The Financial Accounting Standards Board has moved forward with a significant change that will require public companies to disclose more granular details about their employee compensation packages, including incentive compensation, in financial reports.

The new accounting standard will fundamentally change how businesses track and report compensation, especially in areas like bonuses, commissions, and other variable pay structures. While this change aims to bring more transparency, it highlights a glaring issue: many companies don’t fully understand the true cost or return on investment of incentive compensation, and have no way to properly measure or report on their programs’ business impact.

Incentive compensation accounts for 40% of overall sales spending, making it one of the largest go-to-market expenses for businesses. This is especially true in industries where companies have large sales teams and substantial marketing budgets, like enterprise technology, medical devices, and pharmaceuticals.

Despite this massive spend, managing these programs is often complex and inefficient. The new rules have made one thing clear: if businesses don’t get a handle on their incentive compensation programs soon, they’ll struggle to comply with the new reporting requirements.

The current struggle

As organizations grow, managing complex compensation structures with manual processes leads to inefficiencies and increases the likelihood of errors. CapitvateIQ’s 2024 State of Incentive Compensation report reveals 81% of companies involve 10 or more people in managing commissions, with some overseeing multiple plan types — an overwhelming task that consumes an average of 49 hours per month in manual work. 

For companies managing over 25 plan types, the time required jumps to 61 hours, increasing the risk of miscalculations and delayed payouts. With 85% of employees manually recalculating commissions for accuracy, these inefficiencies erode trust and productivity, underscoring the urgent need for technology-driven solutions to modernize compensation management.

Compensation complexity

Incentive compensation, whether in the form of sales commissions, bonuses, or performance-based rewards, has traditionally been difficult to manage. The sheer volume of data alone — imported from multiple sources with unique formats across functions — is overwhelming, making it challenging to ensure consistency. This is especially the case as compensation plans often change due to market shifts or evolving business goals and can require mid-cycle adjustments to account for changing targets or individual performance.

People management can add another layer of complexity as employees move between roles or teams, requiring regular updates to reflect changes in their compensation plans. For larger organizations, this complexity only grows with the business — more data, people, and plans make it more challenging to manage, and ultimately increase the likelihood for errors.

With more companies expanding incentive programs beyond sales — incorporating teams like marketing, customer success, and business development — the complexity only increases.

A fragmented approach not only leads to incorrect payouts but also wastes valuable time and resources. It also becomes nearly impossible to accurately measure the ROI of these programs, leaving executives unsure if their incentive structures are driving the right behaviors and outcomes.

Four questions

The new FASB standard will force public organizations to provide detailed disclosures on incentive compensation. The C-suite must now closely manage these programs, as compensation costs must be broken down in financial statements by categories like cost of goods sold and administrative expenses, giving investors more insight into their impact on the company’s financials.

Late-stage and pre-IPO companies, as well as earlier-stage startups eyeing an eventual exit, will also need to pay close attention. As they prepare for increased scrutiny from investors, regulators, and potential acquirers, having a transparent and efficient incentive compensation program will be critical. While full compliance isn’t required until 2027, companies may benefit from early adoption, allowing time to adjust their systems and processes and ensuring they are fully prepared for when the mandatory deadline arrives.

C-suite executives can begin preparing to align with the FASB rules by addressing the following four issues related to their company’s current incentive compensation systems:

1. Do we have a centralized system for managing and tracking incentive compensation across all departments? If compensation data is scattered across different systems, it’s 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 error, and incorrect payouts can not only harm employee morale but also lead to financial discrepancies. A robust automation system can ensure that calculations are accurate and transparent.

3. Can we measure the ROI of our incentive compensation programs? Incentive compensation is meant to drive performance, but without proper measurement tools, companies can’t assess whether their compensation structures are yielding the desired results. Implementing analytics capabilities will be essential for tracking performance and justifying compensation decisions.

4. Are our compensation programs aligned with company goals? The incentive structures in place should motivate the right behaviors. If the sales team is rewarded based solely on revenue without considering customer retention or satisfaction, the company might be inadvertently encouraging short-term wins at the expense of long-term growth.

The FASB’s new ruling encourages companies to enhance transparency and strengthen their incentive compensation programs. While these changes may initially feel challenging, they also offer a valuable opportunity to modernize processes, reduce inefficiencies, and achieve positive outcomes for both employees and the business.

It’s never too early to prepare — addressing the new requirements early will help ensure a smooth, thoughtful transition and minimize the risk of last-minute adjustments that could lead to unnecessary complications.