Sales Compensation Plan – Draw Against Commission

When you bring a new sales representative into a territory, he will often ask about a “draw.”  The first time you hear the term, you may not know what it is or why it’s important.  A draw is a pay advance against expected earnings or commissions.  It can be important to both your sales representative and your company, but for different reasons.

Importance to Your Sales Rep

Selling high-priced, complex products or services can involve a lengthy sales cycle.  From first contact through the close of a sale, months may elapse.  The time needed to develop a fully productive territory can range from as few as three months to a year or more.  During this ramp-up period, your sales rep may experience severe personal cash flow shortages.  His or her base salary is usually significantly less than the total expected compensation plus commissions haven’t kicked in yet.  To help your sales rep get through this initial period, you may pay your rep a draw – an advance against future commissions.

Sales cycles can also be seasonal.  In the utility industry, energy demand is highest during the summer and winter months; it is significantly lower during the spring and fall.  As a result, companies that service the power generation equipment for utilities experience a well defined seasonal sales cycle.  Sales reps earn much greater commissions in the spring and fall months; summer and winter month commissions can be near zero.  Draws can help smooth out your rep’s seasonal cash flow in these situations.

The draw provides several benefits to your sales rep:

  • Provides a “living wage” during the period when a territory is being developed and commissions have not yet been earned.
  • Reassures your sales rep that the company has faith in his or her ability to be successful in the territory.
  • Smooths cash flow across seasonal earnings.

Importance to Your Company

As a company, you have two key interests when placing a new sales representative in a territory.  First, you want your sales rep to succeed, developing relationships and driving sales.  Second, you do not want to lose the substantial investment your company makes in hiring and training a new sales representative.

By paying a draw, you can help promote these interests.  The draw reduces your sales rep’s cash flow concerns.  Instead of worrying about meeting monthly cash flow obligations like rent or mortgage payments, your sales rep can focus on learning the territory, developing customer relationships and moving customers along the sales cycle.  Without immediate cash flow concerns, your sales rep is also less likely to look for a new job which is less risky from an income perspective.  The draw reduces your sales rep’s perceived income risk and keeps him or her focused on the job – selling your products and services.

Recoverable vs. Non-recoverable Draws

Draws can be either recoverable or non-recoverable.  Recoverable draws are loans against future commissions or bonuses.  Each month during the draw period, you pay your sales rep the draw amount. If your sales rep earns commissions that are less than the draw amount, you pay your rep the commissions.  However you only pay enough draw so that the commissions plus the draw total the amount of the full draw.   The outstanding draw amount accumulates from month to month.  When earned commissions exceed the draw, use the excess commissions to repay the outstanding draw.  Once the accumulated draw is repaid, all commissions are paid to the sales representative.

In the event that a sales representative leaves your company owing an outstanding draw, most companies will write off the outstanding debt.  It is very difficult, if not impossible, to collect monies paid to a departed employee.  Some companies will deduct the draw amount the sales rep owes from other amounts the company would normally pay, such as unused vacation, severance, etc.  However, before withholding benefit payments, check with a labor attorney to ensure you meet local regulatory requirements.

Non-recoverable draws are also loans against future commissions or bonuses.  However, a non-recoverable draw guarantees your sales representative a minimum level of income for each commission period.  If earned commissions are less than the draw amount, your sales rep receives the draw amount.  No accumulated draw is carried to the next commission period.

Recoverable draws are more advantageous for your company.  Non-recoverable draws are more advantageous to your sales rep.  There is a trade-off.  How much risk is the sales rep willing to accept to work for your company versus how much is your company willing to pay your sales rep?

Time Limits

Draws should have a time limit.  The length of the draw period should give the sales rep enough time to establish his or her territory plus the time needed to repay the accumulated draw.  Usually, this works out to one to two sales cycles.

Draw Amounts

The amount of the draw can vary by sales representative or by territory.  I generally look at several factors when determining the draw amount.

  • On Target Earnings (OTE) – What are the OTE for the sales rep?  An aggressive draw can bring the rep’s base salary plus draw to 85% or more of OTE.
  • Territory – What do I expect the territory to generate in revenue and commissions?  Based on this information, I may increase or decrease a planned draw amount.
  • Sales Rep Experience – How quickly do I expect the sales rep to get up to speed?  How much revenue or commissions do I think this particular sales rep will generate?  Again, using this information, I will target a draw equal to 65%-80% of my expectations.
  • Market Expectations – What draw amount and for what time period will it take to get the sales rep to agree to work for my company?  Depending on the competitiveness of the market and how badly I want a particular sales rep on my team, I’ll increase or decrease the planned draw amount.

As with all sales compensation issues, there are no right or wrong answers when determining your draw structure.  You need to consider the goals of your business, the level of risk (draw repayment) you are willing to assume, and how much competition exists for attracting the best sales team you can afford.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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  1. A draw is a loan from the company to the sales person. The draw is repaid to the company when the sales person earns commissions on sales s/he makes. Commission payments are reduced by the amount of the outstanding draw (repayment of the loan/draw). The purpose of the draw is to even out the sales person’s cash flow so the sales person can meet monthly expenses. Usually a draw is paid in increments that coincide with your paycheck. So, if you are paid monthly, your draw would likely be paid at that time in an amount equal to one-twelfth of your total annual draw amount.

    In your case, if the company paid you the full $16K up front when you joined the company and you repaid it in the first 3 months, you are not entitled to the rest of the draw for the year. That $16K draw would have been a loan against commissions that you repaid. On the other hand, if the company paid you $4K (one fourth of the $16K represented by 3 mos.) and you repaid $16K, then you should be paid the $12K commissions that were withheld from you. Finally, if the company paid you $4K in draw and you repaid that amount, plus were paid the balance of the commissions you earned, then you are not entitled to any additional draw monies.

  2. The January commission was paid in February, his employer had deducted the draw from the last week in December from this commission, since that paycheck was processed the first week in January. But there was no actual pay for hours worked in January. There were already four weeks draw deducted form Decembers commission, which was paid in January. I feel the draw being taken out of January’s commission is in error and I don’t know where to turn to get assistance with this issue.

  3. Carol,

    You need to go back and reconcile your draw checks with the commission statements to make sure they match up. Please don’t confuse “draw” with “base salary.” The base salary is for hours worked. It has nothing to do with draw. Draw is a “loan” against expected commissions. A draw has nothing to do with hours worked.

    If there was an outstanding draw amount when the January commission check was issued for commissions earned in December or earlier, I would expect the commissions check to reflect a deduction for the outstanding draw. The February check, however, probably had no deduction for a draw since all outstanding draw amounts were likely paid with the commissions issued in January.

    From what you shared with me, I don’t think the draw was taken out in error. That was draw paid in December against expected December commissions (which were paid in January).

  4. I was hired as an independent contractor with a draw… in December I was switched to straight commisoand my boss said since I was in the red that he was going to take out of my check monthly to pay back draw. He fired me on March 14th the day I was supposed to get paid and Leo my check. Also, next check he’s keeping to and then I’m sure he’s going to try and collect amount due. Our agreements was to take out of my check till he was paid back but unexpectedly he terminated me! I know he will have his attorney send me letter to try and collect. What rights do I have???

  5. Julie,

    I recommend that you speak with a labor attorney, or at least contact your state’s department of labor to determine what is and what is not allowed in your state with respect to draws and recovery of draws. Some states treat draws as wages (i.e., minimum wage) and they are not recoverable if you leave the company. Other states treat the draws as loans that you are legally liable to repay.

    Many companies will threaten legal action if you don’t repay the draw, however, in many cases that’s bluster. It really depends on how much outstanding draw you have and what the company’s cost will be to recover it. Lawyers, even for the companies, are not free.

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