I’ve gotten into two lengthy discussions recently about draw as a sales compensation component.  Specifically, since I work with start-ups, the questions were around whether or not you should offer up a draw or not as part of the compensation package.

I have some very strong opinions about draw, and I want to start by going over the basics.  Draw is compensation offered to a new salesperson coming on board.  There is a “draw period” which is the time over which the draw is paid.  (typically 3 to 6 months).  There are two types of draw:

• Recoverable draw:  This is set amount of commission that is paid to the salesperson in advance of actually being earned.  It is pre-paid commissions, that get credited against earned commissions.  If, at the end of the draw period, the salesperson has not sold enough to cover the amount of the draw, then he/she needs to pay the company back the unearned portion of the draw.
• Non-Recoverable draw: This is a set amount of commission that is paid to the salesperson in advance of it actually being earned, but at the end of the draw period, the salesperson is NOT responsible for paying back the un-earned portion.  Think of non-recoverable draw as essentially a higher salary during the draw period that drops down after the draw period is over; however any actual sales commissions made during the draw period get crediting against the draw.

Why do salespeople deserve draw?  Isn’t it all about their performance?  A salesperson should just work harder to get their commissions faster, no?

Well… some of that is true, but the fact is, as I have always said, that sales compensation plans are designed to drive behavior.  They should always be designed to drive the behavior that the company wants.  So, as a component of a compensation plan, draw can be a very important part.

The most important thing that you want your salespeople focused on is SELLING.  When a salesperson is worried about getting their first sale because without commissions that cannot pay their mortgage, and other bills, this is distracting from their focus.   So, a draw helps keep the salesperson focused on making the sales they need to make during their start-up phase.  Once the salesperson has built a pipeline and is moving - then I think its all up to their performance.

There are many situations where draw make a lot of sense.  Some examples:

• Your product has a long sales cycle.  If a realistic time frame to close a deal is 9 months, then even if you have a superstar salesperson that brings a rolodex with him/her, you know that it will be several months before any sales are made.  Its reasonable to offer a draw to help that salesperson stay focused on selling in the initial 6-9 months.
• The salesperson is walking away from large commissions.  One of the hardest things for a salesperson switching jobs is that after you have built up a large pipeline, that salesperson could be walking away from a large potential commission payout.  If you really want this person selling your product, you can offer the draw to compensate for that loss of income (essentially a signing bonus - but tied to sales in your firm).
• Your product/market/pricing is unestablished.  Of particular relevance to start-ups is asking a salesperson to come on board and trust that your product has a market, that the pricing is correct, that your product works, etc.  For all these reasons, it is reasonable to offer a draw to a salesperson while he/she flushes all of that out.  What you don’t want is for the salesperson to be thinking about moving on, stalling your momentum, because he is too focused on when he will start making commissions.
• Your comp plan is mostly commission.  If you are offering a compensation plan which is very low base salary and mostly commissions, a draw can make sense in order to mak sure the salesperson has some income dring their startup phase.

The bottom line is that you should be expecting big things from your salespeople, but EVERY salesperson has a start-up phase and it can take a while before he/she sees a commission check - not because they are a bad salesperson, but because pipeline building can take time.  When a salesperson is walking into a virgin territory, new product, etc. it is reasonable to offer them a draw to make sure that they stay motivated and focused while they get up to speed.  In fact, I think that offering a draw can help ACCELERATE sales in the short term because you keep the salesperson focused on selling.

Since draw is credited against actual sales commissions, if the salesperson does succeed in the short term, then you don’t double pay the salesperson. 

Should you offer recoverable or non-recoverable draw?  I think this is really part of your negotiation.  Of course, non-recoverable is better for the salesperson and recoverable is better for the company.  Asking for the recoverable money back at the end of the draw period certainly is a de-motivating exercise; however, it protects the company in the event the salesperson really cannot perform.  In my own experience, offering up non-recoverable vs recoverable is based on the person and also the maturity of the product.  If I’m confident in the saleability of my product (already proven it can be sold), then a recoverable draw makes sense.  If I’m working with a known entity (the sales person has succeeded in 10 other companies), then a non-recoverable draw may be more appropriate - thinking that if he/she doesn’t sell its a function of my product and not him/her.  Relatively new salespeople should probably be offered recoverable draw until they prove themselves. 

Bottom line:  There really are no hard rules around this - and should be part of negotiation with the sales rep.  Start-ups need to be realistic about the task they are asking the salesperson to go into, and while they are getting risk/reward for their sales efforts, keeping them focused during the start-up phase for an unprovien product with a virgin market and untested pricing is essential - and a draw may make the difference between you winning or losing.

In many large companies, departments get “use-it-or-lose-it” budgets.  What this means is that they get dollars for projects for that year, and if they don’t use up all of that money by the end of the year, then they don’t get to spend it.  It does not roll over until the next year.  This is where salespeople looking to finish out their own year great can capitalize.  It requires you to be flexible in your pricing technique, but you can very often push through a sale that might otherwise take a very long time to close.

A manager at BigCo has $150,000 left in his budget for the rest of the year.  He is evaluating your product for an initiative next year, and your product costs $400,000.  Currently, in his mind, your product is completely on next years budget.  But, you ask about his unused budget and find out about the remaining amount.  You determine with him the best way to bill him the $150,000 now, and the remaining $250,000 next year.  If you can convince the manager of this, not only do you secure a sale this year, you lock up your sale for next year, and leave the manager $150,000 extra on his budget for next year.

So, how do you flush out if there is an unused budget.  Often it is as simple as asking.  Managers may not even think of this as a possibility because its never been proposed to them before.  If they are not very forthcoming, and you really want to flush it out, you should continue to ask.  One sweetener I have often used to get managers cosy with the idea is to offer them $1.10 credit for every dollar they spend with me today.  So, If they handed me an invoice for $150,000, I would credit $165,000 off the cost of the project.  This essentially makes the next year cost of my project an additional $15,000 less.  Initial hesitation is often because they may not be sure that they want to use your product, or if what you suggest is OK with their company.  But, most managers, knowing that they have money that will dissapear and that this method will free up cash for next years projects, will want to at least explore the option in my experience.  And if you have a manager willing to think outside the box, you will get the sale, and an appreciative customer who will alreayd know that you are the type of sales person in for the win-win.

Of course, you DO need to make sure that you aren’t getting a manager into hot water, and I would never suggest something that circumvented corporate purchasing policies, but there are often creative ways to unbundle or unhook your product that makes it fit perfectly into this existing and disappearing budget money.  Sometimes, the reason your product is scheduled for the next year is because it is part of some capital project that has dollars assigned to it.   Once, I had a customer who had money left in his budget for professional services, but not for software.  Yet I was trying to sell him software.  Well, my software typically included installation services, training, first year support, and some data-loading services as part of the core product.  All of those services were completely valid to be billed against his unused professional services budget.  So, I unbundled these services for him, billed him in December for those items, and then billed him for the remaining software licenses in the next year.  The tactic served me and the manager well.  I got a sale in the current year, cash in the bank in the current year.  He got to use this years dollars for next years project, and freed up more money in next years budget (which I took too!).  I also guaranteed that I was going to get a sale in the next year because by doing the first invoice, there was very little chance he would not take the second part.

As I’ve written before, you should be building relationships with your customers - not just selling them.  This is actually one of those instances where what you are doing actually benefits everyone involved.

Knowing that there are about 10 weeks left in the year, and that it can take several weeks to get the contracts done and pushed through, you should be asking about this unused budget and making the deals… TODAY!