What are "draws" under a sales compensation plan, and how do they work?

A draw is an advance against future anticipated incentive compensation (commission) earnings. This form of payment is a slightly different tactic from one where an employee is given a base pay plus commission. Under a base salary plus commission approach, although sales employees may still be required to meet specific sales goals, not meeting a particular goal will not necessarily affect their pay since they receive their base salary plus a percentage of any products or services they actually sell. With a draw versus commission payment, typically the only way for the sales employee to earn a higher salary is to meet or exceed specific sales goals in order to earn a higher amount than the draw rate.

There are basically two types of draws:

• Non-recoverable.
• Recoverable.

In both instances, if sales produce an incentive amount in excess of the draw, then the sales representative receives the additional monies beyond the draw amount.

When a sales representative enters a new sales role, either in a new company or in the current company, it is a common practice to pay a non-recoverable draw (also known as a guarantee) for a number of months. Guarantees typically are temporary in nature and last for no longer than a one-year period. This enables the sales person to build potential sales into his or her pipeline. This is also known as the ramp-up.

A guarantee is a compensation payment made in addition to base salary that is paid regardless of performance. Even if the actual incentive earnings do not exceed the draw amount, the monies are not owed to the company by the individual.

Alternatively, a recoverable draw sometimes is paid to each sales person to assist with cash flow between incentive payments. For example, it is common to pay sales commissions earned in a quarter one month after the end of the quarter. In order to even out earnings, many employers will pay a percentage of the monthly target variable as a recoverable draw each month. At the end of the quarter, if the sales representative’s earnings are less than the draw amount, the individual owes the company the difference. The amount owed may be carried forward to subsequent quarters depending on the sales plan policy. Any amount still owed at the end of the plan year usually must be paid back to the company.