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What Is Shadow Accounting in Sales & Why Is It a Problem?

There’s a popular TV comedy series called, “What We Do In the Shadows.” Hilarity ensues as you get to be a fly on the wall of a small Staten Island residence that is home to four vampires that have lived there for over a century. While peeking in on some unruly vampires and their shenanigans in a modern world is quite funny, it’s no joke how much of a productivity suck shadow accounting can be on your sales team. When they don’t have the transparency they need to trust their compensation is timely and accurate, it can have a negative impact on performance. 

In sales, shadow accounting refers to the practice of sales reps keeping unauthorized financial records that parallel their employer’s official records. Employees use shadow accounting to calculate their sales commissions, track their progress toward quotas and goals, and compare against the payouts they receive. The practice is associated with tremendous costs to organizations and sales reps alike, yet it frequently goes unnoticed or unaddressed.

In this article, we’ll examine:

  • Why sales reps engage in shadow accounting
  • The many problems caused by shadow accounting
  • How organizations can prevent shadow accounting

The cause of shadow accounting

It can be tempting to think of shadow accounting as a problem that sales reps engage in and are thus to blame for, or to attempt to prevent shadow accounting by simply imposing rules to prohibit it. But this would be a mistake. Shadow accounting is actually a symptom of a bigger problem—lack of visibility, clarity, and trust regarding compensation. Sales reps typically engage in shadow accounting out of necessity, to fulfill a need that isn’t isn’t being met by their employer.

In order to prevent shadow accounting, you must first understand why it’s happening. Only then can you address the root cause of the issue with an effective solution.

Sales reps are constantly managing their progress toward a number of different targets, like sales quotas, stretch goals, specific bonuses, competitions, and the amount they intend to earn in commissions.

They know they won’t reach any of their targets by haphazardly making individual sales and hoping for the best. Instead, reps take a strategic approach, carefully planning out how many and what kinds of sales they’ll need to make in order to achieve their goals. They then spread those out over the period of time they have to work with, and they monitor their progress to ensure they’re keeping up with where they need to be.

But to do this effectively, they need a reliable way to track their sales and see exactly where they stand at any given moment. This capability is not a “nice to have,” it is a “must have.”

If they can’t gauge their progress, they’ll have no way to know whether they’re on course toward reaching their targets. Or worse, they’ll think they’re on course, only to be hit with a nasty surprise at the end of the sales period when they suddenly discover they underperformed, failed to reach their goals, and won’t be bringing home nearly as much compensation as they had planned on.

So when employers don’t provide a reliable way to track progress, sales reps have no choice but to engage in shadow accounting to fill in those gaps.

Providing periodic progress reports helps address this, but sales reps may still feel the need to engage in shadow accounting when the reports are too infrequent, when they don’t provide enough detailed information, or when they’ve been known to contain errors. Any of these issues can lead sales reps to not trust the reports they’re given, causing them to keep their own records to double check the official figures.

Usually this takes the form of individual spreadsheets that sales reps create. They fill them with homebrewed formulas to track their progress and calculate their commissions—calculations that tend to be approximations at best. They’re frequently even less accurate than the official reports they’re provided with. But what other choice do they have if they can’t trust what they’re given, or if it doesn’t stay current long enough to be useful?

Bottom line: shadow accounting occurs when sales reps aren’t given enough transparency into their sales activities and earnings.

We’ll take a look at how to fix that soon, but first let’s go over how much shadow accounting could be costing your organization.

The costs of shadow accounting

At first glance, shadow accounting may not feel like a very big deal. How harmful could it be for sales reps to keep extra records on their own? The reality is that shadow accounting has wide-ranging, detrimental ramifications for sales organizations and sales reps alike. Let’s take a look at some of the most severe problems.

Wasted time

When your sales reps are all building and maintaining individual spreadsheets to track their sales activities, it adds up to a lot of time. Estimates on the amount of time a sales rep can spend on shadow accounting range from around two to four hours per week. For an organization with 50 sales reps, that’s roughly 5,000 to 10,000 hours wasted every year—or as much as five employees worth of work lost!

All of this is time those sales reps could have spent making sales, earning commissions for themselves, and generating revenue for the company. Shadow accounting doesn’t help them—or the organization.

Compensation disputes

Shadow accounting frequently results in far less accurate calculations than official reports. This is due to a number of factors:

  • Sales reps don’t always have an accurate understanding of how their commissions are calculated, especially with more complex sales comp plans.
  • Even when they do understand how their commissions should be calculated, it is far too easy to make a mistake when working in spreadsheets.
  • The more redundancy caused by multiple people attempting to track and calculate the same things, the more likely it is that errors will be introduced.

This all increases the likelihood that sales reps’ individual records won’t match those provided by finance for any given pay period, and that leads to disputes. These disputes waste even more time on the part of sales reps, as well as taking up finance’s time, as they must now verify and prove their own records—or issue a correction if they were at fault.

Lack of trust

Shadow accounting begins with the failure to provide sales reps with sufficient and accurate information about their sales commissions. This inherently communicates to employees that they aren’t being entrusted with transparency about their own information.

But it gets even worse when disputes arise. Regardless of which party was actually at fault, the mere fact that the dispute came up at all plants a seed of doubt that can easily grow into full-blown mistrust and antagonism—especially when these disputes are widespread. And the more people become aware of compensation disputes, the more they’ll feel the need to engage in shadow accounting.

The last thing you want is for your sales reps to constantly be looking over their shoulders, worried that the organization is trying to cheat them out of their earnings.

Low morale

All the wasted time, compensation disputes, and lack of trust add up to a serious morale problem. Sales reps will be frustrated that: 

  • They end up spending so much of their time just tracking their progress and calculating their commissions. 
  • These things aren’t being provided for them by the organization. 
  • Their own calculations never seem to line up with what they ultimately earn. 
  • They feel like they can’t trust what they’re being told. 
  • They could be earning more income if they had just been given the proper tools in the first place.

These compounding frustrations lead to suffering morale, which is associated with even lower productivity, less revenue generation, and increased turnover. It creates a sales culture in which people feel defeated. And since they don’t have clarity into the relationship between the work they do and the compensation they receive, sales reps will have far less motivation to work toward targets or go above and beyond.

Security risks and compliance violations

Any time employees keep unofficial records of potentially sensitive financial information, it becomes a concern for security and compliance.

In many cases, sales reps aren’t merely tracking their overall sales figures, but are also tracking specific progress on individual accounts. They need to return to the same prospect multiple times to move them along and eventually reach a sale—or they need to return to existing customers to secure additional sales.

If they include any personal details about the customer in their shadow accounting, that would not only be a security risk, but could also run afoul of the General Data Protection Regulation (GDPR), the Health Insurance Portability and Accountability Act (HIPAA), or other region-and industry-specific regulations.

Sensitive information should only be stored in dedicated tools that have the proper security protocols in place, not in unauthorized spreadsheets.

Financial losses

Every element we’ve looked at represents a specific cost to organizations, and it all adds up. To recap, shadow accounting costs organizations money in the form of:

  • Lost revenue from wasted time
  • Unnecessary payment disputes
  • Decreased productivity
  • Increased turnover
  • Potential fines from security violations

The costs of shadow accounting can be enormous. But the good news is that there’s an easy way to prevent shadow accounting. Let’s take a look at that now.

The solution to shadow accounting

To prevent sales reps from engaging in shadow accounting, you need to provide them with transparency into their sales activities, progress toward quotas and goals, and earned commissions. Once they have access to an authorized and trusted source for this information, they’ll no longer need to attempt tracking it on their own.

But how do you offer such transparency?

One option is to send out frequent reports to sales reps detailing their activities and earnings to date. But this is problematic for a number of reasons:

  • It’s extremely time consuming, especially if you have more than a handful of sales reps.
  • Creating a single large report that covers all reps would violate their individual privacy.
  • Creating separate reports for each individual rep introduces greater risk for errors.
  • It can often be difficult to pull out the information each rep needs, especially if you’re still relying on spreadsheets for your sales compensation.
  • No matter how many reports you send, they will never be able to provide the real-time insights sales reps need.

The far better option is simply to invest in a quality Incentive Compensation Management (ICM) platform like Performio.

With Performio, each of your reps will have access to their own dashboards, where they’ll have full visibility into their sales, commissions, and progress—all updated in real time, with role-based access to ensure that no sensitive information is available to anyone who shouldn’t be seeing it.

But don’t just take our word for it. Consider the case study of AVEVA Select Central, an authorized software distributor who came to us facing problems with shadow accounting and a lack of trust among their sales reps. They expressed interest in finding a solution with an intuitive user interface that their reps could embrace. President and General Manager Jason Bass put it this way:

“We went through several demos and evaluated a number of vendors. Performio could meet all of our requirements, but it really stood out for its superior user interface. We knew with Performio that the users would like using the software and feel comfortable with it.”

And following implementation, Bass confirmed how Performio had solved their problems:

“Performio is a great product. It is working for us, and our needs are absolutely being met by Performio. It’s transparent and cost effective. We have never had a problem with our commission plan since we adopted Performio, and our users love it.”

Promote transparency and trust with Performio

Performio’s ICM software is the single best way to prevent shadow accounting, but that’s far from the only benefit it offers. Our platform provides transparency across the board for all parties who need it.

Sales reps, in addition to seeing their individual progress, will also have access to leaderboards that promote healthy competition. Sales leaders will see all the detailed stats, trends, and insights from sales data analytics they need to develop strategies, form plans, and keep their teams on track. Other departments like finance will likewise have access to the details they need to maintain interdepartmental alignment.j

And of course, Performio will take care of all the heavy lifting when it comes to creating and managing your sales compensation plans. You’ll turn weeks worth of work into hours, freeing up your time for more profitable pursuits.


Want to see what Performio can do for your organization? Request a demo today!

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