation package and current standing at any time, giving greater insight into their sales status. Errors are also less likely; thanks to the real-time functionality of the software, sales staff can spot efforts before their paycheck is due.

“That’s one of the benefits of an open system,” Perry said. “The more eyes that are on the data, the more accurate it will be.”

At the same time, it gives managers like David the ability to make changes to individual compensation plans and to create multiple settings for different roles, regions and product categories. “It’s awesome being able to go into the system as a manager and be able to move things around and see what everyone is getting paid, without having to track down HR to get answers,” he said.

One of the David’s favorite features has become the ability to create one-off incentive programs to motivate certain behaviors. For example, in 2013 one of the company’s strategic goals was to shift priorities from one-off product sales to subscription-based services. To support that goal, David launched a cash incentive in the fourth quarter for all digital sales.

In third quarter of 2014, David launched a similar program to motivate the U.S. sales staff to close business earlier in the quarter. “We always see a spike in sales in the last couple of weeks,” David said. That, however, made it harder to manage volume, especially for operations people who get flooded with end-of-quarter orders. “We wanted to level out the spikes so we can stay on top of that volume,” David said.

So he created a short-term incentive program that gave extra “credits” for sales completed by midquarter as opposed to the end of the quarter. In both cases, he set up the programs through Xactly, which automatically adds credits as the deals are closed. “It gives the sales team a real-time view of how their sales are trending and gives them the extra boost they need to get focused,” David said.

The new systems are also helping recruiters attract sales talent because it gives them a visual tool to show candidates what their comp plan will look like and makes manager more confident in offering guaranteed draws for new hires.

This can be an obstacle for recruiters wooing passive candidates. In the past, the company was hesitant to offer recoverable draws — which guarantees new hires a minimum monthly payment against future commissions — because it was too complicated to keep track of in the spreadsheet system.

But Xactly can track draws for them, which makes managers more comfortable. “From a recruiting standpoint, it’s very beneficial for recruiters to have that in their back pocket,” Yates said.

Globally Sound

While the new compensation system’s implementation in the U.S. was fairly painless, Rosetta Stone executives said it required a little more planning on a global level. The company had to make sure all plans met the unique regulatory requirements of each country.

Rosetta Stone’s compensation team is in the process of customizing new compensation plans for every country where it operates. For example, in the U.S. Rosetta’s sales compensation plans are typically 50 percent base and 50 percent commission, but in Brazil the sales team receives a 70 percent base and 30 percent commission “because that’s what the market dictates,” David said.

Local laws and regulations also affect the compensation plan structure. In Mexico, employment law states that salespeople must be able to participate in profit sharing. In Brazil, salespeople must be paid on a 13-month schedule to accommodate paid time off. And in China, every city has a different set of regulations and sales teams often benefit from collective bargaining.

“It’s a challenge to get it all right,” Perry said.

Once the country’s plans are defined, they’re implemented through Workday and Xactly, which translate payments into local currencies and back to U.S. dollars so Perry can generate local and global reports on the company’s compensation budget to make sure sales goals are on track.

As the compensation and HR team work to get more familiar with the tools in 2015, results from the implementation are already coming into view.

Yates said her team already generates reports on how the company and each department is distributing compensation resources, and she’s beginning to do workforce analytics to track how such compensation changes are influencing business results.

“We can see who is above or below trends and compare it to things like attrition rates and productivity,” Perry said. That, she said, will help her make more strategic decisions about compensation going forward. “We want to see trends, both positive and negative, so we know where to focus of efforts.”

Rosetta Stone hasn’t yet quantified whether long-term increases in sales can be tied directly to the software, but it was able to meet target sales goals with its incentive programs. “Having access to the data and combining it with a cash incentive definitely motivates the right behavior,” David said.

In addition to continuing to track sales results, Perry anticipates being able to use the data in future workforce planning efforts to forecast compensation expectations for the coming year.

“From a strategic standpoint, these tools are having a huge impact,” Perry said. “We are trying to be more profitable and more efficient, and this technology has been a catalyst to help us do that.”

Reprinted from Talent Management Magazine

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