Increasing sales is one of the main goals of every company and this is the reason that they employ various strategies for success in the sales department. Other than achieving targets, there are several factors that impact success in sales. To keep your salespersons motivated, you must be offering them commissions as a part of their compensation package. Though, due to several factors, there might be ups and downs in their variable pay which can lower their morale. Hence, to offer financial stability to your salespersons, you can offer them a draw against commission. This strategy will help them manage their expenses efficiently till the conditions improve.
What is a draw against commission?
A draw against commission is defined as a category of incentive-based compensation that works as an assured pay that salespersons receive along with every paycheck. This compensation is offered only to employees eligible for commissions such as the sales staff. The amount herein is usually pre-defined and is a form of advance that will be later subtracted from the commissions that the employee will receive. In case, commissions are remaining to be paid at the end of a period, then you would have to give them to the salesperson.
It is important to note that a draw against commission is not a salary but a regular payment towards commissions instead of a lump sum. As a short-term incentive, this amount offers income stability to salespersons during times when sales are low. Another key aspect here is to know that the salespersons may have to repay the draw during the next payment cycle based on the fact that the draw is recoverable and non-recoverable.
Types of Draw Against Commission
When it comes to including a draw against commission in your compensation plans, there are two options available i.e., a recoverable draw against commission and a non-recoverable draw against commission. Both these options can be integrated into the compensation plan as a permanent or non-permanent options. They will certainly help ensure lower turnover and better retention as the reps will be more secure in their profile
Recoverable Draws
Recoverable draws are defined as an advance against sales commissions but are recoverable. This means after the commission period is completed, you will determine the actual amount you need to pay to the salespersons. Based on the difference between the actual commission amount and the advance paid, you either pay the remaining amount or recover the excess amount from the salespersons.
It is therefore vital to ensure that you fix a specific percentage of the incentive amount as an advance. Most experts agree to set a number between 30% to 60% based on the chances of salespersons achieving the target and the incentive percentage size. You can define recoverable draws as a loan that you are giving to the salespersons with the option of recovering it from future commission payments. Some of the situations when you can use this option are:
- Seasonal business: If you have a business with seasonal variations, it is not realistic to expect the salespersons to ensure similar sales every month. So, you pay them some advance to cover their costs and then recover it later.
- Extended sales cycles: If you are dealing in high-value products, the sales cycles are bound to be longer, sometimes in years. Hence, you must pay them some amount to cover their expenses in the meantime.
- Incentive-heavy plans: In some cases, salespersons have a compensation plan with commissions forming a major part. In such cases, it will not be wise to make them wait long to receive a part of their commissions.
Non-Recoverable Draws
A non-recoverable draw against commission is defined as an advance payment against commission that cannot be recovered completely from the salespersons. These payments are made as a goodwill gesture that you will make at certain times of the year when the sales are uncertain, and it is vital to boost the morale of the sales reps.
It is possible for you to combine commission plans and non-recoverable draws if there is a need. Though, if in case the final payment is lower than the commissions already paid to them, then you will not be able to recover the amount. Thus, unless the draw against commission law requires you to do so, avoid combining these two.
Here are some situations when you can use non-recoverable draws.
- Economic downturn: As threats of economic recession loom large, salespersons are confronted with the possibility of losing out on commissions. For example, during lockdowns, it was not possible for salespersons to make any sales, hence they could not make any commissions. You can offer a draw against the commission in such situations even if they did not earn that commission.
- New recruits:During the initial few months, salespersons cannot be expected to hit targets as they are still in ramp up period. In such situations, it is vital to offer them some sort of payment as an incentive even if they have been unable to hit their targets.
Draw Against Commission Examples
Here is a draw-against-commission example to help you understand the concept better:
You hired a salesperson wherein you pay them a draw of $2000 on a semi-monthly basis. When the month ends, you pay them the remaining commission. This means, that the salesperson must earn $4,000 in commissions every month to take care of the draws.
After the ramping period is over, you will make a move to recoverable draws. Herein the employee still has to earn $4,000 in commissions to cover the draw. If the employee earns $5000 in commissions, then you pay the remaining $1,000 or if the commissions are $3000, the remaining $1,000 will become a debt. This debt will keep on rolling over unless you have recovered the entire amount.
Why have a commission draw?
It is vital to have a draw against commission if you have a sales-oriented organization. This system can offer various benefits to your salespersons as well as the company. Some of the benefits of draw against commission are:
- Your employees will be able to focus better on their jobs as they receive regular income.
- Improvement in their financial situation is likely to reduce attrition and turnover rates.
- Salespersons who are still ramping will get a stable source of income and will have higher motivation levels.
- The company will benefit from lower turnover rates, better-motivated employees, and prospects of higher sales.
When to use a draw against commission?
You must create a customized compensation plan for every salesperson based on their unique abilities and ensuing responsibilities. Similarly, the draw against commission must also factor in the seasonal variations and the capabilities of the salesperson. Some of the reasons for you to implement a draw are as follows:
- This will help you ensure a steady and consistent payout for newly hired salespersons who are still in the training stage.
- Draw against commission can be used during times of economic downturns. This will help the salespersons have stable finances and be able to focus on their jobs.
- If you want to retain a good salesperson during times of recession or seasonal variations, offer then draw against the commission to enjoy a steady income.
Conclusion
Ensuring an optimal sales compensation plan is vital to drive your salespersons to achieve revenue targets and fulfil their sales quotas. By using draw against commission judiciously you can motivate them to go for the goals as their money needs are taken care of even during disruptions. But make sure you develop a customized compensation plan for salespersons that is commensurate with their abilities and responsibilities.
FAQs
Q1. Is draw against commission good?
A1. Draw against commission is a good option to keep your salespersons motivated by ensuring stability in their income during seasonal variations.
Q2. How does a draw against commission work?
A2. A draw against commission works as an advance against commissions that a salesperson can earn during a period. Based on the option chosen, this advance can be recoverable or non-recoverable.
Q3. Is a draw better than a salary?
A3. No, a salary is a basic income that a salesperson will make during a period. Whereas a draw is based only on the commission that a salesperson can make, it is a form of incentive. An ideal compensation plan will have a balance of both these options.
Q4. Do you have to pay back draws?
A4. You may have to pay back draws if your company is offering recoverable draws. The amount will be deducted from your commission the next month. It will work like a rollover debt.
