What is Shadow Accounting?

October 19, 2020

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.

Inevitably every sales team or other roles with variable pay will experience the reality of calculation errors. Variable pay can be extremely motivational—high commission payments are typically met with smiles and excitement; eagerness to go out and grab more success. But when payments are lower? First comes disappointment, but then, and even worse, comes the questions.

“Is this correct?” Or, “That can’t be right, can it?”

While rolling out a pay mix with even a bit of variable pay can be motivating in the right scenario, asking someone to work on commission is also asking them to trust a process—which can easily lead to motivation erosion if something seems amiss. 

So, 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 commission checks amount to what they think sales people think they should, they begin to keep their own records of their sales and compute their own commissions – shadow accounting.

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. 

For those in sales, each of these mistakes 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.

Impact of Shadow Accounting

Given the above, while shadow accounting seems like a reasonable thing for salespeople to do, it doesn’t come without consequences.

Shadow accounting costs you and your salespeople selling time

There are few formal studies of the practice, for instance, research shows that sales reps spend an average of 64% of their work hours on non-selling activities, which could include manually calculating and validating their own commissions.

Research aside, just think of your own organization. it’s not hard to imagine a salesperson devoting an hour a week to tracking commissions, right? Now, multiply that figure by a year’s time—that’s 50 hours per week. 

Oh, and do you have 50 reps? If they’re all engaged in shadow accounting, you’re losing the equivalent of one sales rep’s time a year.

Shadow accounting results in increased, sometimes unwarranted disputes

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 also makes life miserable for comp managers.

These disputes lead to adversarial relationships

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 isn’t cheap.

Shadow Accounting Solutions

Fixing all of 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 (I mean, good luck with that), or, you turn to technology. 

Thus, the one true solution to help curb shadow accounting and avoid the consequences above…

Automation. 

Benefits of automation

Automation cuts the error rate

By automating your commissions plan, you can cut the error rate dramatically. Data is automatically inserted in the fields it needs to populate, commissions are computed automatically (including SPIFs, bonuses, accelerators and other modifiers to the basic structure) and everything is trackable. 

Automation leads to fewer disputes

This tech-backed, human error-less process creates fewer disputes, and the data can speak for itself; sales reps won’t be pitted against comp plan managers any more. And the positive impact of this on the culture that drives shadow accounting is dramatic. 

Automation increases trust

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 claims quickly and provide sales reps with a specific set of events that explain exactly what the situation is.

Automation allows for more (selling) time

Best of all, all parties involved get an enormous amount of time back. Salespeople 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.

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