Sales compensation packages come in many different types and are calculated in a variety of ways, depending on the industry and the company. A sales compensation agreement usually involves careful negotiation with your employer. Make sure that you have a good understanding of the terms and how your compensation will be calculated.
Most sales commission structures are based on one of these models:
- Straight commission. Industries with immediate sales, one-call closes or a closing cycle of less than a month often use a straight commission structure. As an employee, this type of compensation can be risky, unless you're confident in your sales skills or are certain the product will sell. Some retail clothing, cosmetics, office products and even residential real estate, are based on straight commission sales.
- Base salary plus commissions. A salesperson receives a regular salary plus performance-based commissions under this structure. Sometimes, companies will increase the base salary and decrease commissions over time, or decrease base salary and increase commissions until the salesperson is on straight commission. This commission structure works well in any field that relies on long-term relationship building or an accumulated expertise, such as national sales for a sportswear manufacturer or an applications specialist for a technology company.
- Draw against commission. Salespeople receive regular advances against future commissions, with a limit on the total advance. This commission structure is often used when salespeople have to plan on a long sales cycle and can have an inconsistent cash flow if they're working for straight commission.
- Guarantee against commission. The salesperson receives a minimum income even if commissions don't reach that level. This differs from a draw in that the guarantee doesn't have to be repaid. Companies who are offering a new product with an uncertain market or who are trying to establish a presence in a new territory will sometimes offer a guarantee against commission in order to attract proven salespeople.
Since selling complex products with a high price tag often involves a long sales cycle, these industries usually offer draws against commission. Sales representatives for technology-related equipment and systems, pharmaceuticals, heavy machinery, or farm equipment -- even newly minted stockbrokers -- may be offered a draw against commission.
Companies realize that their sales representatives may have difficulty budgeting and meeting their month-to-month living expenses, and will offer a draw to help them out.
This practice also helps companies to attract and retain good sales representatives, while allowing the sales rep to develop confidence in his or her abilities and develop assigned territories.
Read on to learn more about how draws are calculated and taxed.