Guest Blog: The Secret World of Shadow Accounting and How to Eliminate It
December 06, 2016
When you offer people variable pay – like commissions – you’re engaging in a trust exercise. Since the amount a person is getting is not fixed within each pay period, the numbers in the “amount” box on their checks can vary dramatically. Sometimes, it’ll vary in a way that brings a smile to your sales reps’ faces – like when the number’s particularly high. Other times, they may not be so happy about it, like when a check arrives with a number lower than they expected.
Because of the feelings those less-than-optimal commissions checks evoke, many sales people subscribe to Ronald Reagan’s old saw, “Trust but verify.” In order to ensure that their commissions checks amount to what they think they should, they keep their own records of their sales and compute their own commissions.
What is Shadow Accounting?
Shadow Accounting is the practice of calculating incentive payout by individual payees apart from official accounting records, for the purpose of detecting errors. This is usually a feature of manual payout calculation processes because payees do not trust the calculation method or accuracy of payouts.
While this seems like a reasonable thing to do, this practice has some downsides.
Shadow Accounting Downsides
First, it costs you and your salespeople selling time. While there are few formal studies of the practice, it’s not hard to imagine a salesperson devoting an hour a week to tracking commissions. Now, multiply that by a year – that’s 50 hours. Do you have 50 reps? If they’re all engaged in shadow accounting, you’re losing the equivalent of one sales rep a year.
Second, as commissions plans become more complex, it becomes harder to accurately compute what a commission payout should be – especially if you’re a sales rep-turned-amateur accountant. The result is an increase in the number of disputes salespeople have with comp plan managers, which further cuts into selling time and which makes life miserable for comp managers.
In the worst cases, the sales team and the comp manager develop an adversarial relationship, in which sales starts to mistrust the comp manager and may even begin to think they’re being cheated on purpose. This erosion of trust isn’t merely unpleasant – it’s expensive, because when salespeople don’t trust the company they work for, they leave, and replacing sales talent is expensive.
Shadow accounting can’t be attributed merely to sales reps’ paranoia. As Joseph Heller wrote in Catch-22, “Just because you’re paranoid doesn’t mean they aren’t after you.” In this case, “they” are the inevitable errors that creep into manually-managed compensation systems. No matter the diligence and good character of the comp plan manager, mistakes are inescapable when spreadsheets are used to manage a plan. According to studies, 88 percent of all spreadsheets contain errors, and the larger the spreadsheet, the more likely it is that it contains an error. Each mistake has an impact; it may be an error that aggravates a sales rep who feels they’re being cheated, or it may be an error that gives away more in commissions that the sales rep deserves, at a cost to the company.
Shadow Accounting Solutions
Fixing this depends on one of two things: either you find a truly incredible comp plan manager who never errs, never tires, never hits the wrong key on the keyboard and never enters the right number in the wrong field of a spreadsheet (good luck with that), or you turn to technology. By automating your commissions plan, you can cut the error rate dramatically. Data is automatically inserted in the spots it needs to go, commissions are computed automatically (including SPIFs, bonuses, accelerators and other modifiers to the basic structure) and everything is trackable. This creates fewer disputes, and the data can speak for itself; sales reps won’t be pitted against comp plan managers any more.
The impact of this on the culture that drives shadow accounting is dramatic. Automation brings a jump in trust from the sales force, because they know that their commissions calculations are no longer widely vulnerable to human error, and the rate of shadow accounting starts to drop. When disputes happen (and they will still happen, albeit in greatly reduced numbers), comp plan managers can research them quickly and provide sales reps with a specific set of events that explain exactly what the situation is.
Best of all, all parties involved get an enormous amount of time back. Sales people can spend more time on sales, comp plan managers can shift into more strategic roles, and there’s less organizational conflict, which leads to less churn and more dollars in the company coffers.
Shadow accounting is the result of sales reps’ inability to trust their comp managers – and by extension, the companies they work for. Sales compensation automation helps rebuild that trust and can get your sales reps’ heads out of their spreadsheets and return them to thinking about selling.