OTE Meaning: What On-Target Earnings Salary Really Means, With Tips and Examples

Of course, the idea of having a high earning potential is very exciting in the context of a sales job. However, the important point here is whether it is reasonable to make that kind of earning as an annual total earning.

As a sales compensation professional, I frequently come across situations where a candidate, an employer, and sales representatives focus on a nice-sounding OTE salary. Unfortunately, if OTE is poorly described in the compensation plan, it may cause a lot of problems.

So, if you are wondering what is OTE, think of it as the expected total earnings a salesperson can make when they fully achieve their assigned target. 

This blog post covers different aspects of OTE, including its definition, salary calculation, how it works, and things employers need to consider while creating their OTE compensation plan.

What does OTE mean in Sales?

OTE is an abbreviation for On-Target Earnings. Simply put, it means the amount that a sales representative can earn once they attain 100% of their sales goal or quota. In other words, when someone asks what is OTE, the answer is that it is the combination of fixed pay and target-based variable compensation. 

In essence, therefore, when you ask about the OTE meaning, it refers to the total compensation package that consists of the fixed base salary of the employee and the performance incentives.

The OTE salary meaning becomes clearer when you understand that only the base salary is fixed, while the sales incentive depends on actual performance. 

Suppose a sales representative gets a base salary of $60,000 and target commissions of $40,000; the total compensation (OTE) will amount to $100,000. Note, however, that this figure is not guaranteed since it is based on performance.

Why is it important to know what an OTE salary is? This is because, while the salary looks impressive, the key factor lies in how achievable the target is.

How Do You Calculate OTE in 4 Steps?

OTE calculation is straightforward; however, creating one requires deliberation. The OTE salary meaning should be clear before the calculation begins because employers must ensure that the salary, incentives, and targets are aligned with business objectives, market norms, job requirements, and employee motivation. 

Below is a step-by-step guide to calculating OTE.

Step 1: Determine the Employee’s Base Salary

Begin by determining the employee’s fixed salary. It should take into account the job, experience of the worker, norms of the industry, geography, sales cycle, and level of revenue control by the employee.

For instance, SDRs could earn higher base salaries since they generally generate sales opportunities but do not seal sales.

An AE could earn an equal split between base and commission as they are the primary individuals responsible for revenue generation.

The most common OTE pay mixes are 70/30, 60/40, and 50/50. The latter pay mix is used for closing sales positions due to high revenue control by the employee.

Step 2: Determine the Sales Quota to Hit

Next, establish the sales quota that the employee will need to reach in order to earn his/her entire variable compensation.

It can be based on revenue, number of meetings, pipeline, renewals, expansion, or margin.

For instance, an Account Executive’s sales quota for one year could be $700,000 in revenue. Should he/she hit this target, he/she gets their entire targeted sales commission.

This is a crucial step because the quota will determine whether the OTE is attainable or not.

If the quota is too easy, there will be a case of overpayment by the organization. If the quota is too hard, the OTE may seem unattainable to the employee.

An ideal quota should challenge the salesperson but remain realistic within his/her territory, product, pricing, and sales support.

Step 3: Identify the Company’s Intended Goals

OTE must be tied to what the business intends to accomplish.

Goals may range from increasing new revenue, renewals, upsell revenue, expanding into a new market, improving margins, and/or customer retention.

For example, if customer retention is the goal of the organization, the compensation program will need to cover not just the new sales but renewal rates, net revenue retention, or expansion revenue.

OTE plans must not just compensate people for selling. They should compensate them for selling correctly.

Step 4: Calculating OTE Using Base Salary Plus Incentive

Once both the base salary and target incentive have been set, calculating OTE becomes very easy.

OTE = Base Salary + Target Variable Pay

For instance, assuming the base salary and target commissions are $70,000 and $30,000, respectively, then the salary will be $100,000.

This implies that the worker is able to earn $100,000 provided he/she meets his/her sales target by 100%.

An alternative scenario is when the base salary and target incentives are $45,000 and $15,000, respectively, making an OTE of $60,000.

As mentioned above, the computation of OTE is easy. However, the accuracy of the OTE compensation package depends on the realism of the salary, incentive, and sales quota.

Benefits of OTE

There are many advantages of the OTE system provided that its design is appropriate. OTE helps employees become aware of how much they can earn, and enables companies to correlate pay and performance.

It Creates Visibility for Potential Earnings

In OTE, employees receive a full view of their potential earnings if they meet all goals and expectations.

Unlike offering employees “salary plus commission,” the company provides a complete picture of their potential earnings.

It can be particularly effective in recruiting employees, who will compare the options.

 It Helps Link Performance and Pay

Sales positions have strong ties to corporate performance. The use of OTE enables employers to link employees’ pay to the value they generate for the company.

If the plan is well-designed, employees will know that good performance means good earnings.

It Enables Companies to Compensate Employees in an Effective Way

OTE makes it easier for businesses to predict what kind of salary they will have to pay.

Once a salesperson reaches their quota, a company can accurately calculate how much money it will have to pay them.

It Encourages Salesmen

Effective OTE makes it possible to motivate employees effectively.

They understand what goals they have to reach and what kind of rewards they are expected to receive.

It Helps During Interviews

By presenting OTE during interviews, a business makes it possible for an employee to analyze their salary structure beforehand.

They will understand all aspects related to the base salary and incentives they have a chance to get.

What Should Be Included in an OTE Compensation Agreement?

The compensation agreement needs to be explicit, specific, and clear. An unclear agreement will confuse in the future.

These are some essential factors that should appear in an agreement.

Base Salary

The contract will include base salary information. This information should specify if the base salary is on an annual basis or any other form of payment.

Variable Pay or Commission

This part will contain the target pay an employee can earn if they achieve 100 per cent of the target. For example: Target annual commission = $40,000 if the employee achieves 100 per cent quota.

Sales Quota or Performance Goal

The sales quota should be explicitly stated. This may be in terms of total revenue earned, pipeline, meetings arranged, renewals, upgrades, etc., or any other measurable goal.

Commission Rate

It should also be stated in the agreement how the commission is to be calculated. Example: The salesperson will receive 8 per cent commission on all closed won revenue under quota.

Commission Payment Timing

You must discuss the payment timing in the contract.

Is it payable upon signing of the deal?

Upon raising an invoice?

Upon payment by the customer?

End of month/quarter?

The reason why this is important is that most cases arise out of unclear payment time frames.

Cap on Earnings

Another crucial issue that needs to be mentioned in the agreement is whether the earning of commission is capped or uncapped.

In capped earnings, there is a limit to what the employee can earn. In uncapped earnings, the employee can exceed his/her OTE.

Accelerators and Decelerators

Accelerators may be used by some firms to motivate employees who have overachieved. Example: 8% commission for sales up to 100% quota, 12% commission beyond 100%quota

5 Considerations for Employers About OTE Salary

Designing the OTE of compensation is not only about determining the right figure. Employers need to ensure that the design is motivating, feasible, and economically viable.

Compensation Balance

First of all, an employer needs to determine the balance between fixed and variable components of compensation. In case when a job has a longer sales period, it is better to provide a greater share of fixed salary since revenues take longer to generate, whereas jobs with shorter sales periods usually have larger shares of variable compensation.

Capped versus Uncapped Earnings

Another thing to consider is the issue of capping earnings. A capped compensation model ensures the economic feasibility for an organization, but at the same time, employees lack motivation after reaching the ceiling of their income.

On the other hand, an uncapped compensation plan offers great opportunities for earning above the target, which is very motivating for employees. Still, even uncapped plans should be economically viable for companies.

Practicality of OTE

OTE needs to be achievable. While a high OTE can lure in potential candidates, a nearly unattainable target may hurt trustworthiness.

The employer needs to consider factors such as how many representatives met their quota, quota attainment percentage, territory allocation, pipeline availability, sales cycle duration, and pricing. In case very few individuals attain OTE, the plan should be revised entirely.

Industry and Market Benchmarks

OTE salary must be comparable to that of the industry and market. If the OTE is too low, potential candidates may turn down the job opportunity. On the other hand, an, that is too high but impractical may mislead workers.

The employer should assess OTE in relation to the type of position, industry, location, company stage, deal amount, sales cycle duration, and experience level. For instance, the OTE for an enterprise SaaS Account Executive will differ greatly from an inside sales representative.

Transparent Structure of the Commission Plan

The plan needs to have an easy-to-grasp structure. It would be wrong if a sales rep needed a sophisticated Excel sheet to figure out his or her earnings.

Transparency is essential in any commission structure and includes describing the target, calculation of commissions, payment schedule, under-performance policy, over-performance policy, cap, accelerator, and clawback. Transparency is probably one of the key components of the OTE incentive scheme since knowledge of how you get paid brings about trust in your compensation program.

OTE Compensation Examples From Real-World Positions

OTE varies based on the position, experience, sector, and the direct involvement of the individual in driving revenues. The OTE of an SDR will vary significantly from that of an Account Executive or Sales Manager because each has a different scope of ownership.

Example 1: Sales Development Representative

An SDR mainly engages in prospecting, scheduling appointments, and developing pipelines. An SDR does not close deals, which means their OTE typically has a higher base salary and low incentives.

In other words, the base salary for an SDR could be $45,000, while the target incentive is $15,000. Thus, the overall OTE for the SDR will amount to $60,000.

Example 2: Account Executive

Account Executives are responsible for closing sales, hence the variable pay is typically higher. Account Executive jobs usually come with a balanced pay structure.

For instance, an Account Executive can earn a base salary of $70,000 and a target commission of $70,000 to give the total of $140,000. With an annual quota of $700,000, the effective commission rate could be 10%.

Example 3: Enterprise Account Executive

The job of the Enterprise Account Executives requires closing larger deals with long sales cycles and involving several people in the decision-making process. Since the position contributes more towards revenue generation, the OTE is typically higher.

For instance, an Enterprise Account Executive can earn a base salary of $130,000 and target commission of $130,000, giving the total OTE of $260,000. The quota will be based on annual recurring revenue, contract value, expansion revenue, or multi-year deal size.

Example 4: Account Manager

In most cases, Account Managers are tasked with renewals, upselling, cross-selling, and retaining customers. Thus, the OTE should incorporate growth metrics and relationships.

For instance, an Account Manager could earn a base salary of $75,000 with a targeted bonus of $25,000. The total salary in such a case would be $100,000, which will depend on renewal rates, expansion, net revenue retention, and upsell bookings.

Example 5: Sales Manager

Sales Managers do not generate sales individually but are charged with ensuring their sales teams perform well in terms of forecasting, pipeline management, and quota attainment. Hence, their OTEs are usually based on their team’s performance.

For instance, a Sales Manager could earn a base salary of $110,000 and have a targeted bonus of $40,000, bringing the total to $150,000. Variables in such a compensation plan include team quota attainment, forecasting, pipeline coverage, growth, and reps’ productivity.

Conclusion

OTE is an essential element in the sales compensation structure; however, it can work effectively only if properly structured.

By definition, the OTE definition means that On-Target Earnings refers to the overall amount of money an employee earns if he/she reaches his/her target. It combines both base salary and incentives.

It can be a great benefit for both employers and employees since it allows defining earning potential for the former and setting a clear compensation structure for the latter. However, its true value is demonstrated through the transparency of targets, incentives, and payouts.

With the assistance of JOP Edge, sales-oriented companies will have an opportunity to add more transparency to the process of achieving business goals.