Despite the benefits of a balanced base + incentive approach, some businesses benefit from a commission-only plan, and then must consider the questions of if and how to offer a draw.  Let’s start with the basics.

What is a draw?

A draw is a compensation payment made in advance of earnings. It is usually offered in one of three situations:

  1. In a highly seasonal business a draw may be needed to smooth out cash flow for sales people if most of their earnings occur during only one or two quarters of the years. Examples include those with businesses strongly affected by weather (e.g., construction in cold-winter areas) or business cycles (e.g., textbook sales to school systems).
  2. In a “lumpy business” in which a sales person’s results for a year may be made up of a small number of large deals that would yield a very inconsistent payout stream, a draw may be used to keep income more steady.
  3. New hires in new business roles may need a draw early on so that they have an income stream while they build their pipeline and move towards the first few sales that will start their earnings flow.

What kinds of draws are there?

The basic types are recoverable and non-recoverable. In addition a declining guarantee (or “ramp”) may be used for new hires. For a discussion of these types of draws and the best way to help transition in a new sales person using a draw, see What types of draws are typically offered to sales representatives when joining a company with a long sales cycle (9-12 months)? How many months and at what % of target?

A recoverable draw is an advance against future earnings. Typically the draw is paid, and future earnings are credited against the draw until it is fully recovered. For example, on a 3% commission plan (with no acceleration or other mechanics), a sales person expecting to sell $400,000 in a year would expect to earn $120,000 or $10,000 per month. A draw of $6,000 per month could ensure some stability in cash flow, but would almost certainly be “earned through” by a sales person who is producing within the expected range. Each month the commissions earned year-to-date {YTD) are compared to the year-to-date payments including any draw payments, and the monthly payout would then be the greater of $6.000 or [commissions earned YTD less payments made YTD].

As you can imagine, accounting for draws takes some effort and clever report formatting to (1) get it right, and (2) make sure the sales person can fully understand how each check amount is calculated and what their position is against their draw. With a recoverable draw, the sales person may be expected to actually write a check to the company if the draw amount is not fully recoverable against earnings by some future date.

A non-recoverable draw is an advance of against future earnings which will not be recovered if un-earned. It serves as a guaranteed minimum level of compensation while allowing the company to not pay additional compensation until a needed level of productivity is attained.

So how do we use draws for #1 and #2 above (seasonal or “lumpy” business)?

  • Find the right draw amount that provides stable enough income for your sales people without risking a substantial arrears position or recovery requirement. Sales people who fear they will never earn through the draw they have already been paid may find the stress associated with that dynamic daunting and distracting.
  • Put effort into your reporting so that the draw position is clear to the sales people every pay period.
  • Consider rewarding those who can manage their finances without a draw by offering them a slightly higher rate. There is a cost and risk to the business associated with offering a draw; it makes sense to reward those who manage their business stream and personal finances so that you don’t have to manage a draw for them.
  • Consider ways you could avoid a draw, and instead switch to a base + variable compensation arrangement. Especially if you find that you frequently forgive a recoverable draw, you might be creating a similar effect to a modest base pay level, but just spending a lot of time and energy accounting for it as a draw.