How to use a draw for commission
Draws against commission are used to provide salespeople with a regular salary while incentivizing them to sell and earn commissions.
It’s exciting to have a fast-growing business with a product you can sell yourself. But eventually you will need to hire a sales team to do the selling for you. When you do this you will have to decide how to pay them.
You can pay a direct commission, a salary with a bonus at the end of the year or a base salary with a commission. In this article, we’ll talk about a way to pay salespeople, called commission debit, that lets you only pay the commission, but also gives them the security of a regular paycheck.
Overview: What is a draw-for-commission?
Draw-for-Commission is a type of commission plan that guarantees your employees a paycheck every pay period, whether or not they have made any sales during that period. It’s especially useful for new hires who don’t have enough experience to earn a regular salary based on commissions alone.
How does a commission draw work?
Consider an example scenario. Marvin Gato works for a private contractor who sells luxury catios. For the uninitiated, a catio is a custom-made patio for cats to safely explore the outdoors.
Catios can get quite expensive and Marvin usually earns between $3,000 and $5,000 per month in commissions. His company pays him a commission draw of $1,000 per week.
At the end of the month, if he has earned enough commission to repay the $1,000 per week, the rest is paid to him. If he has not, the balance of the draw increases during the following month. The following chart shows a typical month for Marvin.
Marvin made two sales during the month. The first was for an older woman, and he reduced the price and only won $500. But the second blew the doors off (literally, for this job, the contractor has to remove the back door) and he owes $4,000 for it.
The total commission of $4,500 for the month exceeds the $4,000 in commission draws he took, so Marvin will receive a commission check during the normal payroll process for $500.
If Marvin hadn’t gotten the second sale, he would enter September with a draw balance of $3,500 and would have to pull himself out of the hole. Some sellers can never get out of the hole. If this is the case for your business, you may want to consider non-recoverable prints, which we’ll discuss next.
Types of prints
There are two types of commission draws: recoverable and non-recoverable. We will discuss the differences between the two here.
1. Recoverable print
A recoverable draw is owed to you by the employee if they do not earn enough commissions to cover the draw. In the second scenario above, if Marvin had continued to flounder and after six months owed the company $10,000, the company would have issued him a note for that amount.
To make a recoverable drawdown, choose a time frame after which you will issue the note to your employees notifying them of the debt. Keep them updated on their progress and work with them. It can be bad for your reputation to have lots of employees who owe the company thousands of dollars.
Some companies will waive recoverable drawing debt if employees leave for another job. It is not compulsory, but it would reinforce the goodwill of the employees.
2. Non-recoverable print
Unrecoverable draws are always paid out of commission, but if the employee does not earn enough commission to repay the draw, there is no additional debt.
This concept generally works well for new hires who need the security of a regular paycheck while they build Centers of Influence (COI) and for times of economic downturn where salespeople can’t make any sales. .
Advantages and disadvantages of drawing against commission
There are several pros and cons to consider when considering instituting a draw-for-commission plan:
Advantages of drawing against commission
- Regular salaries: This may seem like a benefit only to the employee, but it’s also helpful for the business to make more consistent payments and not have to find $5,000 every time there’s a big sale.
- Less stress: Overworked employees don’t perform well. They can be unfocused, unruly, and eventually, they become desperate. A regular salary goes a long way to reducing this stress.
- Lower overall commissions: There is a trade-off for the employee: if you offer consistent paychecks, you can offer lower overall commissions. If you have the cash to make payroll deductions, you can save money.
Drawbacks against commission
- Less stress: There’s a downside to employees not being as stressed about salary: they can now work just as hard to sell. Find a good balance where they aren’t happy with the normal salary, but they aren’t tearing their hair out or taking anxiety medication either.
- Accomplicating employees: Some employees just want to take advantage of you. They will simply do the minimum to either pay off the draw, or if it is a non-recoverable draw, to keep their jobs. Have regular sales meetings and track everyone’s progress. For late employees, be prepared to cut ties.
- Potentially more turnover: One of the ways companies can reduce turnover in sales staff is to factor in potentially large commissions that salespeople have to expect. They spend months on a deal, and by the time the commission is paid, there’s a massive new project that will have its own high commission. If employees know that those big commissions will only be used to pay off past draws, they might be more likely to jump ship to a place where they haven’t accrued draw debt.
- Monitoring: The more information you have to keep for payroll, the harder it is. However, as long as you have good commission-based payroll software or a good payroll service provider, you should be able to do commission-based drawdowns if you stay organized.
Pay commissions or draw 25
Determining how to pay sellers is complicated. You have to find that balance between incentivizing the pursuit of new sales and just putting in the hours. Commission draws are a great way to break even by paying commissions while continuing to pay regularly each pay period.