Here's What CFOs Need to Know: Avoiding the Sharp "Claws" of Auditors and Salespeople

4 min read

A recent CFO Magazine piece explored a study in The Accounting Review that looked at the impact of the Dodd-Frank Act. For those who are unfamiliar, the 2010 act requires public companies to have “clawback” policies in place to recover incentive compensation paid out to executives in error as the result of misstated financials. While the number of companies enacting such clawback policies has dramatically increased, the study shows that the regulation alone is not the determining factor in restatements declining. It also has something to do with the level of the auditor involved. The study found that CFO's facing “lower quality” auditors are more likely to push back on a proposed restatement, which could impact their compensation. The higher quality the auditor, the less likely they are to do so. While there are a lot of intricacies involved in a restating process, the piece made us think about some of the reasons these misstatements occur in the first place. One glaring example is in sales compensation. As a CFO you may be saying, “sales compensation?” But think about it. Sales compensation is often one of the biggest cost centers in any organization, second only to general staff costs. It’s also a commonly mismanaged area, as many companies are still relying on archaic systems – or worse... spreadsheets– to manage this process. So what does this have to do with clawbacks, you ask? One famous example was a glitch in an old-HP compensation system that at one point was alleged to have caused up to 50,000 employees to be short-changed in commissions and bonuses. Even a small fraction of that number could cause a company to materially misstate their financial performance. On the flip side, we just as often see sales reps overpaid as underpaid. In fact, this very scenario happened to Xactly’s own founder and CEO, Christopher Cabrera when he was coming up the sales ranks. He was overpaid more than $72,000 in commissions one quarter. He returned the money, at which point the organization noted they never would have caught it! Can you imagine what a few quarters like that would do to your bottom line? But what if they did catch it? It would have required them to “clawback” the money from an unsuspecting sales rep. It’s like someone giving someone $1,000 dollars and then saying “oh, wait, never mind.” What does this scenario do to sales rep loyalty and morale? The long and the short is, in today’s information age where automated systems are available to not only make sales compensation more efficient, but also significantly more effective, none of the above scenarios should ever be a factor. Unfortunately, however, the “claws” are still out. And it's only a matter of time until those companies still relying on old systems and spreadsheets rather than incentive compensation management software to handle this complex and critical job get pinched.