What does “on-target earnings” mean?
That’s how much an SDR or AE can expect to make if they meet their sales goals. This is called “on-target earnings” (OTE). OTE is a precise number that is found by adding up the seller’s yearly salary, sales goal, and how the company pays commissions. That being said, it’s not a promise of pay.
For the seller to get OTE compensation, they must meet their full quota. They will make more than expected OTE if they meet or beat their quota. They will make less money if they don’t meet their sales goals.
Like words
- Earnings are on track
- ₷Incentive that works
- OTE pay
How OTE Does It
‘OTE’ is listed below ‘base pay’ on almost all job postings for Sales Development Representatives (SDRs) or Account Executives (AEs). It’s the North Star for salespeople, who use it to determine how much money they could make in a position.
Companies use four principal things: pay, meeting quotas, commission rates, and bonuses.
Base salary: This is the part of a salesperson’s pay that stays the same no matter how many deals they close. They get the same amount of money every month, rain or shine.
Achieving a sales goal (quota) is a way to measure how well you’re doing. It’s how many deals an SDR or AE needs to close in a year or three months. As a sales manager, I set a fixed dollar amount based on the company’s revenue goals and how realistic they are based on average deal size, lead velocity, and lead/pipeline volume.
Commission Rate: This is the part that can change. It’s usually a percentage of the sales value based on how much was sold. More sales, then? More money to spend.
Bonus: You might get a bonus for going above and beyond your sales goals, getting a big client, or meeting other performance standards unrelated to sales. Some companies give a bonus of X% or $X every three months or a year to everyone who meets their goals.
Either OTE can be capped or it can’t be capped. Capped OTE means once a rep hits that amount, they won’t receive any more. Uncapped OTE means the sky’s the limit—if a rep hits their quota, they could earn unlimited bonus money.
For newly hired SDRs at enterprise companies (e.g., Oracle), capping the first year’s commission at a certain amount is common. Restricting sellers’ earnings after their first year or once they hit a promotion milestone is much less typical.
Benefits of OTE Compensation
Another great thing about OTE is that it makes it easy to see how much money you could make immediately. This offers untold benefits for companies and salespeople alike.
Advantages for Companies
Some of the most influential people in a business are its sales reps. A big chunk of its income comes from them, and the best reps want to know how much they could make when they compare deals. Most want to know OTE directly, so highly competitive talent sourcing is much easier for companies that provide transparency.
Setting up an OTE also helps businesses get a better idea of how much their salary costs will be. It helps them plan their finances because they know how much they might have to pay if everyone meets their success goals.
While base wages stay the same, commissions change based on sales; when sales are low, the company pays less in fees. This acts as a natural cushion when times are tough.
On a broader scale, OTE ensures individual sales goals align with the company’s broader aims. When salespeople move toward their OTE, they push the company closer to its overarching revenue goals.
Advantages for Sales Representatives
When looking at job offers, people often compare how much money the best reps can make. It can be hard to figure out how to use commission models, so OTE helps people who want to become sales reps compare what they sell to how much they can earn.
Like most commission-based pay plans, OTE encourages salespeople to make more sales and earn more money. People are often happier with their jobs when they see a link between their work and their pay.
They are also more likely to look for a mentor and more sales training to ensure they meet their salary goals. In the short term, more engaged employees make more sales; in the long term, they learn skills that will help them throughout their jobs.
Most people who quit their jobs (63%) say that low pay is the main reason they did so. HubSpot says the usual turnover rate for salespeople is 35%, which is a lot higher than the rate for most jobs. A well-structured commission plan keeps employees longer when combined with good perks and a good work-life balance.
How Companies Figure Out OTE in Sales: It’s easier to figure out OTE when a company’s commission system is transparent. Let’s look at how companies figure out OTE.
Formula for figuring out OTE
The simple formula for figuring out OTE is:
The formula for on-target earnings (OTE) is base salary plus (100% of quota attainment value times commission rate).
Add up the base pay and the projected commission, and there you have it! You now have the OTE. For instance, if a salesperson makes $50,000 a year and gets an extra $50,000 in sales bonus for meeting their goals, their OTE is $100,000.
Examples of OTE
There are two situations where figuring out on-target results is trickier than the one given above:
1. When the business has a tiered commission system
2. If they give you an extra reward
It would be best to consider any changes in commission rates that depend on the number of sales when you figure out your OTE.
Take a look at this example:
Company A might give a base pay of $50,000. It needs to make $500,000 in new sales. When SDRs make sales of $100,000 or more, the company gives them 15% in commission. When they make sales of $250,000 or more, they get 25% in commission. And when they make sales of $500,000,
This is how we’d figure out their OTE:
1. Get your first $100,000 in commissions: 15% x $100,000 = $15,000
2. Commissions on the second $150,000: 20% of $150,000 = $30,000.
$300,000 in fees for the third: 25% x $250,000 = $62,500
The total amount of money earned was $50,000 plus $15,000 plus $30,000 plus $62,500, which is $157,500.
That’s $162,500 if Company A also gives a bonus for meeting the quota, say 10% of their base pay, or $5,000.
