Question: 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?
To address this, here’s an overview of a few ways to smooth the entree for a new rep, listed from the least to the most effective in a long sales cycle role.
A recoverable draw is an advance against future earnings. So if a person were paid a $10,000 draw for each of the first three quarters of work (typically in addition to a base salary), and if they earned under the standard compensation plan $5,000 in that same period, they would go into their fourth quarter owing the company $25,000 (3 x $10,000 – $5,000). And since the sales cycle is 9-12 months, we might expect more substantial sales in the fourth quarter – perhaps earning $12,000. So the sales person would finish the fourth quarter owing the company $13,000 ($25,000 – $12,000).
A non-recoverable draw is an advance against earnings in a specific time period which will not be owed back at the end of that period if earnings on the standard plan are less than the non-recoverable draw amount. So consider a new sales person who is paid a $10,000 non-recoverable draw per quarter for the first three months, with earnings under the standard plan of $0 for the first quarter, $1,000 for the second quarter, and $4,000 for the third quarter, The sales person would receive payments of $10,000 each of the first three quarters since earnings are less than the draw. The fourth quarter would then start with no arrears position for the sales person, and the earnings of $12,000 in that fourth quarter would be paid to the sales person.
A declining guarantee
A guarantee is an amount that will be paid regardless of performance, and it is often structured to decline over time. For our example sales person, the guarantee might be structured as $12,000 for the first quarter, $10,000 for the second quarter, $8,000 for the third quarter, and then $0 going forward. In this case, the sales person would be paid the $10,000 for the first quarter (no earnings under the standard plan) + $11,000 for the second quarter ($10,000 guarantee + $1,000 earned) + $12,000 for the third quarter ($8,000 guarantee + $4,000 earned) for a total of $33,000.
The problem with this example is, of course, that we are assuming the same performance with different incentive plans. Many companies find that the declining guarantee makes for the fastest start since the sales person is protected in the early period, but there is no reason to hold back sales or not get as fast a start as possible since they all result in earnings.
Key sales objectives
For long sales cycle jobs, it is also reasonable to expect certain activities, training, and progress in creating account strategies and moving opportunities along in the pipeline in order to earn the full guarantee amount. So instead of a no-strings guarantee, the declining payment stream shown above might be made contingent on developing and executing a territory or account development strategy.
How many months, what % target?
A good approach is to offer a guarantee which, when combined with the earnings under the standard plan in the early quarters, will yield 2/3 to 3/4 of the target amount. You want the sales person to invest with you in this time period – you are paying something even though sales aren’t coming in, and they are earning less than their market value as they make progress towards closed sales. If the sales cycle is 9-12 months, there may need to be some accommodation for up to a year, but diminishing in value over time.
For an additional discussion of these ideas see another post about onboarding for a shorter sales cycle all-commission role. Many of the principles and examples will apply here in an obvious way.
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.