Randall Bolten and Bob Berry
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…
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:
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):
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.