What it means
Sales commissions can be uneven. A salesperson may spend months building a pipeline and then close several deals at once.
A draw gives them a predictable income in between, so they can pay their bills while they work. The payment is treated as an advance, not a salary.
Each pay period the company compares commission earned with the draw paid, and any commission above the draw is paid out as additional pay. If commission falls below the draw, the difference is either carried forward as a debit balance or written off, depending on the terms.
There are two main types. A recoverable draw must be paid back from future commission, which means the salesperson carries a debt until they earn it back.
A non-recoverable draw is a guaranteed minimum, and the company absorbs any shortfall, which is closer to a base salary with commission on top. Companies use draws to attract and keep salespeople, especially in industries with long sales cycles.
The finance team needs to account for them carefully. A recoverable draw creates a receivable from the employee, and if it is unlikely to be recovered, the company should provide for it.
Clear paperwork prevents disputes. The agreement should say how long the draw lasts, whether the balance carries forward, what happens on resignation and how commission is calculated.
Some places have rules on deductions from pay, so the legal position should be checked before any recovery is made. The cost sits in the budget as well as in the accounts.
When planning headcount, sales leaders should include the draw as a cash cost for the ramp-up period, since commission will not cover it at first. A new salesperson typically takes several months to build enough sales to earn more than the draw.
In practice
Real-world examples
Example 1
A software company hires a new salesperson with a recoverable draw of $3,000 a month for the first six months. After month six, the salesperson has earned $15,000 of commission against $18,000 of draw, and the remaining $3,000 is carried forward. The company agrees to extend the draw by two months to give the salesperson a fair chance to recover it.
Example 2
An estate agency offers a non-recoverable draw of $2,500 a month for the first quarter. If the new agent's commission is lower, the agency simply absorbs the shortfall to help the agent settle in.
Example 3
A medical equipment supplier uses a draw to cover a seasonal gap. The sales team earn large commissions in the autumn budget season, and the monthly draw smooths their income for the rest of the year. The company recovers each advance from the autumn commission.
Think of it
A draw against commission is like taking an advance from your parents before your allowance is due, which you must pay back once you complete your chores, or which they might occasionally forgive if chores were especially hard.
Formula
Calculation
Additional payout = Commission earned - Draw paid - Prior shortfall carried forward
Suppose a salesperson receives a draw of $4,000 per month against an 8% commission. In month one, sales are $30,000, so commission is 0.08 x 30,000 = $2,400. The draw exceeded commission by 4,000 - 2,400 = $1,600, which is carried forward. In month two, sales are $80,000, so commission is 0.08 x 80,000 = $6,400. Additional payout = 6,400 - 4,000 - 1,600 = $800, which clears the shortfall and pays the salesperson a further $800.Case study
Seen in the real world
Bluestone Security is an illustrative, fictional business that sold alarm systems and hired three new salespeople on a recoverable draw of $3,500 a month. After six months, two had earned more than their draws, but the third had a shortfall of $9,000 and wanted to leave.
The sales director realised the agreement did not say what happens to an unrecovered balance when someone resigns. The finance manager had also not recorded the balance as a receivable, so profit was overstated.
The illustrative company rewrote the agreement to say that unrecovered balances would be forgiven after six months. It also began recording the draw balances and reviewing them quarterly, so the cost of hiring and ramping salespeople was visible. The new policy also helped the board decide how many new hires it could afford the following year.
Watch out
Common mistakes
- Treating a recoverable draw as a normal salary expense, when it is an advance that may be recovered from future commission.
- Failing to state in writing what happens to any shortfall when the salesperson leaves, which invites disputes.
- Ignoring the draw balance in the accounts, so the company's receivables and profit are misstated.
Questions
People also ask
What is the difference between a draw and a salary?
A salary is paid regardless of results, while a draw is an advance against future commission and may need to be recovered.
Is a draw guaranteed?
Only if it is non-recoverable, and many companies prefer recoverable draws so that the payment stays linked to results.
Can the company take the money back from pay?
That depends on the agreement and local employment law, and advice should be taken before making any deduction.