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OTE in Sales Compensation

There are three important things to consider when using this incentive compensation structure...

OTE is defined as the sum of a sales rep’s base salary and her On-Target Commission (OTC). OTC is simply the sales commission a rep earns if she achieves her sales goals. OTE tells sales employees how much total compensation they can expect to earn in their job. There are three important things to consider when using this incentive compensation structure:

On-Target Earnings

  1. Setting the OTE: As mentioned above, this is simply the total compensation a rep will earn if she achieves her goals. It is the combination of base salary and on-target commission. Getting this number right is critical to attracting and retaining talent.
  2. Determining the Pay Mix: This is the ratio of base salary to OTC. It indicates the degree of risk associated with achieving OTE. A higher ratio of commission to base salary indicates more risk.
  3. Setting the Quotas: These are the sales goals a rep must achieve in order to receive the full OTE. Reps will need to know that the quotas are achievable, or they will discount the OTE accordingly.

Setting the OTE

The biggest consideration here is what the market compensation is for your industry. Sales reps must feel like they’re earning similar to what they’d make with other companies. If it’s not in line with the market, you’ll have a hard time holding on to good sales reps. This will vary depending on the market you’re in, the type of product you’re selling, how complex the sale is, and how much experience is required for the role. A website like Glassdoor can help you get a sense of what market compensation looks like in your area if you’re not sure.

Of course, OTE also has to be compared to other sales and non-sales roles within your company. You will want to ensure similar levels of pay for similar levels of impact.

The trick to setting OTE is finding a good balance. You don’t want to overpay or underpay for sales performance. Overpaying leads to excessive customer acquisition costs and underpaying can lead to poor performance, lower morale, and high turnover.

Determining the Pay Mix

Pay Mix is the ratio of base pay (salary) to variable pay (commission) that is used to determine what OTE will be for specific roles. In our experience, on average, OTE plans are 65% base and 35% commission.

The pay mix will vary depending on factors like experience and industry, but the most important criteria is the degree to which a rep can influence a sale. If the rep has little-to-no influence, the base salary should make up a higher percentage of OTE. If the rep can heavily influence the sale, then the commission should have a higher percentage of OTE.

Setting the Quotas

To receive her full OTE, a sales rep must hit her sales quotas - so reps will consider these values carefully when evaluating their comp plans. Therefore, quotas should be achievable. Ideally, quotas should be attainable by 60 - 70% of your sales reps. Any less and rep morale will suffer, any more and you're likely overpaying for performance.

Many factors go into quota setting. Most organizations start with historical performance (if available) and adjust based on changes in market conditions. For newer products and less mature markets, it is more difficult to set quotas. Often in these situations, companies will move to quarterly quotas and adjust during the year as more data is available.

Automating OTE Calculations

Once you have determined your OTE plans, you will need to calculate the results. If you’d like to learn more about how you can automate your sales compensation process, let’s talk. We love helping people reduce the pain of calculating sales commissions. Contact us today to find out more.

FAQs

What is OTE compensation?

OTE is short for On-Target Earnings. OTE is a metric that companies use to forecast the total amount of money that an employee can be paid once they achieve 100% of their performance targets. OTE is most commonly used in sales, since these positions pay a base salary plus a performance-based commission. One more thing to know about OTE is that it’s calculated as a yearly figure. For example, a sales job listing might state that it will pay “$100,000 OTE”. This is the maximum total (base salary + sales commission) that the sales professional can earn once they hit their sales quota.

Is OTE on top of salary?

No, on-target earnings is the maximum amount of money that an employee can make. OTE is the sum total of their base salary + their full commission if all sales quotas are hit. For example, someone’s OTE could be $50,000, where $24,000 is their base salary, and $26,000 is their on-target commission.

What does 25k OTE mean?

Here’s an example scenario. A Sales Development Representative (SDR) has an OTE of $25,000. Their base salary per year is $13,000. This SDR is expected to reach a quota of $10,000 every month. He earns 10% in commissions off every sale. This means that if he hits 100% of his quota every month, he will earn a $1,000 commission every month, which equals $12,000 per year. $13,000 (base salary) + $12,000 (commission) = $25,000 OTE.

How is OTE calculated?

The simplest definition of OTE is the combination of a salesperson’s base salary and on-target commissions. This is what the formula looks like: Annual base salary + Annual On-target commissions = On-Target Earnings (OTE). Calculating OTE can get more complicated if the salesperson receives bonuses or their commission rate changes based on performance (accelerators/decelerators).

What does 150k OTE mean?

Here’s an example scenario. An Account Executive has an OTE of $150,000. Their base salary per year is $78,000. This Account Executive is expected to reach a quota of $60,000 every month. She earns 10% in commissions off every sale. This means that if she hits 100% of his quota every month, she will earn a $6,000 commission every month, which equals $72,000 per year. $78,000 (base salary) + $72,000 (commission) = $150,000 OTE.

How realistic is OTE?

One sure-fire sign that OTE is realistic is if 80% of reps are hitting them. If that isn’t the case, then the OTE might not be achievable by most. Another thing to note about the realism of OTE’s is that job postings might round this number up or down for ease of calculation. For example, a sales position’s actual OTE might be $80,350. But in the job posting, the OTE is listed as $80,000 for convenience.

Is it hard to hit OTE?

This depends on a number of factors both internal and external. The external factors, such as the level of competition, market saturation and brand recognition are outside of your control as a sales professional. This is why most of a prospective hire’s time should be spent evaluating the internal factors that might influence OTE, such as the company culture, sales training and employee turnover. During interviews, they should also ask “what percentage of reps are currently meeting 100% of the quota”? If less than 70% of reps are achieving this, that might be a red flag. They should ask to speak to some of the current reps to get a good bearing on this.

Is a bonus OTE?

Yes, a bonus is part of one’s OTE. On-Target-Earnings consists of a salesperson’s base salary plus any other “variable” performance-based payment, which includes commission and bonus. But a bonus functions differently than a commission. A sales rep earns a commission as a percentage of every sale (e.g. 8% of sales revenue) they make. A bonus, on the other hand, is a percentage or fixed (3% of base salary or $15,000) amount that is rewarded for meeting a quota.

What is OTC salary?

OTC is short for On-Target Commissions. On-Target Earnings (OTE) is an annualized figure that combines your base salary and commissions. OTC, on the other hand, is the total amount of money that a sales rep can be paid in commissions once they achieve 100% of their sales quota. For example, if a sales rep’s commission is 8% of sales revenue, and they are expected to reach a quota of $720,000 per year, then their OTC is $57,800.

What does double OTE mean?

OTE is short for On-Target Earnings. OTE is the maximum total (base salary + sales commission) that the sales professional can earn once they hit their sales quota. Double OTE means that they can earn twice as much in bonuses and commissions as their base salary. For example, if the salesperson's base salary is $40,000, then double OTE means that they can earn $80,000 in total (double) if they meet all their performance targets.

What does uncapped OTE mean?

To understand uncapped OTE, we should first understand capped OTE. Capped OTE limits how much commission a salesperson can earn from the deals they close. For example, a capped commission structure could offer a base rate of 8 percent of sales revenue, and increase the rate to 1 percent every time the rep hits double their quota. This could continue until the rep maxes out at 10 percent after hitting 300% of their quota. At this point, the rep will continue to earn 10 percent commission no matter if they hit 400% of their quota or more. Uncapped OTE means that there is no limit to how much a salesperson can make from their commissions.

How does a 70/30 salary work?

A 70/30 pay mix means that 70 percent of a salesperson’s total compensation is base salary, and 30 percent comes from commissions. Let’s say their base salary is $70,000 and their on-target commission is $30,000. Even if the sales rep doesn't close a single deal, they’ll still make this $70,000. But if they hit 10% of their quota, then they’ll earn $3,000.

What is included in OTE?

In its simplest form, OTE consists of a salesperson’s base salary plus on-target commissions. Meaning that if their base salary is $56,000 and their on-target commission is $24,000, then their OTE is $80,000. However, more complicated forms of OTE might also include bonuses, shift loadings and allowances.

How do salary negotiations work?

Here are a few tips for negotiating a sales salary. 1. Don't "battle" with your employer over what you'd like to be paid. Instead, meet them halfway and find an offer that works for both of you. 2. Research what the average salary is for someone with your experience level. If the employer offers you less, then you can try to negotiate for more. 3. Emphasize your skills and experience, such as how long you’ve been in the business, how well you understand the product and the deals that you already have under your belt.

What is OTE in English?

OTE is short for On-Target Earnings. OTE is a yearly figure that consists of a base salary + the maximum sales commission that the sales professional can earn once they hit 100% of their sales quota.

What does first year OTE mean?

OTE is short for On-Target Earnings. OTE is a yearly figure that consists of a base salary + the maximum sales commission that the sales professional can earn once they hit 100% of their sales quota. First year OTE is the salesperson’s On-Target Earnings during their first year in a sales position, for example $60K. If they hit your quota and decide to stick around, then their OTE might increase to, for example, $90K in their second year.

How much should a salesperson bring in?

Calculating the total cost of sale will help determine the amount of sales needed for an organization to break even. Here are some of the different costs associated with sales: OTE (On Target Earnings) (e.g. $300K), office space (e.g. $20K), travel expenses (e.g. $8K), training and enablement (e.g. $10K). In this example scenario, sales would need to bring in at least $338K.

What is OTE in a job advert?

OTE is short for On-Target Earnings. OTE is a yearly figure that consists of a base salary + the maximum sales commission that the sales professional can earn once they hit 100% of their sales quota. OTE is calculated as follows: Annual base salary + Annual On-target commissions = On-Target Earnings (OTE). For example, a job advert might list OTE of $100,000, with $70,000 in base salary and $30,000 in commission.

What does annum OTE mean?

OTE is short for On-Target Earnings. OTE consists of a base salary + the maximum sales commission that the sales professional can earn once they hit 100% of their sales quota. The word annum simply means “by year”. So, annum OTE represents the maximum amount that a sales rep can make throughout the course of a year.

Is OTE a word?

Yes, it is. OTE is short for On-Target Earnings. OTE is a yearly figure that consists of a base salary + the maximum sales commission that the sales professional can earn once they hit 100% of their sales quota.

How are bonuses paid?

A sales bonus is a lump sum received when a sales rep hits a certain pre-defined goal. Sales bonuses could be structured as a percentage of revenue generated. For example, a sales rep that receives a 10% bonus for every $10,000 that they bring in. Sales bonuses could also be a fixed sum. For example, a sales rep that earns $20,000 once they bring in $100,000 in revenue.

How are bonus payments taxed?

Bonuses don't get taxed as heavily as regular income. A bonus gets taxed at a 22% flat rate as supplemental income. For example: if a sales rep receives a $10,000 bonus, then they’ll have to pay $2,200 in federal taxes. They may also need to pay state taxes on their bonus, where the tax rate will vary from state to state.

What does uncapped mean?

To understand uncapped OTE, we should first understand capped OTE. Capped OTE limits how much commission a salesperson can earn from the deals they close. For example, a capped commission structure could offer a base rate of 8 percent of sales revenue, and increase the rate to 1 percent every time the rep hits double their quota. This could continue until the rep maxes out at 10 percent after hitting 300% of their quota. At this point, the rep will continue to earn 10 percent commission no matter if they hit 400% of their quota or more. Uncapped OTE means that there is no limit to how much a salesperson can make from their commissions.

What is a typical base salary for sales?

The average base salary for sales will vary by industry and job role, which is why it’s hard to put a definitive number to this. According to ZipRecruiter the average base salary for sales is $47,504, while Indeed claims that this number is $65,377. As with all complex questions, the answer is likely somewhere in the middle.

What is a 50/50 split salary?

A 50/50 pay mix means that 50 percent of a salesperson’s total compensation is base salary, and 50 percent comes from commissions. Let’s say their base salary is $40,000 and their on-target commission is $40,000. Even if the sales rep doesn’t close a single deal, they’ll still make this $40,000. But if they hit 10% of their quota, then they’ll earn $4,000.

How are sales engineers compensated?

Salaries for sales engineers vary based on their location, experience and company size. Sales engineers typically earn a combination of base salary and commission. This compensation ranges from a 50/50 split to a 80/20 split. According to the U.S. Bureau of Labor Statistics, Sales Engineers earn $108,830 per year.

What is not included in OTE?

The simplest definition of OTE is the combination of a salesperson’s base salary and on-target commissions. Meaning that if their base salary is $56,000 and their on-target commission is $24,000, then their OTE is $80,000. However, more complicated forms of OTE might also include bonuses, shift loadings and allowances. OTE does not include overtime.

Is on-call allowance OTE?

On-call allowances are paid to an employee for being called in to work at unusual and inconvenient hours. This is separate from the salary that employees receive for working normal hours. In other words, on-call allowances are not OTE.

Is leave loading OTE?

OTE is paid to employees for their normal work hours, while overtime is paid to employees for non-ordinary work hours. For employees that regularly work overtime, leave loading is usually an extra % paid on top of their normal wage while they are on annual leave. This payment is intended to compensate employees for their loss of opportunity and expenses during annual leave. Since leave loading does not account for normal work hours, it is not OTE.

What does target annual salary mean?

A sales rep’s target annual salary, otherwise known as their On-Target Earnings (OTE) is their base salary + the maximum sales commission that they can earn once they hit 100% of their sales quota. It is calculated as follows: Annual base salary + Annual On-target commissions = Target Annual Salary or OTE. For example, a job advert might list OTE of $70,000, with $50,000 in base salary and $20,000 in commission.

Why do salespeople get paid so much?

Two main factors will determine how much money a salesperson can make: base salary and commissions. Many U.S. salespeople earn $47-65K in base salary, which is on-par with the average wage. Commissions are where the real money is made. Sales reps might earn anywhere from 5% to 50% in commission off every sale. In other words, if a salesperson closes $100,000 worth of deals, they could make $5K-$50K in commissions on top of their base salary. All this to say, salespeople are able to earn high sums because they are paid based on revenue-driven performance.

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