How to use a Non-Recoverable Draw Against Commission in Sales Compensation
Sales is synonymous with commissions, which are the key component within your sales compensation plan. These plans outline and structure your employees’ base salary as well as your company’s commission and incentive program.
That means when you enter the world of sales, it also means that you are entering into the world of incentives and variable pay. There are many types of compensation structures to choose from which allow sales leaders to implement plans that align best with their team’s specific needs.
Given the current state of the economy, we’d like to talk about a feasible and prevalent option for your commission-based salesforce: a non-recoverable draw. In this sales commission structure, a draw amount is established for each sales rep, which means each said rep is paid the difference between the draw and their total earned commissions.
What Is a Non-Recoverable Draw
So what is a non-recoverable draw? Under non-recoverable draws, the borrowed amount (the difference between earned commissions and draw amount) does not carry forward for repayment in the next period. Think of it as a guaranteed minimum commission payment.
How Does a Draw work in Sales? Recoverable vs. Non-Recoverable Draw
Draws against commission guarantee that sales reps will be paid a certain amount in a given pay period. At the end of a pay period, if a rep's total earned commissions are less than the draw amount, the rep is paid the difference, so they receive the full promised draw amount in the period.
Recoverable Draw Against Commission
Under a recoverable draw, the amount paid as “recoverable” (the difference between total pay and commissions earned) carries over as a balance to the next pay period for reps to repay to the company.
For example, imagine a sales rep is eligible for a $1,500 recoverable draw for the pay period, and at the end of the period they end up earning $500 in commissions. At payout, the rep earns the $500 in commissions plus $1,000 from the set draw allowance—for a total of $1,500. This "borrowed" $1,000 from the established draw then carries over to the next pay period and functions as a loan that must be repaid by the reps. Over time, this “debt” can add up and runs the risk of putting too much pressure on the sales rep.
If the rep ends up earning $3,000 in commissions the following month, they must first pay back the $1,000 balance, bringing their total payout down to $2,000.
Non-Recoverable Draw Against Commission
Under a non-recoverable draw, a rep doesn't pay back the borrowed money paid out from the established draw. In the above situation above, the rep was paid $1,000 in draw funds in the first month, but the following month earned $3,000 in commission.
In month two, the rep would be paid the full $3,000 in earned commissions and paid no draw money. The borrowed $1,000 from the prior month would not be paid back to the company.
Why Offer a Non-Recoverable Draw?
1. For New Hire Sales Reps
This can be especially useful in industries and markets where the first commission check can be months away. The company would rather have a non-recoverable draw that has a specific time frame attached to it instead of boosting salary to ensure that living expenses are covered.
2. For Sales Reps in Seasonal Businesses
This is best when deals only come in every 12-18 months, or only during the last month of a fiscal year. This can be situations such as defense contracting or other multi-year sales cycle businesses.
3. Sales Reps in an Economic Downturn
Economic downturns can impact a sales team member’s ability to hit their goals, which then can impact their motivation derived from incentives. If the goals are unattainable or unrealistic, the potential earnings are seen as a false promise. If the company is experiencing external challenges (e.g., global, national, or industry disruptions), and does not want to lose a good rep while waiting for recovery, a non-recoverable draw against commission can help bridge the gap in the same way a new hire draw supports sellers who are not fully ramped up. Of course, the challenge then becomes being able to predict when the market will recover so as to determine how long to provide the draw payments against future commissions earned.
4. For advancing team members
A non-recoverable draw could be used when team members are promoted into new responsibilities or territories. The draw might not be as long as a new hire agreement, but still works to bridge the gap as the sales rep builds an entirely new pipeline.
Taking Pay Mix One Step Further
Sales compensation is an essential factor in the success of a sales organization. Companies must develop incentive compensation plans that motivate reps and drive the right sales behaviors. They must also consider the impact of pay mix and develop compensation plans that are competitive within the industry to attract and retain top talent.
Interested in learning more on how to create and adapt your sales comp plans for any situation? Download our guide, The 2021 Guide to Successfully Managing Sales Compensation.”