Win, Lose, or Draw

I’ve gotten into two lengthy discussions recently about draw as a sales compensation component.  Specifically, since I work with start-ups, the questions were around whether or not you should offer up a draw or not as part of the compensation package.

I have some very strong opinions about draw, and I want to start by going over the basics.  Draw is compensation offered to a new salesperson coming on board.  There is a “draw period” which is the time over which the draw is paid.  (typically 3 to 6 months).  There are two types of draw:

  • Recoverable draw:  This is set amount of commission that is paid to the salesperson in advance of actually being earned.  It is pre-paid commissions, that get credited against earned commissions.  If, at the end of the draw period, the salesperson has not sold enough to cover the amount of the draw, then he/she needs to pay the company back the unearned portion of the draw.
  • Non-Recoverable draw: This is a set amount of commission that is paid to the salesperson in advance of it actually being earned, but at the end of the draw period, the salesperson is NOT responsible for paying back the un-earned portion.  Think of non-recoverable draw as essentially a higher salary during the draw period that drops down after the draw period is over; however any actual sales commissions made during the draw period get crediting against the draw.

Why do salespeople deserve draw?  Isn’t it all about their performance?  A salesperson should just work harder to get their commissions faster, no?

Well… some of that is true, but the fact is, as I have always said, that sales compensation plans are designed to drive behavior.  They should always be designed to drive the behavior that the company wants.  So, as a component of a compensation plan, draw can be a very important part.

The most important thing that you want your salespeople focused on is SELLING.  When a salesperson is worried about getting their first sale because without commissions that cannot pay their mortgage, and other bills, this is distracting from their focus.   So, a draw helps keep the salesperson focused on making the sales they need to make during their start-up phase.  Once the salesperson has built a pipeline and is moving – then I think its all up to their performance.

There are many situations where draw make a lot of sense.  Some examples:

  • Your product has a long sales cycle.  If a realistic time frame to close a deal is 9 months, then even if you have a superstar salesperson that brings a rolodex with him/her, you know that it will be several months before any sales are made.  Its reasonable to offer a draw to help that salesperson stay focused on selling in the initial 6-9 months.
  • The salesperson is walking away from large commissions.  One of the hardest things for a salesperson switching jobs is that after you have built up a large pipeline, that salesperson could be walking away from a large potential commission payout.  If you really want this person selling your product, you can offer the draw to compensate for that loss of income (essentially a signing bonus – but tied to sales in your firm).
  • Your product/market/pricing is unestablished.  Of particular relevance to start-ups is asking a salesperson to come on board and trust that your product has a market, that the pricing is correct, that your product works, etc.  For all these reasons, it is reasonable to offer a draw to a salesperson while he/she flushes all of that out.  What you don’t want is for the salesperson to be thinking about moving on, stalling your momentum, because he is too focused on when he will start making commissions.
  • Your comp plan is mostly commission.  If you are offering a compensation plan which is very low base salary and mostly commissions, a draw can make sense in order to mak sure the salesperson has some income dring their startup phase.

The bottom line is that you should be expecting big things from your salespeople, but EVERY salesperson has a start-up phase and it can take a while before he/she sees a commission check – not because they are a bad salesperson, but because pipeline building can take time.  When a salesperson is walking into a virgin territory, new product, etc. it is reasonable to offer them a draw to make sure that they stay motivated and focused while they get up to speed.  In fact, I think that offering a draw can help ACCELERATE sales in the short term because you keep the salesperson focused on selling.

Since draw is credited against actual sales commissions, if the salesperson does succeed in the short term, then you don’t double pay the salesperson. 

Should you offer recoverable or non-recoverable draw?  I think this is really part of your negotiation.  Of course, non-recoverable is better for the salesperson and recoverable is better for the company.  Asking for the recoverable money back at the end of the draw period certainly is a de-motivating exercise; however, it protects the company in the event the salesperson really cannot perform.  In my own experience, offering up non-recoverable vs recoverable is based on the person and also the maturity of the product.  If I’m confident in the saleability of my product (already proven it can be sold), then a recoverable draw makes sense.  If I’m working with a known entity (the sales person has succeeded in 10 other companies), then a non-recoverable draw may be more appropriate – thinking that if he/she doesn’t sell its a function of my product and not him/her.  Relatively new salespeople should probably be offered recoverable draw until they prove themselves. 

Bottom line:  There really are no hard rules around this – and should be part of negotiation with the sales rep.  Start-ups need to be realistic about the task they are asking the salesperson to go into, and while they are getting risk/reward for their sales efforts, keeping them focused during the start-up phase for an unprovien product with a virgin market and untested pricing is essential – and a draw may make the difference between you winning or losing.