Tag Archives: Guarantee

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.

Reducing base to bring one sales person into alignment with the rest of the team

Question and answer format

Question

We have one sales rep who was brought in to sell into a different market with a base pay level that is much higher than that of the rest of the team. We have changed our emphasis and he is now selling the same products and in the same role as his 9 peers, but at a higher base. How do we correct his base pay?

Answer

This one is tricky as you know, and fraught with opportunities to totally undermine the motivation of Mr. Overpaid. Aligning compensation is the fair thing to do (at least internally). However, a transition of some kind might be a nice compromise so here’s an idea:

Reduce the base, but fund a guarantee for six months equal to the amount of the base that has been reduced. Then require that the sales person “earn through” the guarantee before additional variable pay is delivered.

Let’s do an example: 

> Current too-high base = $80k

> Appropriate base = $60k

> New target incentive (once base is $60k) = $40k

So you’ll need to take $20k out of the base, which is $5k/quarter. The sales person then is guaranteed $20k for the quarter = new base ($15k) + guaranteed variable ($5k). If the person earns less than $5k on the normal variable pay plan, then no additional pay is delivered (beyond the $20k). If they earn $7k (for example), then an addition $2k would be paid.

Continue this for a very few quarters as a transition, then they would be on the regular plan like that of their peers.

Clearly, if Mr. Overpaid is not satisfied with the lower base, he will have a look around during those six months, and may move on to a job that meets his needs for less risk if he can find one. Meanwhile, he has a chance to see what his earnings would be on the new plan and re-commit to the job with the new compensation arrangement at the end of six months if it works for him. And the company has established a clear endpoint by which the too-high-base will end.