In sales, a draw, also known as a draw against commission or a draw against future earnings, is a form of advanced payment provided to sales representatives to ensure a minimum level of income during a specified period, usually a month or a quarter.
Here's how a draw typically works:
1. Base Salary and Commission: Sales representatives often have a base salary as part of their compensation package, which serves as a guaranteed income. In addition to the base salary, they also have the opportunity to earn commissions based on their sales performance.
2. Draw Amount: The draw amount is a predetermined sum that is paid to the sales representative regularly, usually on a monthly or quarterly basis. It is an advance against future commissions and is intended to provide a minimum level of income during the draw period.
3. Commission Deductions: As the sales representative generates sales and earns commissions, the draw amount is deducted from their commission earnings. The deducted amount is typically applied against the draw balance until it is fully offset.
4. Reconciliation: At the end of the draw period (e.g., the end of the month or quarter), the sales representative's total commission earnings are compared to the draw amount they received. If the total commissions earned exceed the draw amount, the excess is paid to the sales representative as their commission. If the total commissions earned are lower than the draw amount, the sales representative may need to repay the difference, or the draw balance may carry over to the subsequent period.
The purpose of a draw is to provide sales representatives with a steady income stream to cover their living expenses and financial stability, especially during periods when their commissions may fluctuate. It ensures that salespeople have a reliable source of income, even if their sales performance falls short of the anticipated level.
Draw structures can vary among organizations. The draw amount, the frequency of payments, the reconciliation process, and the specific terms and conditions are typically outlined in a draw agreement or contract between the sales representative and the company.