When you enter the world of sales, it also means that you will be entering into the world of commissions and variable pay. Given the current state of the economy, I’d like to talk about a feasible and prevalent option for your commission-based salesforce—A non-recoverable draw. Like a regular draw against commission, 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. However, under non-recoverable draws, the borrowed amount (the difference between earned commissions and draw amount) does not carry forward for repayment to the company in the next period. This makes the draw non-recoverable by the company.
Recoverable vs. Non-Recoverable Draw
Draws against commission guarantee 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 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?
- For new hire sales reps: Especially in those industries and markets where the first commission check can often 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.
- Sales reps in seasonal businesses: Where 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.
- 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 (it can be global, national, or industry depending), and does not want to lose a good rep while waiting for recovery, a draw can help bridge the gap - the same way a new hire draw helps bridge the gap from hire date to fully trained and contributing. Of course, the challenge is being able to predict WHEN the market will recover, so as to determine how long to provide the draw payments.
- For advancing team members: 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 sales 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.
Learn more on how to adapt your sales comp plans for any situation in our Xactly Virtual Unleashed on-demand session, Modifying Compensation Plans in the Face of Disruption: Draws, Quotas, Territories, & More.