What is Draw Against Commission in Sales?
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 calculate and break down payment, but one of the most common is draw against commission.
What is it? Draw Against Commission Definition
The draw against commission is a “guarantee,” paid with every sales paycheck. It is generally used to get sales reps through times of sales uncertainty, where they may experience decreased cash flow due to inexperience within a particular territory or product as they ramp up.
Research shows that it takes an average of 9.1 months for a sales rep to become fully productive, so this can be a fitting compensation solution for reps in the on boarding phase of their career. Simply, the draw is often offered to offset the lack of incentive payments in the rep’s earnings during a sales rep’s training time, and 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, that borrowed amount carries over to the next period (for example, a month if dealing with a monthly draw against commission), and must be paid back by the rep, unlike receiving a salary. See an example here.
Types of Draws
Not all draws against commissions are created equal. 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 shows the sales rep that the company has confidence in both the sales rep’s abilities and the value of the opportunities in the territory that the sales rep will own. The company would not be paying a draw if they did not think that they would get a return on their investment.
A Recoverable Draw is one that is paid, but the company will recover the draw payments from earned commissions over time. In cases where the sales rep leaves before all draw payments have been recovered, it can be difficult to collect the funds depending on national or local laws. 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. This is the most common for new hires, and being on a non-recoverable draw typically impacts any commissions that can be earned. It can also be combined with the Draw Against Commissions in a given period, with the stipulation that if the commissions are less than the draw, there is no payment made – but 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 can also aid in continuous monitoring of current plans to ensure the right sales behaviors are being driven through the incentive plan.
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 an singular center for data, aiding in collaboration and improving data accuracy. With a singular source of sales performance insights, this data can then be leveraged to build well-informed sales territories, quotas, and compensation plans, resulting in an optimized sales plan that drives growth and sales objective attainment.
Designing Sales Compensation Plans
With careful consideration and strategic design, you can use incentive compensation to inspire your teams and empower them to perform above and beyond the competition.