When sales reps go job hunting, they want to know how much they can earn in a particular role if they hit all their targets.
Similarly, if companies want to attract the right talent, they need to include OTE in their job listings—something juicy enough to draw reps in but reasonable enough actually to be achieved.
OTE full form is On-Target Earnings. It indicates how much an employee can potentially earn in their role (mostly sales and SDRs). Read on to know more about OTE meaning and calculation.
What is OTE salary?
OTE salary is an extremely popular compensation strategy where employers use incentives and commissions to motivate salespersons to work hard to meet their sales quotas.
Under this compensation plan, you give your sales reps specific targets to be achieved within a given timeline. If they reach those targets, then you offer them incentives and commissions.
What does OTE mean in compensation?
On-target earnings (OTE), also known as on-track earnings, is the total salary/compensation an employee (usually a salesperson) can expect to earn if they achieve all the targets for that role.
Here's a post from LinkedIn for your reference (check the 5 th and 7th listing) 👇
These targets are generally expressed in the form of a sales quota which can be monthly, quarterly, or annual — though, in the case of OTE, the quota is usually annual.
For example, a software sales rep looking for jobs online might come across a listing that says: OTE $120,000, Quota $500,000, Pay Mix 60:40
Let’s break these down:
- $120,000 is the amount the sales rep can expect to earn if they make quota.
- $500,000 is the amount of revenue (quota) the sales rep must generate within a year.
- A 60:40 pay mix means 60% of the OTE ($72,000) will be fixed pay, while 40% ($48,000) will be commissioned.
To sum up, the sales rep will take home a fixed annual salary of $72,000 no matter what, but if they want to earn $48,000 in annual commissions, they will need to sell company products worth $5,00,000 across the year.
How is OTE calculated?
There is no one-size-fits-all approach to determining on-target earnings for a role. You need to create a customized compensation plan based on factors such as the salesperson's experience, the company’s profits, and competition in the sector.
Here are the steps you must follow to calculate OTE for sales: -
- Establish base salary: Firstly, you need to consider the position of respective employees to define the base salaries. You must ensure that the base salary is sizeable and the volume of work they undertake. There are no fixed parameters to define the base salary; hence, you must determine it per the industry standards.
- Determine the sales quota: After establishing the base salary, you must set the quota the salespersons must meet to be eligible for commissions and incentives. Normally, companies set the quota as 4x to 6x of the OTE, though this is not a fixed formula. You must strike the right balance between company goals and an individual’s capacity.
- Determine the commission percentage: The rationale behind including commissions as a part of OTE is to motivate the salespersons to achieve the given goals. Based on the difficulty of these goals and the time required to achieve these sales, you can decide the commission component of the OTE salary.
- Add the base salary and commission: After deciding on the commission and base salary, simply add these two for OTE calculation. For example, to calculate OTE for sales executives, you will add base salary and projected sales commissions.
You can use a sales commission software to track commissions for employees. You can automate commission calculation and make your payout cycles faster with no errors.
Also read: Quota to OTE ratio
Factors that influence OTEs for a salesperson
To determine the OTE for a salesperson, you need to define the pay mix, i.e., commission and base salary. It is crucial to understand that OTE is not guaranteed; it merely indicates potential earnings. Here are some essential factors that you must consider for OTE calculation:
- Duration of the sales cycle: Some products and services have a longer sales cycle, lasting for quarters. In such situations, sales representatives need that extra motivation to remain focused. Hence, you must ensure that the base salary is higher than the commission part in the OTE. In a shorter sales cycle, you can offer higher commissions and a lower base salary in OTE.
- Position and experience: The role and experience of a sales professional also play a vital role in OTE calculation. For example, a sales manager will have a different OTE as compared to a sales executive. The compensation plan you develop must align with the responsibilities of different positions.
- Your preferences: OTE calculations are largely dependent on a company's preferences. It is your prerogative to offer a higher base salary or more commissions in a compensation plan. You may also abide by the norms your competitors follow to stay competitive and retain talent.
- Type of product: The complexity of your product also plays a considerable role in the OTE calculation. For example, in the SaaS industry, some products are based on the latest technology, which requires salespersons with considerable expertise in the area. Here, you will have to offer higher commissions in OTE to motivate them to close more sales.
Learn how to set up a commission plan for the customer success team.
3 Common examples of OTE-based roles
Let’s look at three common OTE-based roles and what a sample OTE for each of them might look like:
1. SDR / BDR
Sales development representatives (SDRs) and business development representatives (BDRs) are considered entry-level sales roles for most industries.
They are mainly responsible for researching prospects, cold calling, qualifying leads, and setting meetings for sales reps.
Hot take on SDR OTE that we found interesting 👇
2. Account Executive
Account executives, commonly known as AEs, are sales reps who handle leads generated by SDRs/BDRs and convert them into clients.
They’re responsible for meeting clients, pitching products, addressing customer concerns, and closing deals.
3. Recruitment Consultant
While OTE is largely used for sales roles, there are a few exceptions. Like recruitment consultants, for example.
They also have OTEs, although their targets are not converting leads into customers but candidates into hires. It’s still revenue at the end of the day, but the way it’s packaged is a bit different.
Additionally, managers can have OTEs that include bonuses they can earn based on the performance of their team or branch office.
Note: Using unrealistic OTEs to attract sales reps is unethical and detrimental to your business. As a general rule of thumb, the quota should be 4-6 times the OTE.
How to evaluate OTEs when looking for a job?
Let’s assume you’re applying for a sales job and you’ve shortlisted a few firms. All of them have great OTEs (in the ballpark of $100,000), but now you want to analyze each OTE on a granular level.
Here’s how you could go about doing that:
1. Find out how each firm treats OTEs
Usually, OTE represents the total pay an employee can expect to earn if they make quota. But sometimes, OTE may also mean a guaranteed amount employees will earn for fulfilling their basic duties or an estimate of the average pay they can expect if they work hard.
Finding out each firm’s outlook towards OTE will give you a clearer picture of your potential earnings and also an insight into the company culture.
2. Dive deeper into your targets
As seen in the OTE examples above, every role has its own quota or targets. Some are directly related to closing deals, while others may include setting up meetings or conducting cold calls.
When applying for any OTE role, you should always find out your targets and what the company expects from you in return for your commission.
Also, not all job listings will mention the quota or pay mix, so you should ask for clarity on those as well.
3. Enquire about ramp time
It’s common practice for companies to grant new sales reps an initial ‘resting period’ where they aren’t expected to sell anything. This time, known as ‘ramp time’, is used to onboard the rep and educate them about the company’s products and use cases.
For many companies, ramp time is usually either the length of one sales cycle or three months — although it can be entirely different.
During ramp time, companies handle sales commissions differently as well.
Let’s say a rep has a monthly quota of $50,000 and a commission rate of 10%. That works out to $5,000 in commissions per month. If the ramp time is three months, the company might pay the rep a non-recoverable draw every three months without the rep closing a single deal.
These non-recoverable commission payouts would likely reduce each month and look something like this:
- First month: 100% ($5,000)
- Second month: 50% ($2,500)
- Third month: 25% ($1,250)
From the fourth month onwards, the rep would be on a fully-ramped OTE, i.e. they will need to sell $50,000 if they want to make $5,000 in commissions. No sale, no commission.
That’s why it’s important you find out the ramp time at your prospective firm. This will help you understand how much breathing space you have and how much you can expect to earn during that time.
4. Request for the latest OTE performance data
You could ask the hiring manager how many sales reps in the firm are currently below, above, or at the median OTE. This will give you a good idea of how practical the firm’s OTE-setting techniques are.
While you’re at it, you could also ask the hiring manager how new hires generally perform with regard to OTE. Are they surpassing it easily or struggling even to come close?
Pro tip: If 60-70% of the sales team is consistently hitting their OTEs, it usually means the OTEs at that firm are fair yet competitive.
What are ramped OTEs?
The ramping period is defined as the time when new salespersons are still learning about the business, its products and services, and its processes. This period usually encompasses the first few months after the employee joins the company.
The ramping period can last four to nine months, depending on the industry type and the nature of the competition. After the ramping period has been completed, salespersons can target the territory allocated to them to achieve their sales goals.
OTE normally does not take ramp quotas and payouts into consideration. During ramp time, the ability of salespersons to achieve the targets is not clear hence you can offer them ramped OTEs through the following methods: -
- Creating a drawn plan that allows them to make a decent amount even if they are unable to achieve the desired numbers.
- Giving reduced quotas instead of fully ramped quotas to ensure that salespersons can meet smaller targets successfully before moving on to bigger targets.
OTE expectations - what is it?
OTE expectations are the estimated amount salespersons expect to make with a company. Salespersons can communicate their concerns to company leadership and determine a suitable OTE that meets their expectations. It is a highly variable number and is likely to differ based on factors like,
- Experience of the salesperson.
- Job profile of the salesperson.
- Nature of business of the company.
- Level of competition.
- Competitor's offerings.
- Total market size.
- The complexity of the product or services.
FAQs on OTE
Does OTE include overtime?
No, OTE does not include overtime. It only includes salary and allowances earned during normal working hours.
Does OTE include base salary?
Yes OTE includes the base salary
Is OTE on top of salary?
No, OTE is your potential salary.
Does OTE include a bonus?
Yes, OTE includes bonuses, incentives, allowances, and shift loadings. Check with your HR to find out what your OTE includes.
Are OTEs capped, or can they be exceeded?
This depends on the company. At most firms, OTE represents the highest amount that can be earned for any sales role.
However, if the firm doesn’t have a capped commission structure, sales reps there could most certainly surpass OTE if they sell like champions.
What does 200k OTE mean?
200k OTE means 200,000 (in the currency mentioned) On-Target Earnings, combining base salary and performance-based variable pay if targets are met. It represents the total expected annual earnings for achieving set goals.
