What is a non recoverable draw?

A non-recoverable draw is a type of compensation arrangement in which a company pays an employee a predetermined amount of money as an advance against future commissions or earnings. Non-recoverable draws are commonly used in industries where salespeople earn a significant portion of their income through commissions. Unlike a recoverable draw, a non-recoverable draw does not have to be paid back if the salesperson’s commissions do not exceed the amount of the draw.

When are non recoverable draws against commissions used?

Non-recoverable draws against commissions are typically used to attract and retain top sales talent. They provide salespeople with a guaranteed income, which can help to reduce the financial stress associated with working in a commission-based role. By providing a steady stream of income, a non-recoverable draw can also help salespeople to focus on their job and perform to the best of their ability, without worrying about their financial situation.

Non-recoverable draws can be structured in different ways, depending on the needs of the employer and the employee. Some draws may be paid out monthly, while others may be paid out quarterly or annually. The amount of the draw will typically be based on the salesperson's expected earnings, and may be adjusted over time based on their performance.

Example of a non-recoverable draw:

Let’s say a salesperson is offered a non-recoverable draw against commissions of $1,000 per month. This means that the salesperson is guaranteed to receive $1,000 per month, regardless of how much they make in commissions. 

If they earn more than $1,000 in commissions in a given month, they will receive their commissions in addition to the draw. However, if they make less than $1,000 worth of commissions, they will still receive the $1,000 draw.

Here’s how a non-recoverable draw against commissions would pan out for a 6-month long pay period:

Recoverable draw vs. non-recoverable draw: What’s the difference?

The difference between recoverable and non-recoverable draws against commissions is that in the case of a recoverable draw, the company can retrieve the advanced money from the salesperson if their commissions fall short of the draw amount. To put it another way, the company is "recovering" the money given to the salesperson if they fail to make adequate sales to justify the draw.

On the other hand, in a non-recoverable draw, the salesperson is not obligated to return any deficit between their commission earnings and the draw amount. The company takes on the risk that the salesperson may not generate enough sales to justify the draw, and as a result, the company may end up paying the salesperson more than they earned in commissions.

Based on various factors that can impact your business like seasonality, long sales cycles, or heavy comp plans, you can choose between recoverable and non-recoverable draws against commissions to understand what can help aid your sales reps and in turn your business for better growth and profitability.

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