Editor's Note: Mark Schopmeyer is co-founder and co-CEO of CaptivateIQ, a sales commission management software provider. The views expressed in this article are solely those of the author.

The Financial Accounting Standards Board (FASB) has advanced asignificant changerequiring public companies to disclose more detailed employee compensation information in financial reports, including incentive compensation.

This new accounting standard will fundamentally change how companies track and report compensation, especially regarding bonuses, commissions, and other variable compensation structures. Although the change aims to enhance transparency, it also exposes a prominent issue: many companies do not fully understand the true cost or return on investment of incentive compensation, nor do they have adequate means to measure or report the impact of their programs on the business.

Incentive compensation accounts for40% of overall sales spending, making it one of the largest marketing expenses for companies. This is especially prominent in industries with large sales teams and substantial marketing budgets, such as enterprise technology, medical devices, and pharmaceuticals.

Despite the significant expenditure, managing these programs is often complex and inefficient. The new regulation makes one thing clear: if companies do not gain control over their incentive compensation programs soon, they will struggle to meet the new reporting requirements.

The current predicament

As organizations scale, managing complex compensation structures with manual processes leads to inefficiencies and increases the likelihood of errors. CaptivateIQ's 2024Incentive Compensation Status Reportshows that 81% of companies have 10 or more people involved in commission management, with some overseeing multiple plan types—a burdensome task that consumes an average of 49 hours of manual work per month.

For companies managing more than 25 plan types, the time required jumps to 61 hours, increasing the risk of calculation errors and delayed payments. 85% of employees manually recalculate commissions to ensure accuracy, and these inefficiencies erode trust and productivity, highlighting the urgency of adopting technology-driven solutions to modernize compensation management.

The complexity of compensation

Incentive compensation—whether sales commissions, bonuses, or performance rewards—has always been difficult to manage. The sheer volume of data alone is daunting—it comes from multiple sources, in various formats, across functional departments, making consistency difficult to ensure. This is especially problematic when compensation plans often change due to market shifts or business goal adjustments, and may require mid-period adjustments to accommodate changes in targets or individual performance.

People management also adds a layer of complexity, as employees move between roles or teams, requiring periodic updates to their compensation plans. For large organizations, this complexity intensifies as the business grows—more data, people, and plans make management more challenging and ultimately increase the likelihood of errors.

As more companies extend incentive plans beyond sales—covering teams such as marketing, customer success, and business development—the complexity only increases further.

Fragmented approaches not only lead to incorrect payments but also waste valuable time and resources. At the same time, there is almost no way to accurately measure the return on investment of these programs, leaving executives uncertain whether their incentive structures are driving the right behaviors and outcomes.

Four key questions

The new FASB standard will force public companies to provide detailed disclosures of incentive compensation. Executive leadership must now closely manage these programs, as compensation costs must be broken down in financial statements by categories such as cost of sales and administrative expenses, giving investors deeper insight into their impact on the company's finances.

Late-stage and pre-IPO companies, as well as early-stage startups that eventually plan to exit, also need to pay close attention. In preparing for increased scrutiny from investors, regulators, and potential acquirers, having a transparent and efficient incentive compensation program is crucial. Although full compliance is not mandatory until 2027, companies may benefit from early adoption to allow time to adjust systems and processes, ensuring full readiness by the time the mandatory deadline arrives.

Executive leadership can begin preparing for FASB compliance by addressing the following four questions related to the company's current incentive compensation system:

  1. Do we have a centralized system for managing and tracking incentive compensation across departments? If compensation data is scattered across different systems, it is time to invest in a unified platform that integrates data from all relevant departments such as sales, HR, and finance.
  2. How accurate are our current incentive compensation calculations? Manual processes are prone to errors, and incorrect payments not only damage employee morale but can also lead to financial discrepancies. A robust automated system ensures calculations are accurate and transparent.
  3. Can we measure the return on investment of our incentive compensation programs? Incentive compensation is designed to drive performance, but without proper measurement tools, companies cannot assess whether their compensation structures are producing the desired results. Implementing analytics capabilities is essential for tracking performance and justifying compensation decisions.
  4. Are our compensation programs aligned with company goals? Existing incentive structures should motivate the right behaviors. If the sales team is rewarded solely based on revenue without considering customer retention or satisfaction, the company may inadvertently encourage short-term wins at the expense of long-term growth.

FASB's new regulations encourage companies to enhance transparency and strengthen their incentive compensation programs. While these changes may initially present challenges, they also offer a valuable opportunity to modernize processes, reduce inefficiencies, and drive positive outcomes for both employees and the business.

It is never too early to prepare—addressing the new requirements proactively will help ensure a smooth, thoughtful transition and minimize the risk of unnecessary complications from last-minute adjustments.