What is OTE?

On-target earnings pertain to an individual's remuneration package, which includes a base salary and a variable component such as commission. It entails a deal between the employer and the employee that guarantees a certain commission. It can also refer to a remuneration structure for executives based on completing the required objectives. Target Earnings are primarily used to recognize and reward employees for their efforts. Employee motivation and engagement are two of the most significant advantages of on-target wages. OTE is one of the most effective methods if you want to boost productivity hacks for salespeople.

What is OTE in Sales?

We all know that on-target earnings comprise a salesperson's base salary plus any additional commissions. It is also to be noted that on-target earnings exclude remuneration for situations such as one-time bonuses, overtime pay, and perks. OTE assists salespeople in estimating their prospective commissions for a certain position. The entire amount of income a firm expects its salespeople to obtain if they meet their sales projections is called 'On Target Earnings.' Businesses rarely guarantee specific OTE estimates since OTE incorporates a sales representative's base compensation and performance-based commissions. Nevertheless, OTE is usually a sensible figure that most salespeople in the organization can achieve.

How does OTE work?

On-Target Earnings (OTE) are typically divided between base salaries and commissions. For instance, consider a candidate applying for a sales representative position with an OTE of $250,000. During the interview, they find out the base salary is $150,000, while the remaining $100,000 is achievable through commissions by meeting their sales quota. If they surpass their quota, their total earnings could be even higher.

OTE sets expectations for candidates regarding their potential earnings in the role. While the exact calculation of OTE can vary, most companies determine it based on the specific role and the employee’s experience or tenure.

Capped vs. Uncapped OTE in Sales

Capped OTE places a fixed limit on how much a sales rep can earn in commissions, even if their performance exceeds expectations. This approach helps organizations maintain predictable budgets, ensuring they don’t overspend on commissions. However, capped OTE can demotivate top performers once they reach the limit, potentially leading to reduced efforts and disengagement.

Uncapped OTE, on the other hand, allows sales reps to exceed their projected earnings by achieving higher performance levels. This model incentivizes high performers, driving them to push boundaries and strive for exceptional results. However, the challenge lies in managing fluctuating costs, as commissions may significantly increase during peak performance periods.

Choosing between these two models depends on your organization’s priorities—financial predictability or motivating sales teams to maximize their potential. Many companies succeed with hybrid approaches, setting thresholds that balance motivation with cost control.

Examples of Different Pay Mix Structures in OTE

OTE plans often follow a typical ratio of 65% base salary and 35% commission, but pay mixes vary significantly. Here are some examples, starting with purely commission-based structures (base salary/commission):

1) 0/100: This pay structure is entirely commission-based, without base salary, and is suited for independent, highly-driven salespeople. High-end department stores often use this model, offering commissions ranging from 5% to 10% on each product sold.

2) 50/50: This balanced pay mix combines a base salary and commission equally, motivating sales reps to meet and exceed quotas while providing financial security through the base salary. This setup allows you to assess performance and adjust the pay mix.

3) 70/30: This mix is slightly less aggressive and emphasizes base salary more. It's ideal for customer success managers who balance customer satisfaction (CSAT) and upselling targets. It's also commonly used in industries with longer sales cycles, such as telecommunications and financial services.

4) 90/10: Offering greater financial stability with a larger base salary, this mix is best for roles where sales are not the primary responsibility. It's a good fit for employees in support functions, like finance or customer service, who may need just a small incentive to contribute to closing deals when possible.

OTE Examples Specific to Roles

Sales Representative:

A salesperson has an On-Target Earnings (OTE) of $100,000. They receive a base salary of $76,000, and their monthly sales target is $40,000. For every sale their team makes, they earn a 5% commission. They will earn $2,000 in commission each month if they meet the sales target. Over a year, this totals $24,000 in commission, bringing their total OTE to $100,000 ($76,000 base salary + $24,000 commission).

Sales Manager:

A Sales Manager has a base salary of $80,000 and a monthly sales target of $200,000 for the team. They earn a 2% commission on their team’s sales. If the team hits its target, the Sales Manager earns $4,000 in commission monthly. Over the year, this adds up to $48,000 in commission, making their total OTE $128,000 ($80,000 base salary + $48,000 commission).

Sales Director:

A Sales Director earns a base salary of $150,000, with a company-wide sales target of $5 million. They receive 1% of the total sales, meaning the director earns $50,000 in commission if the company hits its target. Combined with their base salary, their total OTE would be $200,000 ($150,000 base salary + $50,000 commission).

Terms Related to OTE

1. Average Rep Earnings

Keep in mind that on-target earnings are not guaranteed. Some hiring managers will disclose the annual salary of an average sales representative. If the average salesperson meets 100% of their quota, they'll boast about it! Expect to be questioned about this if their salespeople hit 30 percent of quota and are significantly underpaid.

2. Fully Ramped OTE

Most sales positions necessitate some initial training. As a result, on-target earnings rarely consider ramp quotas and rewards. Good sales organizations would offer you a draw or elevate your commission rate to compensate for the lower quotas.

3. Pay Mix

This refers to the percentage of your On Target Earnings comprising basic salary and commission. The industry standard for SaaS sales is 50% base and 50% commission/bonus, but several industries pay differently.

How to Calculate OTE?

Determine the minimum compensation for your employee

Without a regular salary for your sales agents, you won't be able to calculate On Target Earnings compensation. This amount should be sufficient to reward them for the caliber of job they will perform and to match their livelihood, allowing them to earn a comfortable living. Consider the average compensation for the role in your country and industry while making your decision.

Determine Your Salespeople's Sales Quotas

It's time to figure out what quota your sales agents will need to meet to earn a commission. One-fifth of the annual sales quota, or 6 to 8 times the sales quota, is proposed for sales OTE. You can also use a salesperson's previous relevant work experience.

Align the Commission with the Team's Objectives

The sales team's planned targets usually determine the commission component of On Target Earnings. For example, it could be growing income by 8% or increasing the number of monthly concluded deals by 8%. Consider how challenging these objectives will be and how long it will take. Align the commission with the difficulty of completing the assignments.

Combine the Base Salary and the Commission

Once you've figured out your base salary and commission, add them to get your OTE.

Benefits of OTE

1. Sales Commission Forecasting

OTE assists a company's management and finance departments effectively forecast sales commissions. By accounting for each sales professional's OTE sales, the organization can plan to handle each rep financially.

2. Predicting Earning Potential

Each individual has a fair expectation of earning potential by understanding the OTE for a sales position.

3. Setting a Legitimate Commission Rate

By defining a realistic OTE figure, sales managers can decide a commission rate or percentage acceptable for the function based on the base salary.

Potential Pitfalls of using an OTE model

While OTE (On-Target Earnings) is a valuable framework for sales compensation, its misuse can lead to significant challenges. Here are some common pitfalls to avoid:

Unrealistic OTE to Attract Talent

Overstating OTE during hiring may initially attract candidates, but unrealistic expectations can backfire. When sales reps discover the promised earnings are unattainable, it leads to frustration, loss of trust, and high turnover. OTE should reflect achievable earnings based on realistic performance metrics.

Don’t turn OTE into a Stretch Goal

OTE represents earnings achievable with reasonable effort, not a stretch goal requiring extraordinary performance. Treating it as the latter can create burnout, dissatisfaction, and higher attrition. Stretch goals should exist separately to reward exceptional results, not replace achievable earnings.

Adjusting OTE after Hiring is a Red Flag

Reducing OTE after hiring, unless absolutely necessary and transparently communicated, erodes employee trust and engagement. Such bait-and-switch tactics demoralize teams and hurt retention. To maximize the effectiveness of an OTE model, organizations must ensure it is realistic, transparent, and aligned with achievable goals.

Conclusion

OTE, or On-Target Earnings, includes base salary and performance-based incentives like commissions, which are crucial for recognizing and rewarding employee efforts, especially in sales. Its structure, with a balanced pay mix, motivates teams and helps increase productivity. However, challenges in its implementation require simplicity and periodic adjustments for sustained effectiveness.