On-target earnings are calculated by adding an employee's basic pay to a variable component such as commission. As a result, it is an employee's total potential income; the revenue made when all sales, lead generation or similar targets are met, which is then added to the basic salary. The amount of commission available if an employee accomplishes all sales targets is sometimes referred to as OTE. OTE can also refer to an executive compensation plan dependent on the executive meeting all of the company's objectives.
A to Z of On-Target Earnings (OTE)
- Amit Jain
- Jun 10, 2022
- 4 min read
- Last updated on Dec 24, 2024
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 amount of commission. It can also refer to a remuneration structure for executives based on the completion of 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. If you want to boost your productivity hacks for salespeople, OTE is one of the most effective methods.
What is OTE in Sales?
We all know that on-target earnings are made up of 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 referred to as '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.
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 periods of peak performance.
Choosing between these two models depends on your organization’s priorities—financial predictability or motivating sales teams to maximize their potential. Many companies find success with hybrid approaches, setting thresholds that balance motivation with cost control.
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. If they meet the sales target, they will earn $2,000 in commission each month. 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, with a monthly target for the team of $200,000 in sales. They earn a 2% commission on their team’s sales. If the team hits their 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, indeed, the average salesperson meets 100% of their quota, they'll boast about it! Expect to be questioned about this if their salespeople are hitting 30 percent of quota and so 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 there are several industries that 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 life. 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 commission component of On Target Earnings is usually determined by the sales team's planned targets. 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 to achieve 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 up to get your OTE.
Benefits of OTE
1. Sales Commission Forecasting
OTE assists a company's management and finance departments in effectively forecasting 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 their expected 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 that is 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 attract candidates initially, 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 is meant to represent 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.
Frequently Asked Questions
What is OTE?
In sales, how does OTE work?
The prospective anticipated remuneration that a sales employee can earn if they accomplish all sales targets is known as OTE in sales. The total combined salary, or On Target Earnings, is calculated by adding the predicted commission to the employee's regular salary.
Is OTE on top of salary?
Nope, on-target earnings refer to an employee's entire potential income, including base salary and commission.
What is covered by OTE?
On Target Earnings is the total salary that an employee can make during normal working hours, excluding overtime. It includes commission, shift loadings, and allowances.
