Tag Archives: Draw

How do we move our pay mix so that there’s more in the incentive and less in the base?

This is always a difficult move and not one that we recommend often. We’ll outline two possible approaches here:

1. Stop base pay increases and add to the variable pay over time.

If you have a pay structure with salary ranges you can red-circle* the reps who are above the salary maximum, and over time hire in newer reps at a lower salary level.  From a practical standpoint, the red-circled reps will be ineligible for salary increases unless they are promoted into a position with a higher range, or the range moves for their position based on market adjustments.

The problem with this approach is it does nothing to increase the motivational value of the incentive plan for the reps who have high base salaries, and it also will likely increase your overall cost of compensation if you simply layer on a higher fixed target incentive for all reps in the role, without decreasing base salaries.

2. Treat a portion of the current base as a non-recoverable draw against variable pay during a transition period.

If you find you must decrease base salaries, it is best to do it over time, converting the salary to a draw in a series of steps.  Under this methodology, if a rep had a salary of $100,000 that you wanted to reduce to $80,000 with a $20,000 target incentive, you could convert the salary to a non-recoverable draw in $5,000 increments over 3 to 6 month periods.  The first $5,000 in incentive earned would cover the draw, and any incentive earned above the $5,000 would be paid as additional income.  If the draw is not covered, the negative is not typically carried forward (which is why is it called a “non-recoverable draw”), but if by the end of the transition period reps are not covering their draw they will be in jeopardy of losing their jobs.

This approach allows reps time (typically 12 months) to adjust their finances to the new lower salary amount and to make whatever adaptations are needed to begin earning the additional pay from their incentive.  If done properly, the increased upside should more than outweigh the risks for your top performers, but expect that you will have some turn-over among your lower performing reps, and even among some of the higher performers who cannot or will not adapt to the new reality.

*”Red-circle” is comp-speak for freezing base pay at the current level for a period of time.

What types of draws are typically offered to sales representatives when joining a company with a long sales cycle (9-12 months)? How many months and at what % of target?

You have a long sales cycle, and you know that even your best new hire won’t sell much in first quarter or two. There are several ways to address this, some more and some less effective. Your basic options are explained below,  listed from the least to the most effective in a long sales cycle role.

Recoverable draw

A recoverable draw is an advance against future earnings. So if a person were paid a $10,000 draw for each of the first three quarters of work (typically in addition to a base salary), and if their performance for those three quarters were worth $5,000 based on the standard plan, then they would go into their fourth quarter owing the company $25,000 (3 x $10,000 – $5,000).  And since the sales cycle is 9-12 months, there are more substantial sales in the fourth quarter, earning $12,000 that quarter based on the standard plan. In this case the sales person would finish their fourth quarter owing the company $13,000 ($25,000 – $12,000).

Non-recoverable draw

A non-recoverable draw is an advance against earnings in a specific time period which will not be owed back at the end of that period if earnings on the standard plan are less than the non-recoverable draw amount. So consider a new sales person who is paid paid a $10,000 non-recoverable draw per quarter for the first three quarters, with earnings under the standard plan of $0 for the first quarter, $1,000 for the second quarter, and $4,000 for the third quarter, The sales person would receive payments of $10,000 each of the first three quarters since earnings are less than the draw. The fourth quarter would then start with no arrears position for the sales person, and the earnings of $12,000 in that fourth quarter would be paid to the sales person.

A declining guarantee

A guarantee is an amount that will be paid regardless of performance, and it is often structured to decline over time. For our example sales person, the guarantee might be structured as $12,000 for the first quarter, $10,000 for the second quarter, $8,000 for the third quarter, and then $0 going forward. In this case, the sales person would be paid the $10,000 for the first quarter (no earnings under the standard plan) + $11,000 for the second quarter ($10,000 guarantee + $1,000 earned) + $12,000 for the third quarter ($8,000 guarantee + $4,000 earned) for a total of $33,000.

The problem with the comparison of these three situations in the example is, of course, that we are assuming the same performance with different incentive plans. Many companies find that the recoverable draw results in an accumulation of fear and resentment, and if often eventually forgiven if the sales person is showing promise, but in an arrears position as the draw period comes to an end. The draw may result in the sales person holding opportunities, “saving them up” until the end of the draw period, so there may be a reduced rate of ramp-up in sales. Whereas the declining guarantee makes for the fastest start since the sales person is protected in the early period, but there is no reason to hold back sales resulting in a quicker increase in selling since all sales result in earnings.

Key sales objectives

For long sales cycle jobs, it is also reasonable to expect certain activities, training, and progress in creating account strategies and moving opportunities along in the pipeline in order to earn the full guarantee amount. So instead of a no-strings guarantee, the declining payment stream shown above might be made contingent on developing and executing a territory or account development strategy.

How many months, what % target?

A good approach is to offer a guarantee which, when combined with the earnings under the standard plan in the early quarters, will yield 2/3 to 3/4 of the target amount. You want the sales person to invest along with you in this time period – you are paying something even though sales aren’t coming in, and they are earning less than their market value as they make progress towards closed sales. If the sales cycle is 9-12 months, there may need to be some accommodation for up to a year, but diminishing in value over time.

For an additional discussion of these ideas see another post about onboarding for a shorter sales cycle all-commission role, but many of the principles and examples will apply here in an obvious way.

How to pay for vacation for a 100% commission sales role

In a 100% commission sales role, there is no base pay. The only compensation earned is that generated from a commission, which is based on sales volume (in units, sales value, margin value, etc.). Commission arrangements range from simple (e.g., $5/widget sold) to sophisticated (commission rates accelerating as quota is met or exceeded, higher rates for new customers, limited acceleration until a hurdle is cleared on a particular product category, etc.). But across all these possibilities, the underlying mechanism is that payout is linked to volume sold.

Some businesses provide a commission plus a base salary, while others may provide only a commission. The commission-only pay plan is appropriate in situations in which the sales person is highly independent, and sales success (or failure) results primarily from the skills, effort, and personal network of the sales person (vs. the price, product features, delivery schedule, location, brand quality created by the company).

100% commission plans drive motivation, focus and accountability for sales like no other plan type. They also link the cost of compensation directly to sales volume so that costs go up and down with revenue (or margin, or volume). They send the clear message that the sales person gets paid when they create value for the company, and doesn’t get paid when they don’t.

So what does a vacation look like in this world, and in what sense is it “paid vacation”?

While there are many nuanced ways of handling vacation pay for 100% commission sales people, they fall into two big “buckets”:

You can take time off, but while you’re not selling you’re not earning

Many 100% commission sales people are paid a draw against commissions to smooth out the month-to-month (or quarter-to-quarter) ups and downs of the business cycle. A draw is a payment made in advance of earning the money – so you’ve got to sell enough to earn the money to cover the draw, or you will owe the unearned amount to the company. If a sales person continues to be paid their draw through a vacation period, but those payments are still part of the draw and must be earned in order to avoid an arrears position, then in truth there is so “paid vacation.” The sales person must sell enough to pay their own vacation.

Alternatively, it may be the case that there is no draw and the sales person just goes unpaid for the time spent on vacation. Either way, vacation will cost the sales person money in total, and there will likely be a dip in payout immediately following the vacation.

You need a break, so take your vacation and we’ll pay you while you’re not selling

Some businesses truly pay for vacation time. This may take the form of a pre-determined daily rate for vacation (same for everyone) , or a variable rate that is higher for the most productive sales people (for example, many businesses calculate average commission earned per day for the prior quarter and pay that amount per day for vacation time). This vacation pay is earned outside of any commission/draw calculations.

Those who design these paid-vacation plans do so anticipating the paid time off, so the commission rates are somewhat lower than they would have been if there had been no true paid vacation in the package.

Either of these approaches can be designed to cost the company the same amount in total comp. The key difference is the message. The first sends the message that the sales person is valued as long as they are producing, and if they are comfortable with the reduced compensation that accompanies time off, they are welcome to take vacation time. The second approach encourages sales people to take allotted vacation time and sends the message that the company believes that time off is important for the health of the employee and the business.