Draw against commissions is a vital part of compensation packages for sales reps. Learn everything you need to know about draw against commissions including its amazing benefits and disadvantages. Also, learn some useful tips to implement this commission structure the right way.
Variable components like commissions have emerged as the most popular means of incentivizing salespersons.
However, some external factors can impact this payout negatively.
To take care of their financial stability, you can offer them a draw against commission. Draw against commissions offers your sales reps the much-needed flexibility to manage their finances efficiently.
Here, I’ll explain what exactly is draw against commission, its advantages, and disadvantages. Lastly, I’ll highlight some best practices.
What is a Draw Against Commissions?
Draw against commissions is an assured incentive-based compensation that you pay to salespeople working under a straight commission plan.
A draw amount is a form of advance payment that will be deducted from the total commission payable to the rep.
If at the end of a given period, any commission amount is still outstanding, it must be paid to the sales representative.
However, it should not be confused with salary payment, as a draw is simply a regular payout rather than periodic commission payments.
Let’s assume you pay commissions on a quarterly basis. And one of your salespeople gets a draw of $1,000 per week to take care of the financial needs.
Now, that employee needs to earn at least $12,000 in the quarter as commissions to take care of the draws. And any amount above $12,000 should be paid to that salesperson.
What are the types of draw against commissions?
There are two types of draws against commission: a recoverable and a non-recoverable draw against the commission.
You can incorporate either of these options in the compensation package to lower salesperson turnover.
Learn more about recoverable and non-recoverable draws here.
Top 3 Benefits of a Commission Draw
Here are the amazing benefits that your organization can enjoy with a commission draw:
1. Motivates employees
Draw against commissions ensures a regular payout for your salespersons – allowing them to not worry about their financial needs. This helps them to focus better on their jobs with higher motivation levels.
On the other hand, organizations get the benefit of lower attrition rates, as motivated employees are 87% less likely to leave their jobs.
Additionally, newly hired salespersons who are still in the ramping stage will also get much-needed motivation through a stable source of income.
2. Adds a direct incentive
When you incorporate a recoverable draw in the compensation package, it works as a major incentive for the salespersons.
They have a greater motivation to exceed the assigned sales quota. This ensures that the net commission payout for a given period exceeds the draw.
Moreover, it also motivates them to give their best efforts and close as many accounts as they can. This, in turn, generates more commissions and eliminates the need to pay you any money.
3. Assists with long sales cycles
When the sales processes take several months to complete, sales reps might struggle to meet their financial needs due to lower payouts.
In these situations, a draw system ensures them a stable income at regular intervals – boosting their morale and keeping them going. This strategy is also an excellent exhibition of empathy towards employees that can help with employee retention.
3 Major Cons of Commission Draw
Some crucial cons of a commission draw include:
1. Increases employee stress
A draw can increase the stress levels of salespersons on multiple accounts. Firstly, during lean periods, they might end up accruing a sizeable debt that might take a few cycles to be repaid.
Secondly, the payout, in this case, directly depends on the commissions earned. As such, the salesperson might face performance stress to meet the targets. Though, it is possible to manage this stress through a balanced approach toward work and personal life.
2. Paycheck uncertainty
There is always an element of uncertainty when it comes to paying packages featuring commissions. This ambiguity increases further in the case of a draw.
A salesperson can never be sure about the commission amount that can be earned in a period, as it is the right of an employer to fix the percentage.
As a result, the salesperson might face a decrease in gross income if the total commissions earned are lower than the draw..
3. Low earning potential
Another downside of having a draw against the commission for a salesperson is the low earning potential.
As the sales rep is receiving a draw at regular intervals, the chances of earning commissions that are more than the total draw amount are pretty low.
The only solution here is to earn commissions that are much higher than the draw amount through different sales strategies.
3 Tips for Using Draw Against Commission
Here are some useful tips to help you use draw against commission:
1. Uphold minimum wage
As per the applicable law, commissioned salespersons should make more than their minimum wages. That is why you need to ensure that the draws offered to the reps meet the relevant minimum wage laws of your state.
For example, in the U.S. the federal minimum wage is $7.25/hr. However, it can vary based on the state you’re in.
2. Be mindful of overtime wages
Some employees working on a commission basis should be paid overtime wages based on the number of hours they’ve worked.
Though, there are certain exemptions to these laws for salespersons engaged in outside sales and inside sales.
3. Verify compliance with state laws
When you are drafting a new draw against commission policy, different federal and state laws might be applicable.
In most cases, state laws are stricter than federal laws.
For instance, California’s minimum wage rate is $15.50/hr and New York’s is $14.20/hr. These are greater than the federal minimum wage.
What should you do?
Here, fulfilling state laws shall take care of guidelines under federal laws as well.
But remember to consult an experienced lawyer or consultant to help you create a comprehensive policy that complies with all relevant laws.
Wrapping It Up!
Elevating your compensation strategy to the next level is crucial in ultra-competitive industries.
When you formulate a well-rounded draw against the commission policy, it will be a major motivational factor for your salespersons. They’ll be motivated to deliver their best efforts and ensure full productivity as their financial needs are taken care of.
It’s vital that your compensation packages meet the industry standards, and incentives should be reviewed periodically to drive the salespersons to give their best efforts.
