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
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 employees' productivity, 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.
What is a Pay Mix?
Pay mix is the ratio of base salary to target incentives that makeup On Target Earnings (OTE). A 60/40 pay mix, for example, suggests that fixed base income accounts for 60% of OTE compensation, while variable pay accounts for 40% of on-target earnings compensation. A 50/50 or similar pay mix formula is more aggressive, whereas an 80/20 kind of formula is less aggressive. Balancing your pay mix just right might make a huge difference between meeting or failing your team's quota—and keeping your salespeople engaged and satisfied.
Benchmarking provides you with the necessary information about how other businesses structure their pay mix guidelines. When it comes time to pull knobs on your compensation approach, you'll have a lot more confidence once you've compared how you compare favorably. You'll gain visibility into the levels at which other companies are establishing their numbers, the proportion of reps that meet their quotas, and the average sales pay mix within their organizations with a sales compensation data benchmarking tool.
Challenges Related to OTE
Even huge businesses face differences in determining on-target earnings. The OTE model is also well-known for its flaws.
The issue with on-target earnings is the level of difficulty some companies can push. When using a complicated OTE paradigm, salespeople lose sight of how much work they need to invest to accomplish their targets. Those sales managers frequently share sales data and quota gaps in this case. In many circumstances, real-time visibility of quota deficits and OTE deficits is lacking. Furthermore, as simple as the on-target earnings model appears to be, they are challenging to master. They can also be pricey unless you obtain the correct blend. Staff turnover is a cost resulting from an unsustainable OTE model.
Keeping your company's On Target Earnings model simple and truthful is the best way to keep good reps who churn out quotas with zeal. Make sure that's the only amount your potential hirer understands and can agree to. Add some built-in progress to your offer to make it more appealing than your competition's. Your sales team is only as good as its representatives. Lastly, OTE models must be amended from time to time. Depending on how difficult or easy it is for sales reps to close deals, you may need to adjust your pay mix.
OTE Examples
Example 1
A $200,000 on-target earnings is featured in a job post for a sales professional. The representative is paid $116,000 per month, along with a $140,000 monthly sales quota. The employee must generate $140,000 in transactions to reach their maximum OTE. The promotion offers a 5% commission on all sales. As a result, an employee who meets their $140,000 goal can receive an additional $7,000 per month or $84,000 a year each. Adding $84,000 to the $116,000 regular salary creates an OTE of $200,000. As a consequence, the pay distribution is 29/21. A set base salary accounts for 29 percent of the OTE, while a variable commission based on performance accounts for 21 percent. Even if a salesperson does not fulfill their monthly sales goal and only generates $90,000 in sales, they will still be paid a 5% commission on each sale. This results in a total commission of $54,000 during the year. As a result, their yearly income would be $170,000.
Example 2
The on-target earnings of a salesperson is $100,000. In this situation, the salesperson is paid $76,000 basic pay and has a monthly sales target of $40,000. Every sale that their sales reps make earns them a 5% commission. If the salesperson meets their monthly target, they can expect to earn $2,000 in commission each month. This implies they'd make $24,000 in commission per year for a total OTE of $100,000.
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.
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.
