What is Draw Against Commission in Sales?
Draw Against Commission Definition
The draw against commission is a “guarantee,” paid with every check. It is generally used to get sales reps through times of uncertainty, where they may experience decreased cash flow due to inexperience with 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.) 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 explain, 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 (a month if dealing with a monthly draw against commission), and must be paid back, which is unlike receiving a salary. See an example here.
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Types of Draws
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.
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.