Salespeople work on commission -- they earn a percentage of each sale they make, or they earn a set fee for each sale. Companies structure the commission packages they offer their sales reps in any one of a number of ways, depending on how instrumental the salesperson is in making the sale, the cost of the product or service and the length of the sales cycle. Although commission-based work can be very lucrative, it also has the potential to result in uneven earnings. A structure known as the commission draw helps salespeople earn more predictably.
Overview of a Commission Draw
A draw is a loan against future commission. The salesperson "draws" a set weekly or monthly pay amount that gives him a guaranteed paycheck. If his commission for the draw period is equal to or higher than the draw, he earns the commission. If the commission is lower than the draw, he earns the commission plus an additional amount that brings his earnings to the draw amount. If he earns no commission, he earns the full amount of the draw. He repays the draw during his higher earning periods, when his commissions exceed his draws.
Repay or No Repay
Two important categories of draw are those that reps must repay if they leave their jobs and those they're not responsible for repaying. Those that must be repaid favor the employer, while those that don't require repayment favor the salesperson. Companies may choose to make draws non-repayable as a show of faith in their salespeople and to affirm the company's investment in them.
Benefits of a Draw
Draws benefit companies and salespeople alike. For the company, the promise of a paycheck attracts a larger pool potential employees and it helps a company retain employees even during slow periods. The draw gives the salesperson predictable earnings that allow her to manage her personal finances while she gets up to speed in a new position or a new territory.
Risks of a Draw
A low-producing salesperson can accumulate a substantial amount of debt to his employer if he has a long dry spell and receives more draws than he's likely to be able to repay in a reasonable amount of time. For the company, the primary risk is that of paying a salesperson indefinitely even though he's not bringing in revenue.
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