When designing a sales incentive scheme, it’s important that the scheme benefits both the employer and the sales force. One of the biggest questions is how and when to pay commissions, and whether to offer a base salary.
There are a some cases however when the traditional “base salary plus commissions” model just isn’t the right fit. In those cases, a draw against commission scheme (usually known simply as a “draw”) is a better option.
What Is A Draw?
A draw is a payment made against expected future commissions. The sales person is given a payment drawn against future earnings.
Each draw lasts for an agreed period (such as a month), and at the end of the agreed period, the salesperson keeps any commission made over and above the amount of the draw.
The amount of the draw is set based on projected commissions for the draw period. The draw is calculated in accordance with the existing incentives scheme and the sales person’s targets and performance.
Types Of Draw
There are two types of draw: Recoverable and non recoverable.
A recoverable draw means that the sales person is expected to pay back the amount of the draw. For example, if they have a monthly draw of $2000, then at the end of that period the employer will keep $2000 of their earnings to pay off the draw. Any commission made over $2000 will be paid to the sales person. If they earn under $2000, the difference becomes a debt owed to their employer.
A non recoverable draw means that the sales person keeps the draw amount regardless of performance. These are usually used for a limited period of time, typically a year or less, and are most commonly offered to new employees.
Why Use A Draw?
A draw is particularly useful in the following circumstances:
- For new sales team members who need time to build up their sales pipeline and learn the ropes before they start earning commission.
- When selling products and services with long sales cycles. If a product has a sales cycle of 2 – 3 years, salespeople have to wait a long time before getting paid commission.
- During times of economic turbulence that affect sales and make it harder to earn a steady commission.
- When there are risk factors at play such as challenging new goals, penetrating a new sales region, a new product launch, or being new to the market.
- If there are tenor and time mismatches, such as when incentives are paid on an annual basis, but sales are made on a monthly basis.
- If the role doesn’t offer a stable monthly income, such as selling products that have a strong seasonal sales cycle.
Benefits Of Using A Draw
Using a draw scheme has benefits for both the employer and the sales force.
For the employer, a draw scheme makes it less likely that the sales person will leave for a job with more secure income. The draw gives them the income they need to meet their expenses.
This is particularly important if the sales person is new and needs time to learn the ropes and build up their sales pipeline. They can focus on learning and improving their performance without worrying about their living expenses.
For sales people whose products have a long sales cycle, a draw boosts their cash flow and gives them the impetus to keep working towards the eventual sale.
Draws encourage existing employees to stick with the job, and help new employees learn how to succeed. That means that the employer’s investment in their sales people is more likely to pay off.
For sales people, a draw offers the advantage of smoothing out cash flow and making it easier to budget for expenses. A draw offers a safety net while learning, working on a long sales cycle, or during seasonal peaks and troughs.
How To Create A Successful Draw Scheme
There are several things an employer can do to help a draw scheme succeed:
- Consult a lawyer. The law surrounding draw schemes varies depending where a company is located, so it’s always best to employ a knowledgeable local lawyer to make sure the scheme complies with local labor laws.
- Set a time limit. Draws need a time limit that allows for the sales person to build up their territory and make enough money to cover the draw. One or two sales cycles is generally a good guideline.
- Weigh the pros and cons carefully. A non-recoverable draw offers more benefits to the sales force, while a recoverable draw offers more benefits to the employer. It’s important to balance the risks of paying a draw with the risks of the sales person deciding to go elsewhere.
- Consider all the factors. The sales person’s experience, current market forces, sales territory and expected commission will all affect the eventual draw amount.
- Invest in employees in other ways. Offering benefits and comprehensive training shows employees that they are valued and that the company is willing to invest in them. This helps foster loyalty and encourages them to succeed, and in turn gives the employer a better return on their investment in each employee.
A draw scheme can be a vital component of an incentive scheme where the sales person would otherwise struggle to produce a steady, reliable income. A draw helps both the sales person and the company over uneven patches and gives sales people extra incentive to succeed.