What is a recoverable draw?
When are recoverable draws against commissions used?
Recoverable draws against commissions are often used to provide commission-based sales reps with a predictable income stream and stability during seasonal low periods, while allowing the company to manage its cash flow and minimize risk.
Recoverable draws against commission structures can be beneficial for both the company and the salesperson. For the salesperson, it provides a guaranteed income while they build their sales pipeline, and for the organization, it ensures that they recoup some of their costs if the salesperson does not meet their sales targets.
Example of a recoverable draw:
Let's say a salesperson receives a $3,000 monthly draw against their commissions. If their commissions for the month are only $1,500, they would owe their employer $1,500 to make up the difference. On the other hand, if their commissions for the month are $4,000, they would keep the excess $1,000 in commission.
Here’s how a 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 draw and non-recoverable draw against commissions is that with a recoverable draw, the company can recoup the money advanced to the salesperson if their commissions do not exceed the amount of the draw. In other words, the company is "recovering" the money advanced to the salesperson if they do not make enough sales to justify the draw.
While with a non-recoverable draw, the salesperson is not required to pay back any shortfall between the draw and their actual commission earnings. The company assumes the risk that the salesperson may not generate enough sales to justify the draw, and therefore 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.