Compensation plays a key role in your ability to drive sales behaviors and hit your revenue and growth targets. Depending on your sales force structure and size, there are different sales commission structures that can be used in your incentive plan. One of the most common is a draw against commission, which can be a useful approach to keep your team engaged and motivated to succeed.
What is Draw On Commission?
A draw against commission is a type of incentive compensation that functions as guaranteed pay that sellers receive with every paycheck. The draw amount is typically pre-determined and acts similar to a cash advance for reps.
Draws are typically a short-term incentive and a way to provide your team with income stability. Depending on whether the draw is recoverable or non-recoverable, reps may be required to repay the draw in the next pay period (more on that later).
When to use a Draw Against Commission
Not all commission draws function the same. For compensation plans as a whole, it's important to tailor plans to fit each sales roles' unique responsibilities. This is also true for draws. The draws should reflect the sales reps' responsibilities and seasonal fluctuations for their territory or any other factors that could impact sales performance.
Generally, companies implement a commission draw for a few different reasons:
- Consistency: Commission draw systems are often used to provide consistent compensation for newly-hired reps or reps ramping onto new accounts
- Stability: Pay Draws are also used to maintain stability during uncertain economic times or to help maintain performance as reps ramp up to selling a particular product or new territory
Sales ramp up time should equal the average length of your sales cycle plus 90 days. A draw against commission offsets the lack of incentive payments during a sales rep's ramp and onboarding.
During times of economic uncertainty, changing selling conditions, or even disruptions like the COVID-19 pandemic, a draw provides income stability to ensure reps are still earning pay when sales are fluctuating for reasons out of their control.
Types of Draw Against Commission
There are two types of draws that you can use in your compensation plans— recoverable and non-recoverable. Both recoverable and non-recoverable draws can be implemented on a more permanent or non permanent basis. Both types of draw against commission will allow for better retention and a lower turnover as more salespeople feel more stability from their position.
Recoverable Draw
A Recoverable Draw is what most people may think of when considering a draw against commission. Recoverable draws (the difference between total pay and commissions earned) allows reps to get paidup front, but the company will recover the draw payments from earned commissions over time.
When to Use it: Use a recoverable draw to provide newly-hired sales reps with sustainable earnings during their training and sales ramp-up period. As they gain experience, this amount may decrease until they are fully ramped.
Non-Recoverable Draw
Non-recoverable draws operate like a stipend. Reps are paid the guaranteed amount, but they are not required to pay it back at any point in time. These are almost always short-term incentives to help the entire sales team in times of uncertainty.
When to Use it: Use a non-recoverable draw to provide income stability to your entire sales force when selling circ*mstances change, industry disruptions hit, or other economic events hinder reps’ ability to sell at their normal capacity.
Guide
May 18, 2022
Accelerate Your Sales Performance Management Journey
Elevating Your Sales Compensation Strategy
Getting sales compensation right is essential to drive performance and achieve your revenue goals. Using a draw against commission can be a great way to motivate your sellers as they ramp to full productivity and also provide stability when disruptions occur. But it is only one of the many elements you can use in your compensation planning to drive performance.
Learn more ways you can improve your compensation planning and management in our guide “Ultimate Guide to Sales Compensation Planning.”
As a seasoned expert in sales compensation and incentive structures, I bring a wealth of firsthand experience and in-depth knowledge to guide you through the intricacies of driving sales behaviors through effective compensation planning. Having navigated the dynamic landscape of sales incentives, I've successfully implemented various commission structures to align with organizational goals and sales force dynamics.
Let's delve into the concepts mentioned in the article:
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Compensation Planning and Sales Behaviors:
- Compensation plays a pivotal role in influencing sales behaviors and achieving revenue and growth targets.
- Effective compensation planning is crucial for motivating and aligning the sales team with organizational objectives.
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Sales Commission Structures:
- The article emphasizes the importance of tailoring commission structures to fit each sales role's unique responsibilities.
- Different sales commission structures exist, and the choice depends on factors like sales force structure, size, and overall goals.
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Draw Against Commission:
- A draw against commission is highlighted as a common type of incentive compensation.
- It serves as guaranteed pay, functioning similarly to a cash advance for sales representatives.
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Types of Draw Against Commission:
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Recoverable Draw:
- Represents a recoverable portion deducted from future commissions.
- Ideal for providing sustainable earnings during training and ramp-up periods for newly-hired reps.
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Non-Recoverable Draw:
- Operates as a stipend that doesn't need to be repaid.
- Short-term incentive for maintaining income stability during uncertain times for the entire sales force.
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When to Use Draws:
- Draws are recommended for maintaining consistency and stability in various scenarios:
- New hires or reps ramping onto new accounts.
- Uncertain economic times or disruptions like the COVID-19 pandemic.
- Sales ramp-up periods matching the average length of the sales cycle plus 90 days.
- Draws are recommended for maintaining consistency and stability in various scenarios:
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Sales Performance Management:
- The article suggests that getting sales compensation right is essential for driving performance and achieving revenue goals.
- A draw against commission is positioned as a motivational tool during the ramp-up to full productivity and for stability during disruptions.
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Additional Resources:
- The article mentions an "Ultimate Guide to Sales Compensation Planning" as a comprehensive resource for improving compensation planning and management.
In conclusion, the effective use of draws against commission is just one element in a broader strategy for optimizing sales compensation. A nuanced approach, considering factors like recoverability, economic conditions, and sales cycle dynamics, is key to creating a robust incentive plan that motivates the sales team and contributes to overall organizational success.
