In situations where there may be gaps in sales that affect a sales rep’s paycheck, it is common practice for organizations to employ commission draws or advances in their pay structure. This is to help make sure that sales reps always have some form of income to take home. Draws are particularly common for organizations that have ebbs and flows in their sales cycles or organizations that pay their sales reps on a commission-only pay structure. The draw works essentially as a loan that the employee will be responsible for paying back at a later date. This form of draw is known as a recoverable draw.
However, there are situations when organizations will provide a non-recoverable draw to their sales reps, where there is no obligation from the employee to pay it back. There are both benefits and drawbacks to implementing non-recoverable draws, which we’ll cover in the sections below.
What is a Non-Recoverable Draw?
A non-recoverable draw is a form of advance that is paid to sales reps as a way to cushion their income during periods where sales are slow or in the case of a newer sales rep as they undergo training or until they can start earning commissions. Ultimately, the intention of providing these draws is to help support sales reps who may be struggling to earn commissions for reasons beyond their control, which allows them to focus on their work without stress or worry about their financial situation.
A non-recoverable draw works as a guaranteed minimum commission payment and the employee is not expected to repay the company for payments received under this category.
Example: A new employee may be given a non-recoverable draw of $4,000 per month for the first 3 months as they are trained on company procedures and develop relationships with the new customers.
What is the Difference Between a Recoverable Draw and a Non-Recoverable Draw?
A non-recoverable draw differs from a recoverable draw because sales reps are not expected to repay the amount that they receive. Recoverable draws are often used by companies to float funds to employees until a sale is complete and the actual commission can be paid. When the commission is paid to the employee, the company is able to recover the draw payment on subsequent payroll cycles by withholding the amount from their paycheck.
Pros of Non-Recoverable Draws:
Financial Stability: The primary benefit of non-recoverable draws is that they provide financial stability to sales reps. Non-recoverable draws are often utilized by companies whose compensation structure is commission-only, meaning sales reps receive no form of salary or other guaranteed wages. This type of structure can be difficult to adjust to for sales reps who may be just getting started or in industries where sales decline in certain cycles or seasons.
By providing a consistent flow of income to your employees as they navigate these types of scenarios, sales reps are able to maintain their standard of living and meet financial obligations without worrying about fluctuations in their commission earnings.
Talent Attraction and Retention: Many sales reps may be wary to work on a commission-only structure, especially if the company doesn’t provide any back-up for their earnings. Providing non-recoverable draws to your sales team can help assuage these concerns and be an effective and necessary strategy overall for attracting and retaining top talent.
Sales reps will be more inclined to join a company that makes efforts to provide financial stability among employees and your current staff are more likely to stay on during periods with below average sales. Ultimately, providing non-recoverable draws can help businesses build a stronger and more dedicated sales team, resulting in increased productivity and revenue in the long run.
Motivation and Focus: When sales reps have guaranteed income, it can encourage them to remain committed and motivated as they are less likely to become discouraged by short-term setbacks or fluctuations in their commission earnings due to seasonal or inconsistent sales cycles. Because they have extra financial support during these periods, sales reps are able to focus on what they do best: selling.
Cons of Non-Recoverable Draws
Increased Financial Risk: From an organization’s perspective, non-recoverable draws come with a certain level of financial risk. If a salesperson fails to generate enough commissions to cover the advances they have received, the company may incur losses. Before implementing or promising non-recoverable draws, it is crucial for businesses to carefully assess and manage this risk to ensure they are able to afford providing extra income to their employees. It can be helpful to review historical sales reports to help forecast how much revenue the organization is likely to generate during the year and how they can adequately allocate funds to their sales teams.
Potential Lack of Motivation: Motivation can be two sides of the same coin when it comes to a non-recoverable draw. While the financial stability they provide can be a motivating factor for sales reps to focus their energy effectively on sales, it may have the exact opposite effect simultaneously. Sales reps may become complacent when they are receiving guaranteed pay, which can reduce the motivation needed to push beyond their comfort zones. They may lack the sense of urgency to pursue new sales opportunities, close deals, or strive for higher levels of performance.
Administrative Complexity: There are added administrative responsibilities for tracking and managing both recoverable and non-recoverable draws. All draws need to be accounted for and monitored regularly to ensure that recoverable draws are paid back to the company and non-recoverable draws remain within the company’s budget. This added complexity can be time-consuming and cumbersome to navigate without proper commission management software.
Track and Manage Draws
There are many benefits to providing non-recoverable draws to your sales team. As mentioned above, it can help provide financial stability to your sales team, keep your team motivated during leaner sales periods, and attract and retain top talent. However, as with any part of your commission structure, it is important to properly research and prepare for how implementing draws into your commission structure will impact your organization.
When you make the decision to implement a draw structure, utilizing commission management software can make a world of difference in simplifying the process. Core’s flexible and easy-to-use application can automate the entire process of tracking and managing draws for your business.
Contact us or schedule a free demo to see firsthand how implementing Core can reduce the administrative burden of commission management for your organization.