Employers use different methods to compensate a workforce, depending on the type of job employees perform and the way an employer motivates them. Some jobs use commission-based payments to motivate the workforce, while many other types of workers receive a salary. Positions using commission plans provide a draw against future commissions, which provides a safety net during low-earning months.
A salary is compensation paid to employees on a regular schedule. The payment has already been earned by employees for past work. A salary is different from an hourly wage. Hourly wages are paid based on the specific number of hours spent on the job, and usually have a time card system or invoice to track cumulative hours worked. A salary pays employees based on an expertise level or the quality of their work, rather than the time it took to complete it, and is expressed on an annual basis. Whether a salaried employee works 40 hours or 65 hours per week, he will receive the same amount of compensation. The annual salary will not change unless the employer renegotiates the payment contract by giving the employee a raise or pay cut. The benefit of a salary is the fixed, dependable income; the downside is an income that is capped at the salaried amount.
Description of a Draw
A draw payment is used in conjunction with a commission-based compensation plan. A draw essentially pays an employee now for dollars he will earn in the future. When he receives his future compensation, the draw is deducted from the proceeds. A draw is usually maintained on a monthly basis, and at the start of the pay period, a specific amount of money is advanced to the employee as a "pre-determined draw." The draw amount then reduces earned commissions at the close of the pay period.
Professions Using a Draw
Sales is the most notable profession using a draw as part of the employee compensation plan. Business development officers, financial advisers and bond sales representatives are examples of sales positions that might receive a draw. The draw helps new employees by providing a base income to sustain them until their performance and earnings increase. The downside of a draw comes when an employee earns less commission that his draw in a given month. Often, this can be paid later, in a pay period where the employee earns more profit. Too many months of small commission, however, may add up to a significant amount of debt for the employee.
Salary is direct compensation, while a draw is a loan to be repaid out of future earnings. A draw is usually smaller than the commission potential, and any excess commission over the draw payback is extra income to the employee, with no limits on higher earning potential. Salary is fixed and higher earning potential comes only through raises or bonuses. In many cases, a draw is "forgivable," and when an employee leaves a job, he does not have to pay the draw back. In some companies, the draw may continue indefinitely, or it may decrease over time.