What is shadow accounting?

Jul 6, 2021

If you’re a sales organization, shadow accounting is a dangerous drain on resources and a significant drag on revenue.

It isn't a question of whether it's happening. It's a question of how much it's happening. Here's everything you need to know about shadow accounting.

What is shadow accounting in sales?

Shadow accounting is the practice of keeping an account of transactions in addition to the primary bookkeeping process, typically to identify mistakes and inconsistencies. It is also sometimes referred to as “shadow auditing.”

In a sales organization, shadow accounting refers to individual sales reps keeping a record of all their transactions and commissions to detect any errors in the payout.

What causes shadow accounting?

Shadow accounting is ubiquitous for one simple reason: it’s necessary.

Pick a sales rep at random and ask them if they’ve ever had a commission error in their pay. They will tell you they have.

1. Compensation calculation errors

Sales reps keep a secondary account of their sales and commissions because they don’t trust the sales compensation or financial team to get it right. That might seem unfair, but they don’t trust them because they frequently get it wrong.

That isn’t intended to attack Sales Ops or Finance. Typically, these departments are lumbered with inefficient, manual processes and sub-par sales comp software to perform them with.

Plan changes, SPIFs, and one-time bonuses are decided far away from program administration, so leadership often doesn’t even realize how hopelessly impractical it is to administer their change without errors.

Disparate manual processes, outdated or poorly maintained incentive compensation management software and manual inputs are to blame for almost all commission disputes. A pay dispute rarely arises as a result of deliberate action. More often than not, it’s simply inaptitude in some shape or form

2. Lack of visibility

Most enterprise incentive compensation plans suffer from a lack of transparency. That’s partly due to overly complex sales compensation plan structures but mainly due to the inability to properly communicate the plan to sales reps.

If your sales representatives aren’t sure how the plan works or what to do to maximize their earnings, they will begin to doubt the plan, the purpose of the program, and their ability to earn through it. The next thing that happens is they leave.

Poor transparency, a lack of communication about plan changes, or other important factors determining payout differences can make it appear that some reps are getting paid more for the same results, causing frustration, resentment, and disengagement.

The unknown is always worse than the known. If reps don’t understand some or all of how the IC plan works, they will assume it’s being made deliberately opaque to shortchange them. That results in shadow accounting, increased pay disputes, and as engagement decreases, reduced sales too.

Why is shadow accounting an issue?

The main issue with sales reps keeping shadow accounts is the amount of time they spend doing it. Some estimate that sales reps spend as much as four hours a week maintaining shadow accounts. That seems a little high, but even half that is too long to spend on a value-less task.

The critical difference between salespeople’s time and other employees is that salespeople are directly responsible for generating future revenue. That means their time is worth their salary plus the amount of revenue they could generate in that time (minus commission, of course).

For large enterprises and established B2B products and services, that missed revenue opportunity could easily run into 8 or 9 figures. That revenue gap will accumulate over the years, creating a significant, long-term drag on growth.

Even though it’s ubiquitous, shadow accounting is a bold statement of non-confidence in your ability to execute a core process. In other words, your employees don’t trust you to get their pay right.

Reps keep commission statements because a clumsy accountant has burned them in the past, but most companies only manage to entrench that view with further commission errors. But that doesn’t have to continue.

Fix Sales Compensation, End Shadow Accounting

Shadow accounting is a symptom of a wider, much more troublesome problem in the sales department: data illiteracy.

Over the last two decades, marketing has become a data-driven and optimization-focused discipline, while many sales teams still linger in the era of brown slacks and finger-to-the-wind forecasting.

Sales may be an art, but there’s a science to administering it and optimizing it at scale that has escaped most leadership teams. Yet somehow, enterprise sales compensation management is still largely performed using spreadsheets.

We’ve got data coming out of our ears, but there is little practical way of using it.

The world’s leading enterprises are constantly looking to optimize their processes. They've already done it with marketing. Now, it's time for sales compensation to embrace the era of automation, AI, and data-driven decision-making.

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