As many sales organizations evaluate the year that was and look ahead to the New Year, most, if not all, will be scrutinizing their current incentive compensation plan to improve performance and correct mistakes moving forward to the following year. One aspect of this evaluation is to consider draw programs and their impact on performance.
Why are Draws Important?
Draws play a significant role in keeping your sales team focused on core business goals by removing concerns related to near-term earnings. This allows sales reps to focus on building a better book of business that should align to the long-term business goals of the organization. For instance, when new sales reps are onboarded, they will face multiple challenges including familiarizing themselves with new territories or new products, understanding the scope of their role, as well as building a sales pipeline. These activities, which are critical for the rep’s long-term success, could be hampered if that sales rep is distracted by chasing poor quality, short-term business. With a sensible draw program as part of your incentive comp plan, sales organizations can focus on developing long-term sales performance.
Types of Draws: Recoverable and Non-Recoverable
When using draws to help bridge earnings for reps, sales organizations must decide between draws that are recoverable, or using a draw function that is non-recoverable.
Recoverable draws are essentially “loans” that a company will pay out to sales reps in advance. The draw payments are then recovered by the sales organization over time through earned commissions. For example, if the draw amount is set to $2000 for the month of March and the sales rep earns $600 in commissions, he or she will take home the $600 earned from commission and $1400 from the set draw amount. The $1400 “loan” is then carried over to April. If the sales rep earns $3000 in commissions during April, the $1400 is then paid back to the company and the rep takes home the remaining value. Recoverable draws are more commonly used because they provide benefits for both the individual sales rep and the company.
Non-recoverable draws are payouts that don’t require individual reps to repay in the future. If we follow the same scenario given for recoverable draws, in a non-recoverable situation, the sales rep would take home the $3000 in commissions for April without needing to repay the $1400 "loan." Non-recoverable draws are usually short in length and used during specific situations like the examples below:
- Integrating New Roles: A common scenario where a non-recoverable draw can be used is when organizations bring on a new rep or have a current rep switch to a new role. New reps and roles require time for sales pipelines to be cultivated and nurtured if they’re to succeed and produce desired long-term benefits.
- When Taking Over a New Territory: Similar to integrating new roles, when a rep is tasked with taking up a new territory, he or she will require an adequate launch period to overcome challenges involved with familiarizing and ramping up a sales pipeline.
- Launching New Products and Services: Finally, when sales organizations introduce new products and services into the marketplace, reps may need to allocate more initial resources towards educating and gaining mindshare before yielding positive outcomes is a legitimate possibility.
Designing a comprehensive incentive compensation plan requires a thorough understanding and knowledge of all components involved. Draws are just one component of an effective comp plan that motivates and maximizes sales reps throughout an entire year.
Intangent recognizes the difficulties involved and recently created a Sales Comp Plan Design Guide to assist with your comp plan changes. Download the guide here.
If you have any further questions, we’re always available to discuss your situation, schedule a meeting with Intangent today!