Employers with sales representatives typically compensate members of their sales forces with a salary, commission, draw or a combination of two of the three. Receiving compensation with a variable such as commission that directly reflects one’s job performance enhances an individual’s ability to maximize his pay. Providing pay in such a manner also minimizes a business’s exposure to paying a guaranteed amount to an employee who fails to attain the revenue goals outlined for him by his employer.
Commission vs. Draw
An employee earns a commission by completing an assignment or achieving a certain level of sales of products or services. An employer may offer a compensation package to a prospective sales representative consisting of 100 percent commission or a combination of salary or draw plus commission.
A draw represents an amount of money made available to an employee by his employer in the event he fails to earn a sufficient amount of commission during a specific period to cover his living expenses. In effect, a draw ensures a salesperson that he will have access to a certain amount of money at the end of a pay period regardless of his sales performance.
A business renders an annual salary to an employee in exchange for the work he performs. An employer may offer a salary in addition to commissions to its sales representatives as compensation. The amount paid as salary offers a salesperson assurance that he will be able to cover all or a portion of his regular living expenses regardless of how many products or services he sells in a designated time. The ability to earn commission in addition to a base salary provides a sales representative with the chance to earn more money by earning a percentage of the amount of revenue he brings into his employer’s business in addition to his salary.
An employer offers a recoverable draw to a salesperson as a form of base pay for a given time. Employers provide recoverable draws to their sales forces in concert with commissions. Unlike a salary, an employer recovers the amount an employee accesses from the draw to cover his living expenses.
An employee takes a withdrawal from a draw when the commissions he earns during a pay period do not equal the amount available in the recoverable draw. For instance, if a business offers a revocable draw of $2,000 per month and an employee earns only $800 in commission in a month, the employee withdraws $1,200 from the draw to equal his pay. The person’s employer recovers, or subtracts, the $1,200 withdrawn by the employee from future commissions earned.
If the amount an employee earns in commission during a pay period exceeds the amount available in the recoverable draw, the worker does not have access to funds in the draw.
Like a recoverable draw, an employer offers a guaranteed or non-recoverable draw in combination with commission. An employee falling short of sales goals withdraws money from a guaranteed draw up to an amount equaling the difference between his earned commission and the amount of the draw for a set period. Similar to a salaried compensation arrangement, an employer does not deduct the amount of guaranteed draw taken by an employee from his future earnings as it would if the draw was recoverable. A guaranteed draw differs from a salary by lasting for a specified period such as six months rather than for the length of an employee's tenure with a business.