What Does OTE mean?
On-Target Earnings (OTE) is the total amount a rep can expect to make if they hit 100% of their sales quota. In general, OTE is an annual figure, and it can vary depending on the position, industry, the goal of your organization, and many other factors.
OTE includes the base salary and the compensation amount, which gets decided depending on the quota of the reps and the sales commission structure followed.
Benefits of OTE
One major benefit of OTE is that it keeps your reps motivated throughout the process of attaining their quota. Incentives in OTE also prompt your employees to push their boundaries and keep them engaged. In this way, you improve sales productivity, which can further result in the growth of your organization.
How Does OTE work?
Below is how you can break down an OTE.
Sales OTE = Base salary + Commissions at 100% quota achievement for the year.
Executive OTE = Base salary + Bonus
OTE applies mainly to roles that are compensated based on their performance like Sales Executives, BDRs, CSMs, etc.
For non-performance-based roles, you have a gross salary.
There are three ways this can play out:
- If quota attainment = 100% then Gross salary = OTE
- If quota attainment < 100% then Gross salary < OTE
- If quota attainment > 100% then Gross salary > OTE
How do you Calculate OTE for Sales?
Now that you have a basic understanding of on-target earnings, let’s look at the OTE calculation.
Establish Your Employee's Base Salary
The first step is to fix the base salary for your employees depending on their position. Ensure that it is set at a fair rate considering the amount of work they do. One effective method to arrive at the number is to look at the average base salary for the particular position in the industry you operate in.
Finalize the Sales Quota
The next step is to set the quota that your employees need to attain to earn their commission. The general norm is quota being 4x-6x of OTE. But this is subject to change depending on the context. You’ve to find the right balance in setting your quota, it shouldn’t be too high while it should be challenging as well.
Your Commissions Should Align with Your Goals
The very purpose of commissions in OTE is to motivate your rep to achieve a particular goal. For example, you want your sales team to increase the monthly revenue, or you want them to close more deals at a particular time.
Depending on how difficult these goals are and how long it would take to achieve them, determine the commission rate.
Add the Base Salary and Commission
Once you’ve finalized the base salary and commission, add them to arrive at your OTE.
How Does Your Pay Mix relate to On-target earnings?
The pay mix is the ratio of base salary and commission, and this is what determines the OTE. If your pay mix is 60/40, then your base salary is 60% of the OTE, and the remaining 40% is the commission rate. You can finalize the pay mix considering the below factors.
A sales rep and a sales manager will have a different compensation plan. The responsibilities of some higher-level positions can vary, and you can increase the pay mix in such scenarios.
Length of Your Sales Cycle
When you have a longer sales cycle, your reps would need the extra push to stay motivated and focused. And so, the ratio of compensation should be higher in this case. Though, if you have a shorter sales cycle, you can stick to a lower pay mix.
The Complexity of Your Product
If your product is complex, you’d need experts who have extensive knowledge about your industry. So here you’ve to give a higher pay mix which will act as a motivation.
Your OTE Approach
By nature, some companies would choose a higher pay mix to keep their employees motivated, while the pay mix can be lower in a few other organizations. You can determine the pay mix depending on how you want your OTE to be, and what would work best for your industry.
Example of OTE Calculation
So, you get a new job offer as a Sales Executive with an OTE compensation of $200,000. The compensation mix between fixed and variable is 60:40%.
We have outlined below what your gross salary might be with the above conditions.
1. You get paid $120k in gross salary regardless of your performance. This part is your fixed pay before taxes.
2. You get paid the remaining $80k only if you attain your targets. You usually get paid lower or higher than $80k based on your performance.
OTE is not guaranteed. It only indicates the potential of what you could make. Whenever you get a new offer, figure out the compensation mix, and your guaranteed pay is only the fixed part of the OTE. Also, you should check the average sales attainment to be sure you have the chance of hitting your OTE. OTE is useless if the average rep only does 50% of their sales quota.
OTE During Your Ramp Time
The first few months of a sales role are usually called the ramping period, during which the reps learn about the company, the business, the product, and the processes. Only after these few months will they fully carry their targets and go after the territory assigned to them.
This period ranges from 3 to 9 months, depending on the industry, role level, and expectations.
Since your ability to do your targets during the ramp period is uncertain, there are two ways your firm provides you with relief:
- A draws plan that lets you make money even though you may not be achieving your numbers.
- A reduced quota compared to your fully ramped quota ensures that you hit smaller milestones consistently before you start carrying the big numbers. With a lesser quota, you should also be able to meet your OTE.
Some Frequently Asked Questions on OTE
Is OTE on top of salary?
No. OTE is the total amount an employee can earn if they achieve hit their target.
What does OTE include?
OTE includes base salary, commissions, bonuses, and other allowances.
Is overtime included in OTE?
In most cases, OTE doesn’t include overtime.
In the end, you’d want your reps to take your business forward. And, OTE keeps them on track to reach the organization's goals. As you figure out the base salary and commissions for your reps, ensure that you deploy sales commission software to make your process seamless. A sales software can increase transparency, minimize disputes, and help you track the earnings of reps in real-time
Book a demo to know how Everstage can help you automate your sales commission process.