On-target earnings: everything you need to know

To attract and retain talented, ambitious, top-performing sales reps, it's critical for you as a revenue and sales operations leader to not only understand on-target earnings (OTE), but how to calculate OTE and communicate the model effectively.

Organizations with successful sales OTE models should theoretically experience lower turnover rates thanks to recognition and general satisfaction with compensation. Which is significant, considering more recent figures put SDR tenure at just 14 months.

Considering the disruption of sales turnover and the importance of compensation in the balance, in this piece we'll cover some key considerations as you navigate OTE models' pay mix, and more.

What are on-target earnings (OTE)?

On-target earnings, sometimes known as OTE or OTE salary, refers to the total earnings an employee is slated to receive if they are “on-target,” meaning they've met 100% of their performance targets set quotas. It’s what a salesperson can anticipate receiving as total compensation.  

OTE compensation (sometimes known as on-target commission) is typically comprised of a base salary plus some form of variable pay, with base being a fixed amount that a person receives unrelated to performance, and variable pay being the commissions, bonuses, and any other incentives that are directly linked to performance.  

Related article: 10 Reasons Top Salespeople Quit

At best, OTE is a guideline based on averages, so the actual amount earned by any given rep will deviate from that number in a classic bell curve.

In a popular analysis, David Skok suggests that a sales rep's quota should be about 5x their OTE. That is, if they have $100k OTE, their quota should be about $500k.  

As with any generalization, there are nuances and optimizations every enterprise should look for internally, but as a starting point, this is a fairly good one.  

How to calculate on-target earnings

If you can't automat the calculate OTE in your sales compensation management software, here's a simple formula to calculate OTE:  

• On Target Earnings = Annual base salary + Annual commission earned from 100% quota achievement

The benefits of an OTE model

In the context of a holistic sales compensation strategy, your organization benefits from using on-target earnings as it boosts motivation for sales teams.  

As an employer, you can ensure income predictability, all while driving high performance. Plus you gain the ability to more effectively budget for sales compensation as a major investment in go-to-market strategy.

In a nutshell:

• Employers and employees can understand how much they can expect total salary or compensation to be (roughly), and

• Revenue or sales ops teams can forecast revenue and accruals from compensation.

Some myths surrounding OTE

Earnings are guaranteed
Well, just as the name suggests, the entire potential compensation is not guaranteed, no. It's the sales manager’s role to clarify on-target earnings are tied to meeting or exceeding target. Transparency is best, so consider disclosing how many team members consistently attain their targets and the amount of work that is required to achieve this.  

OTE are for sales professionals only
Actually, while OTE models are predominantly used in sales roles, they are sometimes also applied to other performance-focused positions. Roles in customer success, business development, and account management can benefit from OTE structures, aligning incentives with company objectives across departments.  

Big numbers are more motivating than good OTE design
Although high incentive numbers can appear exciting, this excitement quickly wears off if quotas feel impossible to achieve. Offering high OTEs can be enticing, but it's not always enough. The structure of the OTE, the culture of the organization, and the actual attainable earnings play far more critical roles.  

Common pitfalls with on-target earnings

OTE can be a useful number for internal forecasting incentive compensation budgeting, provided the data is reliable and reassessed regularly. And yet, two common issues tend to occur, namely:

1. Some companies overstate earnings

As attrition increases and hiring sales talent becomes increasingly difficult, some companies resort to inflating the potential OTE on job descriptions and recruitment.  

Inflating the potential earnings to some eye-popping figures is an easy way to lure sales representatives, but once they realize their real OTE is considerably lower than advertised, it won’t be long before they walk. Be sure you're avoiding the bait and switch here.

2. The timeline to OTE is unclear or miscommunicated

The other pitfall surrounds salespeople being unclear about the actual pathway and realistic timeline to achieving OTE.  Most sales reps don't start making deals on day one of employment. They need time to:

• learn the product & get comfortable talking about it
• learn the sales process and language
• build a pipeline, and
• negotiate deals over the line

Over this period, some organizations offer recoverable or non-recoverable "draws" to ensure sales reps earn a reasonable living wage until they are 'fully ramped' up and can hit their quotas independently. Those draws will often be a fraction of the OTE. 

Related article: Recoverable vs. Non-Recoverable Draws

As Martin Roth has pointed out:

“OTE relies on the rep being ramped AND hitting their number, which likely doesn’t include the six to nine-month ramp period where the rep is getting their feet underneath them with the product, the market, the sales cycle, and the company’s sales culture.”  

Consistently earning more than stated OTE can take even longer than a rep might expect, especially for younger reps with a smaller personal network and less experience in their industry.  

Most companies don’t communicate their compensation plans well or educate reps about the upsides of staying in a role or industry for a long time. Many reps instead move on for a higher base or perceived OTE in the short term, which can harm both the company and the rep’s earning potential.

Although virtually all OTE structures are made up of some combination of base plus variable pay, the different incentives, and combinations of incentives, are limitless.  

Some common OTE based sales compensation structures include:

• Payout curve relative to OTE (defines how much of OTE the rep will earn at different performance levels vs quota)

• Employee specific quotas and commission rates (each rep receives their own commission rate that yields 100% of OTE when they achieve quota)

• OTE delivered through MBOs and qualitative objectives (less common)

Strategic pay mix decisions (balancing fixed vs. variable pay)

The first part of your OTE model to consider is the pay mix.  

A pay mix ratio is the ratio of base salary to commission. A pax mix ratio of 60/40 pay mix would mean that 60% of an employee’s compensation consists of base salary, and 40% is commission.

Calculating the pay mix ratio is simple. Most companies estimate it at the beginning of the year by dividing the base salary by the On-Target Earnings (OTE) when they are setting OTE targets. Divide the commission portion by OTE structure to get the variable side of the ratio. 

There are several factors influencing a pay-mix ratio, such as the performance metrics and targets, the knowledge and experience required by the seller, the length and complexity of the sales cycle, the industry and economic factors, and more.  

Ultimately there's no ‘silver bullet’ solution for setting your pay mix, however some initial guiding principles may include the following.

You'll likely set a pay mix ratio with a high commission component if:

• Sales employees must pursue new accounts

• The sales function is direct

• The sales position requires a high degree of skill

• The price of products is high

• Internal career opportunities are limited

You'll likely have a pax mix ratio with a high base salary component if:

• The sales function is indirect (dealers and distributors)

• The sales function is a collaborative team effort

• The company is in an early or startup stage

• The sales cycle is very long

• Marketing activities play a strong factor

• Internal career opportunities are more easily available

Tailoring OTE models to various sales roles and career stages

Tailoring OTE to different seniorities of sales roles requires a strategic approach that considers all other factors influencing OTE in addition to seniority and role type.  

For example—a senior rep that works in medical device sales may have a different OTE model than that of a senior rep that works in insurance sales.  

Generally, when considering sales roles and career stages, you'll want to ensure that you're creating an incentive model that balances fairness across different rep profiles depending on the factors and output that they can influence.  

• For example, in junior sales roles, a higher base salary with a modest commission structure may provide financial stability while this individual develops skills and builds a customer base.  

• Senior sales roles, often with substantial industry knowledge and established client relationships, however, may benefit from a lower base salary and higher commission rates, motivating them to leverage their expertise for maximum sales results.  

Overall, a tiered OTE structure ensures your compensation aligns with the capabilities and expectations at each level, fostering motivation and growth across the sales team.

How do you know once you've achieved OTE optimization? There are a few characteristics of an especially good OTE approach.  Let's cover this next...

The 5 features of an effective OTE structure

Here are five ways you can ensure your on-target earnings structure is optimized:  

1.  It's clear, simple, and measurable

Ensure your OTE model has clear key performance indicators (KPIs) that align with your company's goals. This will vary significantly based on your industry and company goals, but may include metrics such as revenue, sales unit volume, gross margin, product specific revenue, discount levels, consumption targets (software), team performance (for sales managers), and many, many others...

Carefully define what "on-target" looks like with precise sales quotas, customer engagement metrics, or any other relevant KPIs. Providing transparency regarding targets helps sales reps understand exactly what's expected.  

Your variable OTE calculations should be straightforward and easy to understand. Overly complicated or ambiguous plans ultimately lead to confusion and demotivation. Every member of your team should understand exactly how their efforts translate into financial rewards.  

2. It's customized to business objectives

While you can search for average OTEs for a given role, OTE compensation isn't one size-fits all. Given that OTE is the target amount the rep will make if they achieve their goals, this amount needs to be tailored based on the role and the cost of labor in the market. It also needs to take into account how much salary the rep will earn.  

The 'right' OTE amount really comes down to having the right pay mix and the right total compensation to have a competitive offering for sales talent, which will be unique to your sales force and business.  There are many sources online that will help you to benchmark your total compensation levels for sales talent.

Overall, you'll customize your incentives to meet both your company's and your sales reps' specific needs. Every business is different, but to help here, research best practices among companies similar to yours to consider benchmarking your OTE against industry standards as a means of staying competitive.  

3. It doesn't cap earnings potential

As long as earnings are tied directly to performance, it makes no sense to cap the earning potential of your salespeople. After all, if employee earnings are exceptionally high, this directly translates to exceptional results for you, the company. Uncapped earning potential can drive performance while also motivating your team to exceed their targets consistently. This strategy not only drives better results but also keeps your team engaged and constantly striving for higher achievement. 

4. It accounts for customer relationships too

Consider rewarding your salespeople for closing deals, yes, but equally for servicing existing customers. For this, consider a hybrid compensation plan balancing rewarding sales performance and after-sales service. This approach ensures excellent customer service, and fostering long-term client relationships. 

5. It includes non-financial rewards

Financial incentives, like commissions and bonuses, are powerful, but non-financial rewards, such as days off, prizes and events, can also play an important role in maintaining engagement and satisfaction. It's worth brainstorming creative ways to celebrate achievements, recognize hard work, and provide incentives beyond the standard commission.

Some ideas for this include contests, awards, prizes, luxury dinners, group events, or other memorable experiences. Ideally, request sales' input instead of a top-down approach to appeal to interests. Often, seemingly small or inexpensive rewards can be the most exciting. Where you might be offering hundreds of dollars in SPIFs, your team may ask to leave early instead and value time even more than monetary incentives.  

Best practices for implementing OTE

There are a few things you can do to ensure you don't encounter common errors implementing your OTE structure. When you set up your on-target commission (from the communication of them through to how you optimize, here are our main tips):

Break it down

As a first step to implementing your OTE, clearly define each of the components, specifically the base salary and the variable pay commission potential. Show the figures and help set clear expectations of what is both possible and probable.  

Engage your team

As always, involve your sales team (especially the sales leaders) early in your planning process to gain insights and buy-in. Asking for feedback demonstrates you value input and expertise. Plus, understanding multiple perspectives will help you design a more effective, motivating program.  

Leverage technology

Compensation management tools have revolutionized how companies' structure and manage employee pay with comprehensive data analysis and automation. Sales compensation software helps ensure accuracy, equity, and transparency, while streamlining the compensation process.  

Regularly assess and iterate to optimize OTE

It is crucial your organization continually assess and adjust your OTE based on performance and feedback. This ensures it supports your business’s objectives while remaining competitive. Use periodic review sessions to gather feedback direct from the sales teams and make necessary tweaks.