Shadow accounting. What reps are doing when the manager in not looking?
Shadow accounting is a common, yet the non- official, practice of keeping records by each rep in order to be sure that company’s calculation is exactly the same as their own. The practice of calculating incentive payouts by individual payees apart from official accounting records, is to detect possible errors.
But what if you find one?
Often official accounts and shadow accounting differ from each other. In this way, mistakes and inconsistencies can be identified as quickly as possible. What then does the rep feel?
- “The company tries to cheat me”
- “There is such a mess with commission counting”
- “Everywhere will be better than here”
All in all, none of those thoughts is a positive opinion about the company.
Let’s go back to the beginning. What causes shadow accounting?
Compensation calculation errors.
The bad news is: 88% of all spreadsheets contain errors. And what’s logical: the larger the spreadsheet, the more likely it is that it contains an error.
As fast as reps find an error in their commission counting, they stop trusting the financial team that counts it and, in general, the company. This injustice will not just demotivate sales, but will probably result in seeking alternative employment.
Moreover, any errors in the official calculations, no matter if caused by legacy systems, disparate processes or manual errors, will disturb the balande and cause errors in financial reporting areas.
Lack of visibility
This may be due to two reasons:
*Overly complex sales compensation plan. Which is sometimes necessary; but as with everything: to a certain degree.
*Second, probably more common: the inability to properly communicate how the plan works to sales reps.
Anyone that is part of an incentive compensation scheme needs to have full sight and access to what the plan is, how does it work, what they stand to gain, and clear information on when there are any changes to it and what effort is needed to gain it. Any misunderstanding can lead to doubt and the urge to do their own math.
Both errors and lack of transparency can in each case result in the same: lack of trust.
If your reps are not totally sure how the sales plan works or what they can do to maximize their earnings, what issues they focus on, they start to doubt the plan, the purpose of the whole idea, and the ability to earn through it. The next thing that happens is to look for a new better job with a clear sales plan and strategy. Lack of transparency in the compensation plan, poor communication about plan changesor other additional factors, can cause payout differences between official and private calculations. It can make it appear that some sales are getting paid more for the same results, or worse pay for harder work (others think that it is very difficult to describe „harder work”).
Why shadow accounting is a challenge for management?
The time spent on shadow accounting by the employee is lost
According to „The Book on Incentive Compensation Management” by David Kelly (2014) it can be even 4hrs per week. That means their time is worth their salary plus the amount of revenue they could generate in that time. Or at least they could spend this time playing PS in a chillout room discussing vacation plans. But in this case you have a motivated and relaxed employee who fears for the payoff less.
Causes lack of trust
In you as manager, your process, your company, and your logic of payments.
The best reps leaves company at the nearest opportunity, opinion on the market spreads. Even business magically expends time for signing new contracts, counting all pros and cons twice.
The remedy: technology.
There are two solutions for all of sales plan issues:
Either you find a truly incredible comp plan manager who will never make a mistake, will not get tired, 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. Let’s face it: we have XXI century and if there are apps that age you up to 90 in a minute, app that search nearby phones that also have a battery status of less than 5% or a goat simulator, then for sure, there will be a solution for errors in manual commission calculation.
This kind of solution assures:
- Better transparency of the sales plan and its rules,
- Gives more transparency in finance,
- Gives accuracy in calculation eliminating errors,
- Increases motivation of sales reps as they
- Clearly know what to do to earn more. Increases trust in you, your company and your success plan
- Allows for more time. For selling, or playing. Choose wisely.
Since 2019, Sands Partners have been working to fully help companies understand, implement and optimize systems, plans, and commission policies. The purpose of these procedures is, among other things, to prevent excessive employee turnover and increase sales motivation by automating commission calculation activities.
If you think your commission plan could use some adjustments, let’s talk about it.