How sales reps make money
First, it’s important to understand how sales reps make money.
Sales reps think about their annual pay as “OTE” (on target earnings) which is a combination of their base salary and commission. Commission is paid out usually on a monthly or quarterly basis and is calculated based on the rep’s percent to goal achievement. Normally, base pay is 50% to 70% of their expected OTE. Some reps will end up making significantly more than their OTE due to over-performing their goals, and others may make slightly less than OTE. But any rep who consistently falls short of OTE will either end up quitting or being laid off.
Everyone fully expects sales reps to make their OTE each year, and if they don’t make OTE, the reps leave the company.
In order to hit OTE, a sales rep has to do many things over time to set up their “sales machine”: find people to contact, set meetings, hold meetings, work opportunities through a full sales cycle, and finally close deals. This process can take a long time to complete depending on the product/service, which is why every new company has a “ramp period” for a new rep. The ramp is either a much lower quota or guaranteed commission payment for a set period of time when a rep joins a company. The intent is to allow the rep to get their sales machine up and running without punishing their take-home pay.
How (most) sales reps are paid on parental leave
At most companies, when a sales rep goes on parental leave they are only guaranteed their base salary, not their OTE. Their pipelines are typically handed off to another AE to “cover” for them while they are out, and in most cases the company will say “if this new rep closes something from this pipeline while the original rep is out on leave, the two reps will split commission 50/50.”
In some instances, the sales manager may take over the pipeline and any deals closed would be credited 100% to the AE on leave.
Both of these examples are an attempt to apply the “pay for performance” standard sales comp plan to someone who is on parental leave.
This comp plan is bad for the parent on leave, the manager and the business results due to:
- Mismatched incentives: The covering AE is not appropriately incentivized to work this pipeline because they only get 50% credit for these deals, vs. 100% credit for closing their own deals — so they will pay less attention to deals that are actually better for the team/company/customer, unless the deals are super easy to close
- Unfair splits: The rep who is on leave may have done 90% of the work to then have someone else do 10% to close the deal but they have to split commission 50/50
- Reduced productivity: The manager who works live deals is too distracted, and spread thin between too many responsibilities, to appropriately work this pipeline and manage a team
- Reduced control and earnings: The AE on parental leave is leaving all of their variable comp (30% to 50% of their normal earnings) up to the performance of someone else, and will almost certainly make less than their OTE
Then, there’s the issue of ramp.
At most companies, when a sales rep returns from parental leave they have a normal quota instead of a ramp quota. So they return to work with limited to no pipeline, yet are paid and evaluated against a fully productive AE quota.
This parental leave compensation structure usually results in dramatically reduced and unfair earnings for a new parent AE, and has lasting and detrimental effects on an AE’s career trajectory.
Why should we care about this?
It’s unfair. When a company makes a decision to offer a certain amount of paid parental leave, they are doing so with full understanding that this is going to cost them money. Every other employee at the company is getting their full normal pay while on leave, and their manager and the business accepts that output for that team will decrease. And yet, most companies still will only guarantee their sales reps just their base pay during this time, and often, the business will expect the sales team to hit numbers as though the sales rep isn’t on parental leave. This makes the situation unfair for the sales manager as well.
This perpetuates the already low representation of women in sales, particularly at more senior levels because:
- Mothers (who generally take full parental leaves) make less money than they should, which can be the impetus for them to switch to other functions with higher base but lower overall comp (e.g. account management)
- Mothers’ “stats” are hurt: since quotas typically aren’t adjusted for their leaves, they have 1–3 quarters of sub-par performance noted in performance reviews and future job interviews
- Managers are incentivized to hire men over women of childbearing age if they know that a woman who goes on leave will result in lower headcount but no change in team quota; this means the sales manager’s pay and stats are hurt by having an AE go on parental leave
This disincentivizes retention. It’s often easier and more lucrative for a sales rep to recruit for a sales role at a different company while they’re on leave, so when they return they are able to join a company that gives them a ramp goal and offers better earnings opportunities. Also — as more companies begin to realize this issue and pay sales reps 100% OTE while on leave, the companies that don’t do this will lose top talent.
Fathers aren’t taking their full parental leaves, which contributes to even more gender inequality. When a non-birthing AE is presented with two options (keep working and make 100% OTE this year, or take a 12 week parental leave and underperform for 1–3 quarters), they will almost always choose the former. This pay structure completely disincentivizes fathers from taking full parental leaves. This in turn contributes to ongoing gender inequality in sales.
This will eventually hurt companies’ ability to attract top talent. As more sales organizations advocate for better comp plans for parental leave, the companies that ignore this problem will be much less competitive from a talent perspective.
So what should we do about this?!
It depends. It’s easy to point out how comp plans for sales reps on parental leave are broken, but it’s much harder to put together “the right way” to do this.
Below I offer some principles and guidance for companies to consider as they seek to create their parental leave comp plans.
How you should think about your sales parental leave comp plan
You should have three guiding principles:
- Focus on delivering the best possible customer experience
- Pay the AE on parental leave as if they are still at work fully productive
- Incentivize all stakeholders to optimize the results of the business (aka what to do with the pipeline)
Guiding Principle #1: Focus on delivering the best possible customer experience:
- Who are the best people to handle the deals that are currently in flight? Is a manager (someone more senior) the right person, or is it better to have another AE who is well versed in the details take over certain deals?
- Should you give the entire pipeline to one person, or spread the deals out to multiple people? Is there something about this pipeline/territory that is nuanced and therefore prospects would benefit from one expert, vs. being spread out to the whole team?
- Are there situations where it’s in the prospect’s best interest to wait for the rep to return from leave to continue discussions?
Guiding Principle #2: Pay the AE on parental leave as if they are still at work fully productive
I have a simple framework I recommend:
- What would they be paid if they were here "producing"?
- Exceptions for major outlier deals
- Ramp goal upon return
What would they be paid if they were here “producing”?
- Pay OTE or historical pay: If the rep has a long enough history at the company, you can have a policy that parental leave will be paid out at the average OTE for the past 6–12 months, or if there is not enough history pay them 100% OTE
- You should take into account your average sales cycle — if it’s 12 months, then historical OTE should be at least 12 months fully ramped performance (not less)
Exceptions for major outlier deals:
- Some sales teams (namely, enterprise) are lumpier and may have massive deals every once in awhile. You should review the outgoing rep’s pipeline to identify if they have any major outlier deals, and then create a deal-specific comp and work plan for that deal
- The exception deals can (should?) split commission as fair as possible; if it’s truly a massive deal, it’s unreasonable to think the company will double pay for this — but it’s important that you figure out who should manage the deal during parental leave, and how to fairly split commission. It’s very important, though, that the parent on leave doesn’t completely miss out on this payment simply because they are already getting paid 100% OTE. If they had not gone on leave, they would have made way more than 100%.
Ramp goal upon return:
This should ideally be fairly simple and data-driven. Plug certain assumptions into a sales model to tell you what an appropriate ramp goal will be:
- Does this rep get their pipeline back when they return?
- How much time will it take them to generate new opportunities?
- Do they need some time to go through onboarding training (if the product or sales process has changed dramatically while they were out)?
Guiding Principle #3: Incentivize all stakeholders to optimize the results of the business (aka how to handle the pipeline)
Most of the time, the right solution is to assign the pipeline to other AEs.
This means you will be “double paying” in the sense that you are guaranteeing the AE on parental leave full OTE, and you are paying commission to the reps that end up closing the deals while he/she is out.
While this feels uncomfortable to most sales managers, it really shouldn’t. Instead, think of it this way: the business is paying for the parent on leave, not the sales team. In fact, many states (NY and CA just to name the two big ones) pay for a decent percent of an employee’s salary while on parental leave.
So — as a sales manager you can do what every other manager does in the business: either eliminate this person’s work (pause their sales?!), or spend additional money to help cover that work. Many companies and functions will actually bring in temp staff when someone is on leave to bridge the gap. When you hand over a deal to another AE to try to close it while the original AE is on leave that’s essentially what you’re doing as well.
When the AE returns from parental leave you should decide how to “hand back” their pipeline. Most companies handle this by saying the returning AE gets their pipeline back, and anything they close in the first 1–2 months back gets double credited to both AEs. Some companies will not hand the pipeline back if they have very short sales cycles. This should be a decision based on business and sales specifics.
Additional thoughts
There are a few other things I recommend every sales organization consider as it relates to parental leave:
- Start a transition work plan when the rep is 30 weeks pregnant — this gives you enough time to plan deal by deal, and is close enough to the due date that you have visibility
- Managers of the sales rep going on leave should get a reduced team quota approved that anticipates lower team performance when this person is out
- If the company will not accept a lower team quota, the sales manager should ask for additional resources (more marketing spend, additional SDRs, etc.) to try to fill the gap
- Keep in mind that companies in certain states receive money to subsidize parental leave — therefore, don’t be afraid to spend money to make this experience a positive one for everyone
- It is the responsibility of sales leaders to advocate for the right comp and work plans for AEs going out on parental leave; companies want to do the right thing, but most people do not understand how sales comp works
We can do better!
Writing a good policy for parental leave commission involves deep analysis of your company’s specific sales process, product and team structures. It’s hard to figure out what is fair, what is good for the business, and what behaviors a company wants to incentivize.
But after working with hundreds of expecting employees — many in commission-heavy roles — I am convinced that companies can dramatically improve their parental leave commission plans if they utilize the framework I presented here.
