If you're considering a job in sales, it's important to understand commission-based pay. A commission draw is one type of pay that advances commission payments to salespeople before the sales cycle closes. Learning about this style of payment can help you decide if a commission draw salary works for you. In this article, we define commission draws, explain how they work and discuss the potential benefits and disadvantages.
What is a commission draw?
A commission draw, also known as a draw against commission, is one of the most common ways to pay commission to salespeople. When employers use this payment structure, they pay employees a "draw" amount with every paycheck. The draw amount is the total that the employer expects the salesperson to make through commissions during the pay period.
Once the salesperson's actual commission comes in, the employer deducts the commission from the original draw amount. Then, the employee receives any commission money left after the deduction. With commission draws, employees receive a guaranteed amount per paycheck, and it's up to them to reach or exceed that amount each sales cycle.
What is the purpose of a commission draw?
Commission draws motivate employees to meet their sales quotas while providing the commission money at the start of the pay period no matter what. Commission draw ensures salespeople receive payment even when sales aren't certain, like when the market's down or a product is out of season. The job performance of the sales team links directly to their paycheck. While this may add pressure to your work, it's a way to control the amount you earn.
How does a commission draw work?
Commission draw advances a commission payment to an employee each pay period. At the end of the sales cycle, the employer deducts the amount of the advanced payment, or draw, from the total commission that the employee earned. With this method, a salesperson only earns a higher salary if they exceed sales goals each pay period by making a commission higher than the initial draw.
A business may decide to use this style of commission when there are lengthy sales cycles. For example, a pharmaceutical sales company relies on building relationships with clients before making sales, which draws out the sales cycle. Instead of withholding commission payments, a draw provides pay during the life of the sale and deducts the commission once the sale is complete. There are three types of commission draws:
- New hire draw: It's normal for employers to provide a guaranteed draw to new hires with no expectation that they meet specific sales goals in their first few months. This period helps the new hire to adjust to the commission practice and gradually start meeting their goals.
- Recoverable draw: This draw method pays employees a guaranteed draw each pay period. However, the employer expects the salesperson to pay the difference back to the company if they don't make the forecasted amount of commission in each cycle.
- Nonrecoverable draw: Nonrecoverable draws are payments where the employer doesn't expect payment back if the salesperson doesn't meet the draw. While less common, it allows the salesperson a chance to earn a commission without accruing debt to the company.
Potential benefits of a commission draw
A company may choose to implement a commission to draw as the primary form of paying employees for a variety of reasons. Here are some of the potential benefits of a commission draw:
Provided starting point: Employers provide a starting point for salespeople to meet goals. The new hire draw is an example of a starting point that motivates the employee to meet and exceed quotas.
Ability to build upon the base amount: Employees may build upon the base draw by earning a commission above the draw amount. Additionally, if they perform well, the base draw amount might increase.
Adds a direct incentive: Commission draws motivate employees to succeed, as they may have a greater desire to meet or exceed the draw amount or avoid becoming indebted to their employer.
Assists with long sales cycles: Long sales cycles extend the period of time that an employee waits to receive their commission, so implementing a commission draw system prevents a large decrease in their paycheck.
Related: The Sales Process and Its Benefits
Potential disadvantages of a commission draw
Even though a commission draw has several benefits, some disadvantages also exist. The potential disadvantages of a commission draw include:
Potential to accrue debt: While multiple low-performance cycles may lead a salesperson to accumulate some debt, they can easily make up for a low-performing sales cycle in the next pay period.
Stress to perform: Because the paycheck amount depends on the amount of commission, there may be high levels of performance stress. However, it can help to develop skills to manage stress and maintain an effective work-life balance.
Paycheck uncertainty: The employer determines the amount of the commission draw, yet if the salesperson makes less commission than the draw amount, their gross income decreases. However, with each pay period, you have a new opportunity to boost your income if you make more than the draw amount.
Low earning potential: With commission draw, there is a low potential to earn above draw amount. The best way to increase earning potential is to make a higher commission than the draw amount each pay period.
Related: 15 Entry-Level Jobs That Pay Well
Example of a commission draw
New Heights National is a company that sells construction management software. Sam McCauley is a sales representative in this company with a quota of $20,000 in sales each quarter. New Heights operates with a recoverable draw against commission, expecting each sales representative to meet or exceed their sales quota. Sales representatives earn 10% commission per sale. At this rate, Sam receives a $2,000 commission draw each pay period.
As the quarter progresses, Sam exceeds his sales quota, making $6,000 of commission in software sales. Because he earned more than the expected commission, he doesn't owe any of the initial draw money back to New Heights National. He already received the draw amount of $4,000, so New Heights National adds an additional $2,000 to his next paycheck. This brings the total to $6,000, which is the full amount of his earned commission.