It’s no secret that compensation structures in the sales industry vary greatly, and the wide array of options can be confusing. The commission details found in job descriptions, in particular, are often vague or misleading, so sales organizations and sellers alike should give careful consideration when establishing or reviewing structures.
On-target earnings are crucial for ensuring your salespeople are adequately rewarded for their efforts. When properly structured, they help sales organizations attract experienced candidates and maintain the motivation, productivity, and satisfaction of their sellers.
Here, we’ll explore the basics of OTE and answer questions like: What does OTE mean? And how can I establish a structure that best suits my employees?
What are on-target earnings (OTE)?
On-target earnings (OTE) is the total pay a seller can expect to receive if they meet all their performance objectives. It’s a commonly used metric that helps sales organizations calculate the overall potential earnings of a particular position. A seller's OTE reflects their total possible commission plus their base salary pay.
For instance, a job description may outline the role as $80,000 OTE. This means the seller in that position can earn a total compensation of $80,000 in a year, given they hit 100% of their quota for that year. OTE is often rounded up or down for simplicity in job postings, so that number might truly be closer to something like $81,350.
How to calculate OTE
To calculate OTE, use this basic formula:
Annual base salary + annual commission earned at 100% quota attainment = on-target earnings (OTE)
Depending on the compensation model of a position, the industry in which the hiring company operates, and the complexity of its sales process, OTE may have slightly different structures. They may be calculated as lump payments, specific commission percentages, or a combination of the two. A common rule of thumb here is to structure a role’s OTE on one-fifth of the total annual sales quota.
Sales OTE
You can calculate sales OTE with this simple equation:
Annual Base Salary + Annual Commission Earned at 100% Quota Attainment = Sales OTE
Let’s say Kristin, an outside rep, has an OTE of $80,000 and her base salary is $50,000 per year. She has a quarterly qualified meeting quota of 40 and earns a $125 bonus per qualified meeting. Kristin also has a quarterly sourced revenue quota of $250,000 and receives a 3% commission for the deals she sources. If she reaches 100% quota every quarter this year, she will earn $7,500 each quarter for a total annual commission of $30,000. When that commission is added to her $50,000 base salary, Kristin earns $80,000 in OTE.
Executive OTE
Executive OTE is calculated as follows:
Annual Base Salary + Likely Bonus = Executive OTE
Darren is a VP of Sales who has an OTE of $250,000 and a base salary of $100,000 per year. He has a quarterly company revenue target of $17 million and earns a $37,500 bonus for reaching that target. If Darren reaches 100% of that quota every quarter this year, he will earn a total annual bonus of $150,000. When that bonus is added to his $100,000 base salary, Darren earns $250,000 in OTE.
The role of OTE in job offers
Aspiring sellers should understand that OTE is not a guarantee. It should be seen as the potentially achievable commission a seller could receive if all goes right. So, when looking at a job offer salary breakdown, it’s important not to base payment expectations on the OTE number. Rather, look at every component of the pay structure, understanding that a seller’s base salary is the only guaranteed part of total compensation. Bonuses and commissions are simply additional compensation for hitting targets.
Sellers shouldn’t view a position’s OTE as set in stone, either. When it comes to the hiring process, negotiating OTE in a job offer should be an open and transparent conversation. Though, there are considerations when negotiating OTE, including:
- What is the specific pay mix?
- What targets must be met to earn 100% of OTE?
- Is OTE capped?
- Is there ramp OTE vs. fully-ramped OTE? If so, what is the ramp time?
- What’s the hiring manager’s philosophy on OTE? Do they view it as a stretch goal, a conservative estimate, or relatively attainable?
- What is the team’s average quota attainment?
- What are the non-selling responsibilities of the position that would take time away from attaining OTE?
These are all necessary to understand before accepting any position, but, especially, the current sales team’s OTE performance breakdown. If, for example, the position’s OTE is $80,000, but the average attainment is only 40% of quota, the seller’s actual commission may be significantly lower. Sales candidates should therefore always inquire about the hiring company's average attainment before accepting a role.
With that information in hand, now it’s time to actually negotiate OTE. First and foremost, sellers must come prepared knowing their worth and also the comparable pay rates of similar companies. Along the lines of knowing your worth, sellers must know what they need to live on versus what they’d like to have. That can help determine how a seller negotiates base pay. Maybe instead of $70k/$140k OTE, you argue for a higher base salary and lower commission structure like $80k/$120k. Whatever you do, don’t be scared to ask for all the information so you can negotiate a competitive compensation package.
Benefits and drawbacks of OTE
OTE can fuel a fire for sellers to hit targets and increase their earning potential. Those financial incentives drive excitement and higher performance. However, they can come with pitfalls. If a company is transparent about on-target earnings, then sellers know what to expect. And while it’s not unusual for compensation plans to be occasionally adjusted, it starts to get opaque when OTE is lowered or, alternatively, increased, making earning potential either less than originally agreed upon or way out of reach.
For employers, a well-balanced pay mix helps you project expenses and keep employees motivated. However, companies should also carefully consider OTE. A pay mix that leans heavily on commissions may work for sellers who are willing to take on a high-risk, high-reward environment. But some sellers may want or need the guarantee of income. On the other hand, if you lean too far in the other direction, sellers may feel less motivated.
And sure, OTE can be used to attract top talent and the right kind of salespeople to your company. Over-inflating the number or neglecting to take average attainment into account can lead to dissatisfied, frustrated employees. A $125,000 OTE is appealing and can get experienced reps in the door. Still, if your team’s average attainment is only 30%, the disparity between your sellers’ projected and actual compensation will likely become a point of contention.
OTE examples
Account Executives
Account executives (AEs) typically handle leads generated by SDRs/BDRs or ones they’ve cultivated themselves. They are responsible for moving prospects through the sales journey to close deals.
OTE structures depend on the type of company, and commission rates vary, too. Some revenue organizations have even started using accelerators to incentivize reps who exceed quota.
Here’s an example of what that may look like:
Lindsey, a sales executive, has a $100,000 OTE. Her base salary is $76,000, and she has a monthly sales quota of $40,000 with a 5% commission on every sale. If she reaches 100% quota every month, she’ll earn $24,000 per year. When that commission is added to her $76,000 base salary, Lindsey earns $100,000 in OTE.
However, for Lindsey, her commission is variable depending on performance. Let’s say she only makes $30,000 in monthly sales; she still receives a 5% commission on each sale. In this case, she would get $18,000 in commission for the year, and her annual earnings would be $94,000. But for Lindsey, every sale after she meets quota for the month gets a commission rate of 10%. So, if Lindsey makes $50,000 in sales each month, she earns an extra $12,000 for the year for a total annual earnings of $112,000.
Sales Development Representative
Sales development representatives (SDRs) and business development representatives (BDRs) are typically entry-level sales roles, primarily responsible for cold calling, qualifying leads, and setting meetings.
Typically, their compensation structure is fairly simple, including a base salary with bonuses tied to specific goals and commissions tied to monthly or quarterly revenue quota goals. Here’s an example:
Trevor, a sales development representative (SDR), has an OTE of $72,000. Their base salary is $45,000 per year. They have a qualified meeting quota of 12 per month and an opportunity goal of 6 per month, and they get paid a $25 bonus per qualified meeting and a $75 bonus per opportunity. They also have a sourced revenue quota of $75k per month, and they get paid a 3% commission on deals they source. If they hit 100% of their quota every month, they earn $2,250 every month. This means $27,000 in commission every year. Add that $27k to the $45k base salary, and you get the $72k on-target earnings.
Director of Marketing
Marketing teams play a role in revenue generation for a company, and the Director of Marketing oversees its execution. OTE is not as common for marketing leaders; however, you may find incentives tied to number of leads generated, amount of marketing-influenced pipeline created, or number of sales accepted leads created.
Here’s an example of what that may look like:
Brett, director of marketing, has a base salary of $150k and they have a quarterly goal of 1,500 sales accepted leads created. Once they hit 50% of their goal, they earn a $5,000 bonus. They earn another $5,000 bonus once they hit 75%. Finally, they earn a $10,000 bonus if they hit 100%. Adding their $20k possible bonus to their $150k base salary, their OTE is $170k.
Resources
Given the multitude of associated variables, calculating sales compensation and OTE can be tricky. To establish OTE for your organization's various sales roles, check out these easy-to-use compensation calculators:
- Omni Calculator: Compute sales commissions in multiple ways, according to the sales compensation plan that best represents your business.
- QuotaPath:A simple, three-input sales compensation calculator to help you figure out how to pay your salespeople.
Frequently asked questions about on-target earnings
Let's take a look at some common questions and related terms surrounding OTE:
What is pay mix?
Pay mix refers to the ratio of an employee's base salary to their commission. It's used to help organizations determine the OTE for specific roles. If a position's pay mix is 80/20, for example, then the base salary accounts for 80% of the mix, while commission accounts for the remaining 20%.
There are many factors to consider when setting this ratio, so make sure the pay mix you choose aligns with:
- The experience level required for the role
- Your average sales cycle length
- The complexity of your products, services, and process
- Industry standards
What is fully ramped OTE?
For many sales organizations, sellers need adequate ramp time to reach their OTE. This is especially true for B2B sales, where sales cycles are generally longer and the process is more complex. It's in the best interest of your company and its sellers to take ramp quotas and ramp payouts into account for OTE, as they reward new reps for their efforts while they're still getting their feet wet.
What are On-target commissions?
On-target commissions refer to the non-salary earnings part of the OTE calculation. They're the pay a rep receives for meeting 100% of their quota.
Is OTE on top of salary?
No, OTE is not an additional earning on top of a seller's salary. Rather, it's the total salary amount a seller can receive, as it reflects their base salary combined with their potential commission.
What are average rep earnings?
OTE is not the same thing as a guaranteed salary. Thus, sales candidates should always ask the hiring company to disclose their team's average rep earnings, as it's a generally more accurate reflection of their potential total salary.
A job posting might advertise the position as $90,000 OTE, for example, but if the company's average rep earnings are only $60,000, the candidate may want to think before accepting the role.
Intelligent Tools to Enable High-Performing Teams
On-target earnings are vital for drawing top talent to your sales organization and for keeping them motivated, productive, and successful once they get there. But calculating the right OTE for the various sales roles within your company can be challenging, especially if you don't have a system that enables reps to consistently hit their quota.
The Outreach Sales Execution Platform helps teams understand how their current compensation plan drives performance, and empowers them to pivot as their business objectives change. With powerful solutions that boost forecasting accuracy, and offer transparency into performance across the org, team, and rep-level, Outreach can help organizations ensure that every member of the sales team has the potential to become a top performer.
Learn more about how to motivate your team to achieve their full potential, or request a demo today.
