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What Are on-target Earnings? The Quick Guide

Compensation structures and frameworks in the sales industry greatly vary in different industries.

And the wider pool of options can just be baffling and complex. The details for commission rates found in a job description on websites can be often hazy or deceitful. Therefore, sales organizations and sellers should always be careful in establishing and reviewing the compensation plan and structure.

 on target earnings meaning

In the United States, 50% of employees in different industries feel disjointed in their jobs. At the same time, 29% of the workforce in the UK are also demotivated working.

Motivation among employees is very much essential to continue the business running and increase its revenue and overall performance targets.

When companies offer a competitive compensation plan, employees are more likely to stay and become more productive and efficient. In fact, 42% of employees are more likely to accept a job offer with good incentive programs from a hiring firm.

 what is on target earnings

Motivating your employees is a sure effective way for your business to continuously gain revenue, ramp quotas, and achieve company goals.

And one of the many ways that companies can encourage sales representatives to bring impressive results and show valuable work ethic is through offering on-target earnings.

Here, you can learn what on-target earnings are, their benefits, and how to determine and calculate OTE compensation. Check out the detailed guide about the sales budget.

 on-target earnings

What are On-Target Earnings (OTE)?

On-target earnings (OTE), otherwise known as On-Track earnings is a metric utilized in forecasting the total potential compensation of a sales team member when achieving certain performance targets.

As a commonly used metric, it helps sales organizations to calculate the overall potential earnings of a specific position. A seller’s OTE calculation reflects the possible total compensation and commission rate added to their base salary pay.

 what does on target earnings mean

Alternatively, on-target earnings (OTE) are commonly termed commission rates and incentives.

It is most common in sales-related jobs, especially when working on their target sales quota. It serves as an incentive given to sales employees to achieve high earnings through a guaranteed commission based on the revenue generated.

In a nutshell, the OTE calculation of a sales rep is based on their expected total pay if they achieve 100% of their assigned sales quota.

On-target earnings are usually expressed through the annual sales quota as against a monthly or weekly value.

 on target earnings definition

How to Calculate OTE?

Calculating OTE to be given to your sales team depends on the revenue generated by your business plus your employee’s experience and the sales targets.

Here are the steps you need to follow in calculating OTE.

1. Identify your employee’s base salary

It is essential that you set the base salary of your employee. The base salary should be able to compensate their daily living wage which is fair and matches their job description. Take a good look at the average rep earnings or for the role that you are hiring and set an amount that you think is appropriate for the job offer. Check out the guide about employee engagement.

 what are on target earnings

2. Figure out the sales quota attainment

The next part of planning your compensation plan is to identify the quota that a sales rep needs to meet on target commissions.

A company usually sets one-fifth of its annual sales quota as its basis. Therefore, the quota is generally six to eight times higher than the on-target earnings.

However, some hiring managers can also base it on the level of work experience.

It is essential to note in this stage that the sales commission rate is attainable by a sales rep or anyone in a particular position while challenging them to grow in their role.

 on target variable earnings

3. Organize the company goals

It is also essential that you get to figure out the likely bonus portion of the OTE for the executive team members who typically rely on the set company goals.

Some examples of these employee goals are the following:

  • Redesign the quality assurance processes for product development.
  • Build a new department by establishing a solid hiring process and a strong new hires team.
  • Increase transparency and company efficiency and productivity by a specific percentage.

Meet with your team and figure out the level of difficulty of hitting these goals and how long it could take to achieve them. Then, create a bonus number that you can give once an employee reaches them. Explore the process of product lifecycle management.

 on-target earnings meaning

4. Add the base salary together with the commission or bonus amount

Once you have established a base salary and project values, add them together to get your final OTE number.

For sales OTE, the formula can look like this:

Base Salary + Project Sales Commission = Sales OTE

For executive OTE, the formula is this:

Base Salary + Bonus Amount = Executive OTE

How does OTE work in real life?

Sales Rep

A sales rep at a company has an OTE of $50,000 with an annual base salary of $32,000. As per sales commissions, one can get a value of 1.5% with a sales target of $100,000 a month. If a sales rep can hit 100% of the designated quota along with the specific commission percentage, one can earn $1,500. This means that a sales rep’s earnings in terms of the commission are valued at $18,000 annually.

Now, add the $18,000 to the $32,000 base salary, and get you can get the $50,000 on-target earnings.

Account Executive

An account executive has an OTE valued at $100,000, with an annual base salary of $52,000. If the monthly quota attainment is $40,000 with a 10% commission rate for every deal they close, then it means that they can earn a monthly value of $4,000. If they continuously reach the sales targets every year, then they get a $48,000 commission annually.

Once you add the $48,000 to the annual base salary of $52,000, you get a total of $100,000 on-target earnings.

Sales Development Representative

A sales development representative earns a base salary of $42,000 annually with an OTE of $70,000. They have a qualified meeting quota of 35 per quarter and get a bonus payment of $100 for every qualified meeting. They also have a revenue quota of $210,000 per quarter along with a 3,33% commission for every deal they source.

If they can achieve 100% of the quota quarterly, they can earn $7,000 which is equivalent to a $28,000 commission value annually.

Store Manager

A store manager has on-target earnings that value $88,000 each year. In their OTE number, there are three different components involved. Their base salary, a monthly sales quota, and payroll productivity. They have an annual base salary of $50,000, a quarterly sales target of $1.3 million, and a commission of .005% for a minimum of 95% target compensation.

This equals $6,500 per quarter which values to $26,000 per year. There is also a $3,000 compensation for every time the payroll productivity target is hit which amounts to $12,000 per year.

Therefore, if the store manager hits both the sales quota and the productivity target altogether, an amount of $26,000 and $12,000 can be added to their base salary of $50,000 resulting in the on-track earnings of $88,000 annually.

Explore the detailed guide about gross revenue.

Most Frequently Asked Questions and Terms in OTE

Pay mix

Pay mix pertains to the ratio of an employee’s base salary to their commission rate. It is primarily used by organizations to determine the respective OTE for specific sales roles.

So, for example, if a role’s pay mix is 80/20, then the base salary is valued at 80% of the mix while the commission accounts for the remaining 20%.

Different factors are considered when establishing the value for the pay mix and should be aligned with the following:

  • The level of experience the job requires
  • The company’s average sales cycle and sales process length
  • The intricacies of the products, services, and processes
  • The set industry standards

Fully Ramped OTE

Many sales organizations such as B2B companies, need sufficient ramp time to achieve their OTE. Since sales cycles are longer along with complicated processes involved, it is important for companies to have fully ramped OTE and ramp payouts in order to provide rewards for new hires.

On-Target Commissions

On-target commissions pertaining to earnings that are not part of the salary but are included in calculating OTE work. They are the kind of pay that is given to a sales rep for meeting 100% of the quota attainment.

Is OTE on top of the salary?

The answer is no.

OTE is not an additional earning but it is the total salary that an employee can receive, as it reflects their basic salary combined with the commission they can earn from closing deals or successfully selling a product or service.

Is OTE guaranteed?

Again, the answer is no.

The OTE is primarily based on whether or not employees can hit their targets. Therefore, a company’s maturity lies in providing realistically attainable figures for its employees. Thus, employees must also be aware of additional variable components, average quota attainment rates, and specific commission percentages.

It is also important that new hires should ask hiring firms or the hiring manager to disclose the team’s average attainment and rep earnings and compensation range to gain a more accurate estimate of their total potential salary.

How does OTE benefit your company?

Employee engagement

Employees are more likely to understand what they need to achieve when everything is rewarded fairly and objectively. They can close more deals and be functional in their sales role when they get the biggest benefits that make both them and the company win.

Higher efficiency and productivity

Providing benefits and an annual commission can stimulate motivation among employees to work harder on their tasks which results in higher efficiency and productivity.

Company’s maturity

Higher efficiency can lead to better organizational growth by hitting all company goals.