Its 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, well explore the basics of OTE and how to establish a structure that best suits your team.
What are on-target earnings (OTE)?
On-target earnings (OTE) is the total pay a seller can expect to receive if they meet all of their performance objectives. Its a commonly used metric that helps sales organizations calculate the overall potential earnings of a particular position. A sellers 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.
Its important to note that OTE is not a guarantee, so sellers shouldn't base their payment expectations around the number. If, for example, the positions OTE is $80,000, but the average attainment is only 40% of quota, the sellers actual commission may be significantly lower. Sales candidates should therefore always inquire about the hiring company's average attainment before accepting a role.
Sales organizations should also be cautious when it comes to calculating and presenting OTEs during the hiring process. Sure, OTE can be used to attract top talent, but 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; but if your teams average attainment is only 30%, the disparity between your sellers projected and actual compensation will likely become a point of contention.
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 roles 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
Lets 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 $125 bonus per qualified meeting. Kristin also has a quarterly sourced revenue quota of $250,000 and receives 3% commission for the deals she sources. If she reaches 100% quota every quarter this year, shell 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, hell 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.
Resources
Given the multitude of associated variables, calculating sales compensation and OTE can be tricky. To get started establishing OTE for your organizations various sales roles, check out these easy-to-use compensation calculators:
FAQ
Lets take a look at some common questions and related terms surrounding OTE:
What is Pay Mix?
Pay mix refers to the ratio of an employees base salary to their commission. Its used to help organizations determine the OTE for specific roles. If a positions 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. Its 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 sellers salary. Rather, its 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 teams average rep earnings, as its 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 dont have a system that enables reps to consistency 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, offer transparency into performance at the org, team, and rep-level, Outreach can help organizations ensure that every member of the sales team is a top-performer.
Learn more about how to motivate your team to achieve their full potential, or request a demo today.
