SOX and Beyond: You Can’t Rely on Spreadsheets to Stay in Compliance


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Throughout the technology boom of the late 1990s, investors lost billions of dollars backing companies that owed their “success” to the creative use of smoke and mirrors. When the inevitable meltdown hit, scandals involving WorldCom, Tyco and Enron drew national attention to the fact that many corporations did not have proper financial controls and corporate governance in place; in response, the U.S. Congress passed the Sarbanes-Oxley Act to force companies to create a paper trail of financial information so that data could be easily tracked. One of the areas that wise companies are beginning to monitor more closely than ever before is sales compensation management.

Most companies use Excel to manage their sales compensation programs. Spreadsheets are fine for sorting tables of data, but they weren’t designed to provide the kind of sophisticated financial transparency that businesses need to manage sales compensation. Despite the nearly universal recognition that Excel isn’t an adequate tool—spreadsheets have an error rate of 7 percent to 10 percent—even the most sophisticated enterprises still use spreadsheets to manage their sales compensation programs. Not only is this an inconvenience for the accounting department, but also it’s a source of liability for the company as a whole.

The Sarbanes-Oxley Act (better known as SOX but officially known as the Public Company Accounting Reform and Investor Protection Act of 2002) requires companies to establish and maintain internal financial controls. One of the major provisions of SOX is that systems need to provide an archive or audit trail—something spreadsheets simply weren’t designed to do. As a result, companies that still use Excel for their sales compensation management functions face major financial and legal exposure. CFOs need to ask themselves the following question: “Can we afford not to have a sales compensation management solution?”

In light of the legislation, Redback Networks Inc., a leading provider of next-generation broadband networking systems, recently deployed a sales compensation management system to support Sarbanes-Oxley compliance, streamline plan document approvals and provide sales compensation management supporting more than 12 currencies for 135 sales professionals worldwide. “It has really helped us to proactively address SOX compliance requirements,” said Tom Cronan, the company’s CFO. “Now, in real time, I can see what our commission exposure is, as well as providing me with an archive and audit trail of any changes including when and by whom.”

Running afoul of Sarbanes-Oxley isn’t as hard as one might think. According to The Hill, in the first half of this year more than 12 percent of companies filing under Section 404—including General Electric, Eastman Kodak and Goodyear—were found to have a “material weakness” in their financial controls. In addition, one of the major features of Sarbanes-Oxley is that it penalizes individuals, not just companies, for malfeasance.

In past years, corporations that did not keep adequate tabs on their data might have gotten a rebuke; today CFOs and other top managers are personally on the line for financial missteps. And the statute is unlikely to go away any time soon. The act’s co-author, Rep. Michael Oxley (R-Ohio), stated that the $11 billion Fannie Mae accounting scandal demonstrates the need for Sarbanes-Oxley compliance. “It was not until Fannie had to comply with Sarbanes-Oxley requirements that executives at the company finally admitted that the company’s internal controls over financial reporting were ineffective,” Oxley said in a statement marking the legislation’s fourth anniversary in July 2006.

Companies are scrambling to implement software tools to help them stay on the right side of new regulatory statutes, but having a coherent system for managing sales compensation can have far broader legal benefits. One area is in the resolution—or prevention—of legal disputes over pay for sales professionals. In many cases, a lack of clearly defined data and a complete paper trail can create legal exposure for companies that get sued over pay. Without a real-time record that explicitly spells out commissions and other compensation due to its sales staff, companies simply don’t have the ability to produce the ironclad evidence they need to defend themselves.

One doesn’t need to look too hard to find real-world examples of sales professionals taking their employers to court over pay disputes. In the Tennessee S. Bowman Reid v. Express Logistics, Inc., case, the courts intervened in favor of a former sales manager who felt that he was denied compensation for deals that had been signed during his tenure at the company. One of the centerpieces of the case (which was won by the employer but ultimately decided by the appeals court in favor of the plaintiff) was that there was no written agreement outlining the terms of compensation. The entire case could have been resolved—and three court trials avoided—if the company had put a system in place to track employee compensation and clearly define the terms of its pay program.

As is the case with most things in life, the best defense is the truth. Unfortunately, in sales compensation cases, proving the truth is far more difficult than just being right, and a lack of accurate, incontrovertible data can put companies in serious legal jeopardy. Buying a real-time automated system to track how much employees are owed can be expensive. Not buying one could prove to be far costlier.

Christopher Cabrera
Xactly Corp.
Christopher W. Cabrera is president and CEO of Xactly Corp. and the coauthor of Xactly Sales Compensation for Dummies. Previously, he was senior vice president of operations for Callidus Software. A Silicon Valley resident, Cabrera earned a bachelor's degree in business administration from USC and an MBA from Santa Clara University.


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