Draw versus commission is a form of pay structure in which an employee is paid a base salary (the draw) that is supplemented or replaced by commission when a specific sales goal is met. This gives the salesperson more stability during slower months, when his or her sales don't meet the set goal, while allowing the employee to earn much more when he or she meets or exceeds those goals. There are a number of variations on this type of pay, including paying a percentage of the commission added to the base salary instead of just the commission and whether or not the base is actually a salary or if it is deducted from projected future earnings.
How Commission Works
Many sales jobs base part of their pay structure on employee commission, which is typically some percentage of the value of each sale. There are many different ways that salespeople are paid, but the two ends of the spectrum are straight commission, in which the person gets no base salary and is only paid when he or she makes a sale, and salaried, where the employee earns a salary and nothing extra. Draw versus commission combines aspects of each; when the salesperson meets or sells more than her goals, all she earns is the commission. When she doesn't, all she earns is the base salary. This method of payment is sometimes used when a salesperson first joins a new company to give her time to build up her base of clients before switching to straight commission.
Draw versus commission is similar to, but slightly different from, the payment structure known as base plus commission. Though these salespeople may still have sales goals, not meeting them doesn't affect their base pay. Instead, they receive a flat salary plus an additional percentage on anything they sell.
A twist on draw versus commission is sometimes called draw against commission. In this pay structure, when sales don’t earn the employee enough money to get paid the standard paycheck, the company deducts the draw from the salesperson's projected future commissions. For example, if the employee does not make her goals in one month, she is paid her draw of $1,200 US Dollars (USD). In the next month, she does meet them, and her commission payment is $3,000 USD; since she was paid the draw in the previous month, however, she'll only get a check for $1,800 USD — the commission minus the previous draw.
In this case, the employee is working on a straight commission, but is guaranteed a minimum amount of salary from paycheck to paycheck. In order to make more money in this system, the salesperson has to consistently sell above the draw level to make sure future paychecks won't have commission deducted from them.
There are advantages to draw versus commission methods of payment, though it depends on the exact payment structure. With the more standard method, employees are guaranteed to make a certain amount of money each month, providing them with some level of earning stability. The superior salesperson is rewarded for working hard and exceeding her sales goals. The company also benefits because, if the employee regularly achieves her goals, it only has to pay commission and no base salary.
In sales jobs where salespeople generate their own leads, draw versus commission may motivate people to work harder to make a higher paycheck. Although there are issues outside the salesperson's control, like a bad economy that might mean slow sales, at least there is that draw amount to fall back upon. This can be better than making straight commission if sales suddenly take a downturn, where no sales means no income at all.
Depending on the product being sold, it may be difficult for a salesperson to meet her goals. A person who works in a retail environment, for example, may not have much control over who comes into the store, and employees are not in control of advertising, the store's profile, or the economy. In some cases, particularly in high end shops, the employees might schedule personal product demonstrations with customers in their clientele book, but meeting the sales goals can still be a challenge, especially if they are not set at realistic levels.
Under draw against commission, an employee who doesn't make her goals for several months in a row may find herself in debt to the company with no easy way to get out. Even if she exceeds her goals regularly, she may find that all of the commission goes toward repaying the draw from the lean months and she's not able to actually earn more money. In some cases, if the salesperson who hasn't regularly met her goals quits, the company may require her to repay the draw since it was deducted from her future earnings. This is not legal in all places, since there are laws in some jurisdictions that say no one can be forced to work without pay, but she may still have to repay any part of the draw above minimum wage.