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How to use OTE in Sales Compensation

On-target earnings (OTE) is a type of sales compensation structure that, when used appropriately, can be powerful in motivating salespeople to achieve their goals. It is the most common incentive compensation plan for sales reps, as it combines the stability of a base salary with the pay-for-performance component sales reps love. However, there are several concepts that are important to get right to use this structure effectively.

OTE is defined as the sum of a sales rep’s base salary and her on-target commission (OTC). OTC is simply the 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:

  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 role 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.

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