While there is no single factor that keeps all sales reps motivated, compensation remains an important discussion topic when companies consider ways to attract, develop, and retain top sales talent.
Sales commission is standard practice when it comes to rep compensation. Using a commission-based structure, the amount of money a sales rep earns is directly related to how many sales they made (or the dollar value of the sales they made) during a specific period of time. Though common, there are some very real challenges for those whose income is subject to change month after month.
57% of sales reps are expected to miss their annual quotas, which could cause a lot of strain for those who depend on sales compensation for their sole source of income. One way to provide a sense of consistency for your sales rep’s earnings is to incorporate a sales draw in your organization’s compensation structure.
What is a draw in sales?
In sales, a draw is an advanced payout sales reps can receive as part of their compensation plan. A draw is typically paid from expected future commission earnings.
While performance is an important factor in determining sales rep compensation, there are circumstances when sales are low, or a rep may not be able to meet quota due to variables outside of their control. In these cases, a sales draw serves as paycheck protection, giving a sense of stability for sales reps who depend on meeting quota for their livelihood.
Incorporating a draw policy in your sales compensation plan can be especially beneficial for new reps who need time and support getting up-to-speed in their new role. According to Xactly, it takes top-performing reps between two to three years in their role to hit their top quota attainment. Financially supporting your new reps as they transition into their roles can be a worthwhile investment in the future success of your company.
How does a sales draw work?
In most cases, a draw is a pre-determined dollar value that serves as an advance payment to the sales rep. Essentially, if a sales rep earns a commission that is less than their pre-determined draw amount, they are paid the difference.
It is important to note there are two types of sales draw — a recoverable draw and a non-recoverable draw. Here’s the difference between the two.
Recoverable vs. Non-Recoverable Draw
When reps receive a draw that must be paid back to their company it is considered a recoverable draw because the company is able to recover the funds they paid the rep in advance of earning their commission.
These funds are typically deducted from future commission earnings. Recoverable draws are most often used for positions with longer sales cycles to help new sales reps earn money upfront.
A non-recoverable draw is money paid out to keep income stable for sales reps that does not have to be paid back by reps. This is often used for new employees getting started or to cover times when work is slow, such as vacation periods or seasoned business cycles. This money will act as an add-on to the rep’s base salary and is considered non-recoverable because the company does not receive it back. It helps stabilize the rep’s flow of income over the course of employment.
Now that we understand what a sales draw is, let’s walk through an example of what a sales draw could look like for a sales rep who is paid on commission.
Sales Draw Example
Sales rep Sacha’s organization has a commission-based pay structure. She has an individual monthly sales goal, and each sale she makes contributes a certain percentage to her paycheck.
Commission payouts are reflective of performance — an on-target commission is 100% of the goal set for your position. In her first month on the job, Sacha’s quota target was $6,000 in monthly recurring revenue (MRR) sales. Since she achieved that, she reached 100% quota attainment and was paid $3,000 in commission.
How did we reach this value? By factoring in the commission rate. Commission rate calculates how much of each sale contributes to how much a rep is paid. Here’s the equation you can use to calculate the commission rate.
Commission Rate = Total Annual Commission / Annual Sales Goal
Sacha has an annual base salary of $36,000 and an annual sales goal of $72,000. So in her case, her commission rate would be:
$36,000 / $72,000 = 0.50
This means Sacha will earn $0.50 for every dollar of new business she closes. Now, let’s take a look at how a sales draw could help Sacha.
Her company provides a new sales employee ramp-up period to help new reps build their sales pipeline. For the first four months on the job, she's given a much lower sales quota target while she gets up to speed. In month one, she's accountable for $1,500 in new recurring sales -- aka 1/4 of her full quota of $6,000 monthly recurring sales. The rest of her commission is paid in a draw amount of $2,250.
Fairly compensating sales reps for their work and contributions is one of the most important investments a company can make. For more resources to help you create a robust sales commission plan, check out this post.
Originally published Jun 30, 2020 12:30:00 PM, updated June 30 2020