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What is On-Target Earnings?
On-target earnings (OTE) is the total pay an SDR or AE can expect to earn if they hit their sales goals. OTE is an exact number calculated based on the seller’s annual salary, their sales quota, and the organization’s commission structure. It is not, however, a guaranteed amount of pay.
Receiving OTE compensation is entirely contingent upon the seller reaching 100% quota attainment. If they hit greater than 100% quota, they will earn more than their estimated OTE. If they don’t hit their sales targets, they will earn less.
- On-track earnings
- On-target incentive
- OTE compensation
How OTE Works
‘OTE’ sits right below ‘base salary’ on practically every Sales Development Representative (SDR) or Account Executive (AE) job posting. It’s the North Star for sales professionals, who use it to evaluate the potential upside of a position.
Companies determine OTE by considering four main factors: base salary, quota attainment, commission rate, and bonuses.
- Base salary — This is the fixed part of a salesperson’s pay, irrespective of how many deals they close. It’s the steady paycheck that lands in their bank account every month, rain or shine.
- Quota attainment — Quota is a measure of sales performance. It’s the number of deals that an SDR or AE needs to close in a given quarter or year. It’s a fixed dollar amount the sales manager calculates based on revenue targets for the company and how realistic it is considering average deal size, lead velocity, and lead/pipeline volume.
- Commission Rate — This is the variable component. It’s based on the sales made and is usually a percentage of the value of the sales. So, more sales? Bigger commission.
- Bonus — Bonuses could be tied to achieving above quota, bagging a particularly big client, or non-sales performance metrics. Some companies offer everyone who hits quota an X% or $X bonus every quarter or year.
OTE can either be capped or uncapped. Capped OTE means once a rep hits that amount, they won’t receive any more on top of that. Uncapped OTE means the sky’s the limit — if a rep hits their quota, they could earn unlimited amounts of bonus money.
For newly hired SDRs at enterprise companies (e.g., Oracle), capping the first year’s commission at a certain amount is common. It’s much less typical to restrict sellers’ earnings after their first year or once they reach a promotion milestone.
Benefits of OTE Compensation
The beauty of OTE is that it gives a clear picture, right from the outset, of what’s on the table in terms of earning potential. This offers untold benefits for employers and salespeople alike.
Advantages for Companies
Sales reps are some of a company’s most crucial employees. They drive a significant portion of its revenue, and top-performing reps want to know how much they can potentially make when comparing offers. Most of them want to know OTE upfront, so talent sourcing (which is extremely competitive) is a lot easier for companies that provide transparency.
Establishing an OTE also helps companies estimate their payroll costs more accurately. They know the maximum they might have to pay out if everyone hits their performance targets, which aids in financial planning.
Base salaries are fixed costs, but commissions vary based on sales. If sales are down, the company pays less in commissions, providing a natural buffer during leaner times.
On a broader scale, OTE ensures individual sales goals align with the company’s broader objectives. When salespeople move toward their OTE, they propel the company closer to its overarching revenue goals.
Advantages for Sales Representatives
When comparing job offers, it often comes down to earnings potential for top reps. Commission structures are sometimes difficult to understand, so OTE gives prospective sales reps a frame of reference for what they sell versus what they can earn from selling it.
Like most commission-based compensation plans, OTE motivates reps to close more deals and earn more money. When they see a direct correlation between their efforts and their paychecks, job satisfaction often rises.
They’re also more likely to seek mentorship and additional sales training to meet their on-target earnings. Higher engagement means greater sales productivity in the short run and skills they can take with them throughout their whole careers.
The majority (63%) of employees who leave their jobs cite poor pay as the main reason for doing so. HubSpot reports the average sales turnover rate is 35% — several times higher than most professions. A well-structured commission plan (coupled with solid benefits and work-life balance) leads to higher employee retention.
How Companies Determine OTE in Sales
Calculating OTE is easier the more straightforward a company’s commission structure is. Let’s break down exactly how organizations calculate OTE.
Formula for Calculating OTE
The basic formula to determine OTE is as follows:
On-Target Earnings (OTE) = Base Salary + (100% Quota Attainment Value x Commission Rate)
Combine the base salary with the expected commission, and voilà! You have the OTE. For example, if a salesperson has a base salary of $50,000 and hitting quota earns them another $50,000 in sales commission, their OTE would be $100,000.
There are two instances where calculating on-target earnings is more complicated than the example above:
- When the organization uses a tiered commission structure
- If they also offer a bonus
If commission percentages change based on the amount of sales, you have to factor that into your OTE calculation.
Let’s look at an example:
Suppose Company A offers $50,000 base pay. Its sales quota is $500,000 in new deals. The company pays its SDRs 15% commission up to $100,000 in sales, 20% for anything between $100,000 and $250,000, and 25% for anything between $250,000 and $500,000.
Here’s how we’d calculate their OTE:
- First $100,000 in commissions: 15% x $100,000 = $15,000
- Second $150,000 in commissions: 20% x $150,000 = $30,000
- Third $250,000 in commissions: 25% x $250,000 = $62,500
Total OTE: Base Salary + Total Commission = $50,000 + ($15,000 + $30,000 + $62,500) = $157,500
If Company A also offers a bonus for hitting quota (let’s say 10% of their base salary, or $5,000), that would be a total of $162,500.
People Also Ask
Does OTE include base salary?
OTE includes base salary and commissions. It is the total amount of sales compensation a rep can expect to earn if they reach quota. Salary is an important part of the OTE formula because it is the only component that remains constant. No matter what, the new employee can expect to earn at least that amount.
What is a good OTE ratio?
A good starting point when creating a sales compensation plan is to base OTE on one-fifth of a rep’s annual quota. At that rate, an annual sales quota of $1,000,000 means reps who hit 100% would earn $200,000 that year.
Keep in mind this is just a starting point. In highly competitive markets, companies may need to increase OTE ratios to attract and retain top salespeople. Startups might want to offer their first reps higher percentages or revenue share to level the playing field with more established companies. And some companies might have newer reps earn lower commission percentages until they become more experienced.
What is the difference between capped and uncapped OTE?
Capped on-target earnings (OTE) have a maximum limit that reps can reach. This means they stop earning commission once they hit quota, no matter how much more they sell.
Uncapped OTE has no upper limit, so sales reps aren’t penalized for exceeding expectations. They earn all their commission, no matter how much they sell. This encourages reps to be extra active in prospecting and closing deals because they can increase their earnings with each one.