Welcome back to our series on the Deadly Sins of Incentive Compensation. As is often the case, many best – and worst – practices are obvious, but we sometimes need a reminder. In this post, let’s look at a Deadly Sin that is less obvious, at least if you go by the number of times it’s committed, and that’s…

.Deadly Sin #12 – recoverable draws    

Just to be clear, a “draw” is an incentive payment made to sales reps that isn’t immediately tied to commissions earned. Companies that institute draws usually do so for the following reasons:

• New sales reps typically don’t earn commissions at all during training, and little or none during a ramp-up period while they’re developing their territory.
• In businesses where a small number of big-ticket transactions is common, or revenues are “lumpy” for other reasons, draws can help smooth out the sales rep’s earning stream.
• In companies with accelerated compensation plans, the largest payouts may occur late in the year, and draws can level out earnings throughout the year.

Many companies make the terrible mistake of paying recoverable draws. These are payments netted against commissions earned in the future.  And if the rep leaves the company before earning back that draw, he/she owes the company the unearned draw, at least technically. On paper, this sounds reasonable – after all, why pay salespeople unless they ultimately bring in business? – but recoverable draws have some serious drawbacks (no pun intended):  

• They’re demoralizing and demotivating. The rep is finally about to start generating revenues, but is he/she going to see any cash? NO! The first $X of commissions earned does nothing but pay off the unearned draw amounts.
• They’re unfair (#1). All new employees have an initial development period, where they accomplish little besides learning what the company does, how it functions, and where the coffee machines are. And they still get paid their normal compensation. Companies should understand that this dynamic is just as true for salespeople as it is for everyone else, rather than by simply giving them a loan against future earnings – that’s all a recoverable draw really is.
• They’re unfair (#2). I have never worked with or heard of a company that actually chose to claw back unearned draw amounts from a terminated sales rep. In other words, the only salespeople who actually end up paying back recoverable draws are the successful ones. Does that sound fair or reasonable to you?

In summary, recoverable draws are a terrible idea. I have nothing against paying sales reps draws when they have little or no prospect of earning commissions – that’s especially true for brand-new reps who haven’t developed their territory yet.  But those draws should be nonrecoverable, and viewed by the company as a cost of training and employee development. Moreover, nonrecoverable draws motivate early production – it’s a powerful and positive incentive for a new sales rep to realize that if he/she can find a way to bring in business quickly, he/she can keep the commission earned AND keep the draw.

In most other situations, draws of any sort aren’t appropriate. Instead, everyone should just grow up and recognize that lumpy earnings are a part of life for sales reps. If the issue is that the company has highly accelerated commission plans, there are ways to level out commission earnings even in those cases – but that’s a complex topic, for another blog post.

Sometimes, the ideas that sound most sensible actually aren’t.

What are your thoughts on this subject? Let us know.