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On-Target Earnings Model Explained

Even if you’re new to sales, you’ve probably seen some mention of on-target earnings, or OTE, and wondered, “What does that mean?”

It’s a common question and is arguably one of the most popular sales commission models.

We get asked about OTE all the time. It doesn’t matter if you call it on-target earnings, on-track earnings, or even on-target incentive, OTE is the expected total pay from a job that combines your base salary and the expected amount you’ll earn from your commission.

What does OTE mean for your income?

OTE doesn’t tell you exactly what you’re going to be earning with a job. It’s a way of letting potential hires know approximately how much they can expect to earn if they hit their targets.

OTE helps paint a clear picture of what your compensation package should look like, which can be problematic with sales because there are often quite a few variables that come into the picture, like whether or not you hit your targets.

How OTE gets calculated

In its simplest form, OTE is calculated by adding together your base salary and on-target commissions. This means that if your base salary is $75,000 and your on-target commission is $35,000, your OTE would be $110,000 if you hit all your sales goals.

Calculating OTE gets more complicated when you start looking at all the different combinations of how you break down OTE, like monthly payments, quarterly, or semesterly. You also need to consider how this can be sliced across those different time periods. You also need to take true-ups into accounts.

To help you gain a deeper understanding of what those calculations look like, check out the video at the end of this post. We break down the process for calculating the various permutations of OTE.

Let’s talk about Pay Mix

You can’t really discuss OTE without talking about Pay Mix. Pay Mix is the ratio of base salary to commission and is what helps determine the OTE for a role. If your pay mix is 75/25, then your base salary is 75% of the mix, and the commission is 25%.

There are a bunch of factors that determine what the pay mix is. This includes things like what the role is, how motivated you want your sales team to be, and even the kinds of people you want to attract to your company.

For example, a pay mix of 0/100 is going to be a role that is totally focused on commission. It’s going to be something that appeals to some people, but not everyone. There is a high amount of uncertainty with a mix like that.

The best way to determine what the ideal mix is, look at the following:

  • Prominence of the sales role - High-risk roles like account executive or new business executives are often more directly responsible for signing new business. The mix needs to be higher here to encourage a more aggressive approach.
  • Sales cycle length - If you’re a company with a shorter sales cycle, a lower mix is okay because the sales team will be closing more deals in any given period of time. However, for longer sales cycles, you the payout needs to be high enough to motivate salespeople to stick with it.
  • Complexity of products, services - The more complex your offering is, the more likely it is you’re going to want someone who really knows your industry, you know, an expert. This level of experience often comes with a higher price tag (as it should), so you need a higher mix.

As a general rule, a pay mix of 50/50 is a good starting point. It’s a common mix and provides a good balance between base rate and commission.

How to manage On-Target Earnings Plans

Performio has been designed to help Sales Comp administrators easily manage OTE plans. The video walks through definitions and examples of how OTE plans work and finishes with how Performio makes it possible to set up any of these plan permutations out of the box in minutes using the pre-built Target and Payable components.

 

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