Draws: Targeted Application Can Accelerate Rep Ramp-Up

Draws: Targeted Application Can Accelerate Rep Ramp-Up

Draws are payments to sellers against future earnings. They provide the sales force some level of assurance of pay, sometimes guaranteed while ramping up into a sales role. Draws can be beneficial to both the company and the seller to build sales momentum while protecting cash flow for the rep. Some approaches to draws and situations in which they’re used are described below.

A common principle across methods is that draws are most effective when they are recoverable and when they require some level of minimum performance toward a goal. This keeps them performance-oriented and builds essential sales practices during the draw period that will ultimately prepare the rep to continue to perform once the draw is removed. Regardless of your draw approach, you should establish a documented policy and standards for how draws work.

Methods for Approaching Draws

Draws are an advance that are deducted from future sales commissions. They provide sellers with regular payouts and a cash flow floor to cover the basic cost of living expenses while they get up-to-speed in the job. For example, a newly-hired seller might receive $500 weekly for a limited period of time. This amount would be subtracted from any commission payouts earned during the draw period. There are a variety of draw approaches that can be used with their unique challenges and benefits.

Recoverable versus Non-Recoverable Draws

Sales Draws: Targeted Application Can Accelerate Rep Ramp-UpDraws can be recoverable or non-recoverable. Recoverable draws are payouts that are paid back, even if the rep doesn’t cover their cost in earnings. Effectively, the employer is providing the seller with a loan that will be paid back from commissions or incentive compensation. For example, a seller receiving a $1,000 monthly draw is expected to earn at least that amount in commissions. If the seller fails to earn commissions to cover their draw amount, the unpaid draw balance (any outstanding draw not paid back by commissions) is added to the draw amount for the next commission period. This carries forward an outstanding draw or loan balance that will have to be paid with commissions from the next period. At some point, determined by the company, if there is still an outstanding draw balance not covered by commissions, it will have to be paid back by the rep. One misconception is that recoverable draws should eventually be forgiven at a certain point or when the employee leaves the company. Maintaining a strict policy on recoverable draws is a best practice that minimizes sales team misunderstanding and maintains the integrity of the program.

Recoverable Draw Example
Period Draw Earned Commission Pay Balance
1 $1,000 $600 $1,000 ($600 earned commissions + $400 from draw) -$400 ($1,000 – $600 paid back from commission earned)
2 $1,000 $2,000 $1,600 ($2,000 earned commissions – $400 draw balance) $0 (-$400 draw balance + $400 repayment from commission earned)

Non-recoverable draws are paid out to sellers and are structured like a recoverable draw. However, if the seller does not earn commissions that cover the draw, the uncovered amount is not added into the next commission period.

Non-Recoverable Draw Example
Period Draw Earned Commission Pay Balance
1 $1,000 $600 $1,000 ($600 earned commissions + $400 from draw) $0
2 $1,000 $2,000 $2,000 ($2,000 earned commissions) $0

In the case of non-recoverable draws, there may not be as much motivation for the rep to cover the draw since that draw is guaranteed. This can lead to reps not developing their sales opportunity pipelines and building the skills necessary to come out of the draw period strong and result in underperformance following the draw period and eventual turnover.

Declining Draws

Under some circumstances, it makes sense to structure draws to coincide with a seller’s ramp or other suitable time period. For example, it may typically take new sellers nine months to ramp to 100% productivity in their role. The company might pay out a 100% draw for the first three months, and then reduce the draw in the subsequent three-month periods until fully ramped.

Declining Draw Example (Non-Recoverable Draw)
Period Draw Earned Commission Pay Balance
1 $1,000 (Full 100% draw) $600 $1,000 ($600 earned commissions + $400 from draw) $0
2 $900 (Draw reduced to 90%) $500 $900 ($500 earned commissions + $400 from draw) $0
3 $800 (Draw reduced to 80%) $1,000 $1,000 ($1,000 earned commissions) $0
Situational Use of Draws with Relative Advantages and Disadvantages
Option Situations to Consider Corporate Advantage Corporate Disadvantage Seller Optic
Recoverable Draw (Temporary)
  • New hire sales rep
  • Reorg or other disruption (new territory or product)
  • Transitioning incentive periods (e.g., monthly to quarterly)
  • Advancing Team Member (Sellers promoted into new responsibilities or territory)
  • Newly launched company
  • Reduced cost of sales when performance unmet through draw balance carryover
  • Reduced payout for lack of performance when sellers exit (assuming recoverable draw is pursued)
  • Additional administration / process
  • State / local laws can impact draw policies
  • Sellers have floor to earnings while adjusting to role
Recoverable Draw (Permanent)
  • Commission only roles
  • Sales cycle is seasonal
  • Long sales cycles
  • After sellers are completely ramped (perhaps after allowing the draws to be non-recoverable)
  • Reduced cost of sales when performance unmet through draw balance carryover
  • Reduced payout for lack of performance when sellers exit (assuming recoverable draw is pursued)
  • Additional administration / process
  • State / local laws can impact draw policies
  • Sellers may find punitive over time if unable to make commission period after period
Non-Recoverable Draw (Temporary)
  • New Hire Sales Reps
  • Economic Downturn – Generally a staged approach (e.g., put draw in place for 3 months and reevaluate after)
  • Reorg or seller promotion (new territory or product)
  • Transitioning incentive periods (e.g., monthly to quarterly)
  • Advancing Team Member (Sellers promoted into new responsibilities or territory)
  • Reduced seller attrition due to floor payment
  • Sellers may have reduced motivation to perform
  • Sellers have floor to earnings while adjusting to role
Non-Recoverable Draw (Permanent)
  • Commission only roles
  • Sales cycle is seasonal
  • Long sales cycles
  • Reduced seller attrition due to floor payment
  • Sellers may have reduced motivation to perform
  • • Sellers have floor to earnings while adjusting to role

Draws with Requirement for Activity

One important reason sales organizations use draws is to allow the rep adequate time to ramp up as a new hire or in a new role. However, draws can have the opposite effect and create a sense of ease and complacency if the rep isn’t well-coached or if there isn’t a requirement to perform at some level during the draw period. This can lead to reps coming off the draw period without being fully prepared with the pipeline and momentum to be successful performing on their own.

Sales Draws with Requirement for ActivityDraws with an activity requirement motivate the rep to perform the essential success-building activities that will prepare them to exit the draw period. These activities may include generating a minimum number of new opportunities, conducting a set number of meetings with buyers of a certain title, or creating a target number of proposals. Alternatively, the company may establish requirements for a baseline level of revenue performance as the draw period progresses.

As an example of how these activities may be converted to administering the draw, if the rep performs the required activities for a given month, the recoverable draw may convert to a non-recoverable draw for that period. This method provides better performance protection to both the company and the seller.

Conclusion

In certain situations, draws can provide benefits to sales organizations and their sellers. Draws should be structured as a program that is motivational, not punitive, and that prepares the rep to fully ramp up. Like any component of the sales compensation program, the draw program should align with the goals you have for each sales role, it should be financially cost modeled, and the policies should be well-defined and transparent to create clarity for the sales team.

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