A salary draw is used in industries in which compensation is based on performance. These industries often use commission as a primary or sole form of compensation, and while this is not attractive to everyone, it is appealing to some. When an employee accepts a draw, he is relying heavily on his performance and has little in the way of a safety net.
Sales and Commission
In performance-based industries, the employee's primary responsibility is to make sales. If she sells high quantities of a product or service, her compensation is high, but if she does not make the sales, she does not receive high compensation. Her compensation is commission. She may receive a percentage of the revenue she brings the company or a dollar amount each month if she sells a specific amount of product or service. Some companies offer a base salary as a safety net for employees. This base salary is a guaranteed amount of earnings the employee receives each pay period, regardless of sales. Other companies do not offer any base salary and only offer a draw.
A draw is an amount of money the employee receives for a given month before his monthly sales figures are calculated. After the employee's sales figures for the month are calculated, the employee may keep any amount of commission he earns that exceeds the draw amount. If he earns less than the draw amount, he does not keep any commission. Draws are often small amounts of money, such as minimum wage.
Types of Draws
Draw agreements vary between employers and employees, but the two main types of draws are non-recoverable and recoverable draws. According to 80/20 Sales Leader, an employee does not have to pay back the company in any case with a non-recoverable draw. The non-recoverable draw is erased each month, and the next month begins with a clean slate. If the employee is under a recoverable draw agreement, the employee must pay the employer any portion of the draw amount she does not earn in commissions in a given period. The negative balance in the draw account will continue to accumulate until the employee earns the money in commissions or pays the employer.
As an example, assume an employee receives a $1,000 per month recoverable draw. In October, he receives his $1,000 paycheck, but his sales commissions are only $950. The balance for October is -$50 in his draw account. In November, he receives his $1,000 paycheck, and his sales commissions are $1,200, so his draw balance is now +$150. In December, his check will be $1,150 -- $1,000 plus the $150 draw balance. Although the employee always receives a $1,000 paycheck, if he does not exceed the amount of the paycheck in commissions, the difference accumulates as a negative balance in the draw account.
If the employee received a non-recoverable draw for $1,000 and his sales commissions were $950 in October, his check for November would have been $1,000. If his sales commissions in November were $1,200, his check for December would be $1,200. The difference between the draw amount and the employee's commissions earned does not accumulate as a negative balance.