Commissions play a key role in your sales compensation plans, driving sales behaviors and motivating reps to hit their quota. Depending on your sales force structure and size, there are different sales commission structures that can be used in your incentive plan. One of the biggest decisions organizations need to consider is when and how they will pay reps their commission. Again, there are several ways to break down payment, but one of the most common is draw against commission.
What is Draw Against Commission? The Definition.
The draw against commission is a "guarantee," paid with every sales paycheck. Generally, companies implement a draw against commission to ensure pay during times of sales uncertainty (e.g., decreased cash flow due to inexperience within a particular territory or product as they ramp up).
Research shows that on average, sales reps ramp up to full productivity in 9.1 months. The draw against commission offsets the lack of incentive payments during a sales rep's ramp and on-boarding. Ultimately, it functions more like a stable base salary payment than it does variable pay.
How Does the Draw Against Commission Work?
The draw amount is pre-determined and is essentially a payment advancement to the rep. To put it simply, when a rep earns commission less than the set draw amount, they keep their commission along with the difference between the commission amount and pre-determined, or "borrowed" draw. In a recoverable draw pay system, reps repay the borrowed commission in the following period (See an example here).
Types of Draws
Not all draws against commissions function the same. For compensation plans as a whole, it's important to tailor plans to fit each sales roles' unique responsibilities. This is also true for draws. The draws should reflect the sales reps' responsibilities and seasonal fluctuations for their territory or any other factors that could impact sales performance.
New Hire Draw
These are designed to provide the rep with sustainable earnings during their training and sales ramp-up period. The New Hire Draw also emphasizes confidence in both the sales rep’s abilities and territories. Most companies would not pay a draw without believing they would get a return on their investment.
A Recoverable Draw pays reps up front, but the company will recover the draw payments from earned commissions over time. For example, if a sales rep leaves the company before all draw payments have been recovered, it can be difficult to collect the funds. Most companies choose to forgive the “loan” in these situations.
Most New Hire Draws are non-recoverable. The non-recoverable draw payment is made to the sales rep, and allows for a draw against commission without paying back. Companies can also combine a non-recoverable draw with a Draw Against Commissions in a given period. Often, this combination comes with the stipulation that if commissions are less than the draw, there is no payment. However, there also is not any debt to pay back or accrue.
Transforming Sales Compensation with Performance Data
Choosing and implementing the right draw for your compensation plans requires access to key insights. The right sales performance data can give sales and sales operations leaders at both enterprise and small and medium-sized businesses guidance in what has worked in the past to guide planning. It also aids in continuous monitoring of current plans to ensure incentive plans drive the right sales behaviors.
A data-driven end-to-end sales performance management (SPM) solution like Xactly Incent or Xactly SimplyComp can help companies do this. With data guiding sales planning, sales and sales operations leaders can optimize their plans to drive performance and growth. Xactly's Insights and Benchmarking gives companies access to 13+ years of industry pay and performance data to benchmark compensation plans and ensure they are competitive to attract and retain top sales talent.
SPM solutions create a singular center for data, aiding in collaboration and improving data accuracy. A single source of sales performance insights provides valuable data. Leaders can then leverage this data to build strategic sales territories, quotas, and compensation plans. The end result: an optimized sales plan that drives growth and sales objective attainment.