Don’t Let Your Salespeople Get Overdrawn
Commission salespeople are among the highest paid people in North America. It’s a high-stress, high-anxiety position that pays well when the individual performs.
Having a draw against commission is an excellent way to keep the wolf away from the door during lean times or while a new salesperson is coming up to speed. There is a potential downside, however.
Unfortunately, there’s some confusion about types of draws, particularly on the part of salespeople. Much of this confusion is caused by sales managers who either don’t understand the differences themselves or who don’t explain it properly.
A draw can either be recoverable or non-recoverable. The key to their effective use is to know when to use one over the other. Basic rule: use non-recoverable draws for the first six to twelve months and then change to recoverable draws.
With the non-recoverable draw, the company takes all the risk. If the salesperson doesn’t perform, the company still pays the draw. So, what’s the difference between a non-recoverable draw and a salary? Not much! The biggest difference is the salesperson is expected to perform well enough to cover the draw. If his sales commissions exceed his draw, he gets to take home more money.
With a salary, you pay, and they get – whether or not they perform. If they don’t perform, the company takes the loss. If they exceed their sales targets, there’s usually no additional payoff for the salesperson and the company keeps the extra income.
The problem is many salespeople think a non-recoverable draw is a salary and they don’t feel any pressure to perform. The smart sales manager treats the non-recoverable draw similar to a recoverable one and has monthly or quarterly “chats” with the salespeople to inform them where they are on their performance curves.
The smarter ones provide the salesperson with a statement every month or quarter, just like the bank does, showing the person where their account stands.
A recoverable draw is basically a loan to the salesperson from the company. It’s somewhat like a bank’s overdraft protection which allows you to write a cheque even though you don’t have enough money in your account.
Like overdraft protection, a recoverable draw is intended to tide the salesperson over in times of temporary financial need and should be considered a loan that must be paid back.
Defaulting on the Loan
When a person is in a continual overdraft position at a bank, the bank will “call the loan” and insist that it be paid in full before extending further credit. The same should apply to a recoverable draw.
Once a salesperson’s draw deficit exceeds two months of credit, the loan is called. In other words, if a person has a draw of $5,000 a month and he has a commission deficit of $10,000, the draw ceases until the deficit is brought to $0. You don’t want the person running a continual overdraft.
A gentler way to do this is instead of stopping the draw cold turkey, simply reduce it to half for a couple of months and then to zero.
Too many sales managers are softies at heart and don’t do this. The result is a salesperson who gets hopelessly in debt to the company and either quits or hopes you’ll fire him, assuming you won’t try to collect. The basic rule is don’t let a salesperson owe you more than you’re prepared to write off because it’s extremely difficult to collect from a former employee (i.e., getting blood out of a stone!).
Nobody plans on falling behind on their bank loans or their draw against commissions. The people who are going to give you the most grief are the ones you probably shouldn’t have hired in the first place. Proper hiring practices, the use of a sales assessment hiring tool, and thorough background checks can help minimize the potential problem.
Every business has dry spells which is why the draw exists in the first place. Most companies make every attempt to ensure their salespeople have a continuing opportunity to make income. On the other hand, salespeople must make every attempt to capitalize on the good times, so they don’t have to go too far into a deficit position during temporary business droughts.
Striking a Balance
If a person is in a continual deficit position, either his draw is too high or his performance is too low. Remedial action is necessary. The draw should be lowered, or the performance increased to achieve financial equilibrium.
Salary vs Commission
Many salespeople get lulled into a sense of false security when they are on a salary. Whether they accept it or not, every salesperson is on straight commission. That is to say, their salary must be covered by their sales over the long term or their job is in jeopardy.
The Bottom Line
Make sure that your salespeople understand why they shouldn’t get overdrawn at the Company bank and what the consequences are if they do.