Sales commissions are by definition “variable compensation”. Due to the layered compensation structure used by most sales incentive plans, variability can be high. When things go well, multipliers and other accelerators kick in, allowing top performers to earn generous commissions. However, the pendulum can swing the other way for new hires or when business conditions change. Draws against commissions help even things out.
Defining Sales Commission Draws
Let’s start with a clear definition. A draw against commission is a promise of a minimum payout. Companies implement draws against commissions to help sales representative ramp up or adapt to new business conditions. In other terms, a draw is an option available to managers who design incentive plans to even out commission payouts. One advantage of draws is that they are still variable compensation – just a placeholder form of variable compensation. Draws make it clear to sales representatives that the promised payout is NOT guaranteed salary, but rather an expectation of future variable performance.
Scenarios For Commission Draws
There are a few scenarios where draws can be useful:
- New hires
- Most sales representatives cannot be effective until they’ve developed sufficient knowledge of their new products, researched target customers, and established a viable business network. Draws against commissions help new sales representatives ramp up.
- Sales re-orgs
- Changes made to account ownership or territory re-design can have a significant impact on commissions. They can easily be perceived as unfair or arbitrary. Draws against commissions help representatives adapt to such changes and bring stability to the organization.
- Pricing change
- Material changes to pricing (ex: a transition from fixed pricing to a recurring one) can negatively impact sales commissions. Draws against commissions give management time to learn from the effect of a pricing changes without risking losing their entire sales team.
- Other scenarios
- There are many scenarios where a draw can be useful and protect sales representatives from a sudden decline in earned commissions. These includes new competitors, product launches, major incidents, losing a large account, and other similar events.
Recoverable vs. Non-Recoverable Draws
There are 2 main types of draws:
- Recoverable Draws
- A recoverable draw is similar to a free loan. There is an expectation that the company will recoup advance commission payments from future ones. Note that not all recoverable draws are in fact recoverable. In some US states, local legislation prevents companies from recovering what amounts to commissions paid in advance.
- Non-Recoverable Draws
- Non-recoverable draws are a popular option for new hires. There is no expectation that sales representatives will reimburse any of the offered amount. Note that if earned commissions exceed the draw, the sales representative normally keeps the entire amount (not just the draw). This may however signal that it’s time to end the draw.
Pros and Cons of Draws
Here are a few pros of draws:
- Protect sales representative during sales re-organizations
- Protect sales representative in times of uncertainty
- Give sales representative time to ramp up
Here are a few cons of draws:
- Additional management overhead is required
- Can result in reduced sales motivation
- Draw payouts may need to be forgiven
So, do you need a draw? If you’ve already automated your sales commission program adding a draw is probably not a problem. Otherwise, the required additional management overhead can make implementing draws challenging.