In bad economic times, sales leaders ratchet-up the attention they give to the effectiveness of the sales compensation plan. Striking a balance between achieving sales objectives at a reasonable cost and paying talented sales people the right amount of compensation for sales results becomes more challenging in uncertain times.
This is because salary alone in high "at risk" plans (e.g., 50/50, or 60/40) may not be sufficient to retain talented sales people when a downturn in the economy is beyond their immediate selling control. This Short sets forth concepts and techniques to guide decision-making about the effective use of "draws" during both good and bad times.
DEFINITION AND TYPES OF DRAWS
A draw is compensation payment in advance of sales performance. There are two of types of draws: 1) Non-recoverable; and, 2) Recoverable. A non-recoverable draw is not owed to the company if the sales person falls short of the performance required to retire it. A recoverable draw, on the other hand, must be paid to the company from the employee's future earnings.
PREVALENCE OF DRAWS
Generally speaking, the use of a draw provision in sales compensation plans is largely influenced by the salary/incentive ratio. This is particularly true in industries where the incentive opportunity is high and the salary is low (e.g., 40% or less salary/60% or more incentive). For example, our research shows that companies in the software industry frequently provide draws to sales employees. Our research also shows that such draws are limited to the first six or less months on the job.
ILLUSTRATION OF EFFECTIVE USE
The creative use of a draw provision can help a company in difficult times. Consider this example: ABC Services, Inc., (fictitious name), a major outsourcing firm in the collections industry was having difficulty attracting and retaining sales people.
While the earning opportunity was high (>$150,000 a year), the salary was relatively low (about $1,500 per month). Also, the more experienced sales reps were having difficulty closing sales at the same rate as prior year. Buyers were either taking longer to buy or were putting off purchase decisions until later. Sales management did not want to change the salary/incentive ratio at this time.
Instead, management implemented the controlled use of two draw provisions: 1) A non-recoverable draw for new sales employees for the first 30 days on the job; and, 2) Recoverable draw for experienced sales people. Also, the company skewed the draw to its better performers by introducing the following two features: 1) Give the historically better performing sales people the opportunity to draw more - A players 60%; B players, 40%, C players, 20%; and, 2) Set a minimum performance threshold for those sales people who have been on board since the beginning of the year, for example, 50% or 60% of quota depending on the specific financial requirements of the situation.
DRAW'S BENEFITS
In economic times like this, it is important to keep in mind that for sales people, the compensation plan is all about cash flow. A company has to consider whether or not to place a bigger safety net under their people without doing irreparable damage to what may be a fundamentally sound sales compensation plan.
This is a good solution to consider for three reasons: 1) It maintains the integrity of the sales compensation plan that is in place - doesn’t comprise by either increasing salaries or putting in place artificial measures of performance like MBOs; 2) It emphasizes performance - the draws have to be earned out and anyone who doesn't react well to this is indicating that they may not be confident in their ability to sell their way out of the current slowdown; and, 3) Finally, it gets money to the sales reps so they can stop worrying about their cash flow and focus on selling.
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