An efficient compensation plan is necessary to drive revenue growth and improve the overall performance of your enterprise. But in the SaaS world, compensation plans vary greatly and having so many options can lead to confusion. It is, therefore, vital for companies to establish compensation plans that are in sync with their long-term and short-term objectives. Most of the time, details related to commissions are vague and can lead to confusion among salespersons.
To get rid of any such confusion, you need to focus on on-target earnings as they help ensure that the sales reps are suitably compensated for their work. Through on-target earnings, you can motivate your employees to give their best efforts and secure impressive results.
What does OTE mean?
On-target earnings is are defined as the total amount that salespersons can expect to earn when they are able to meet all their performance targets. 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 for completing the task successfully. Normally, OTE calculation is done on an annual basis, but you may also calculate it for shorter durations based on mitigating circumstances.
There is no one-size-fits-all approach for determining on-target earnings for your company. You will need to create a customized compensation plan based on factors like the experience of the salesperson, the company’s profits, and competition in the sector.
What are the benefits of using OTEs?
Now that you have understood the on-target earnings meaning, it is essential to know more about their benefits. Some of the standout advantages of OTE are listed here:
- Better Productivity: When salespersons have a clear understanding of how much they can earn, they are encouraged to perform better. Their productivity will increase, and they will be motivated to deliver impressive performances regularly to help the company achieve long-term growth objectives.
- Higher Motivation: Sales reps are always looking for that added motivation that can push them to work harder. With OTE, they have a set goal in their mind to secure the commissions and incentives in offer. They are motivated to work harder to deliver better results.
- Attracting Talent: If your company has clearly defined the on-target earnings in the compensation plan, you can attract suitable talent to join your enterprise. High-performing salespersons are drawn to companies that suitably reward them for their efforts.
How do you Calculate OTE for Sales?
Here are the steps you must follow to calculate OTE for sales: -
- Establish Your Employee's 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 as per the industry standards.
- Determine the Sales Quota: After establishing the base salary, you must set the quota that 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.
- Your Commissions Should Align with Your Goals: 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 you have decided 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.
How to determine OTEs?
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 which can stretch to months. In such situations, sales representatives need that extra motivation to remain focused. Hence, you need to ensure that the base salary is higher than the commission part in the OTE. In case of a shorter sales cycle, you can offer higher commissions and a lower base salary in OTE.
- Position and Experience: The position 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 be in sync with the responsibilities of different positions.
- Your Preferences: OTE calculations are largely dependent on the preferences of a company. It is your prerogative if you want to offer a higher base salary or more commissions in a compensation plan. You may also abide by the norms followed in your industry.
- 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 that 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.
What about 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 initial few months after the employee has joined the company. Based on the industry type and nature of competition, the ramping period can last between four to nine months. After the ramping period has been completed, salespersons are able to 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.
What about OTE expectations?
OTE expectations can be described as the estimated amount that 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.
- Total market size.
- The complexity of the product or services.
To create more productive sales processes, you need to automate your sales compensations. You would want to usher in efficiency and transparency in your OTEs to motivate the salespersons to achieve their sales quotas. By integrating sales commission software with your existing systems, you can take the hassles out of the entire process. Hence, you and your salespersons can be more focused on achieving the targets and not on complex calculations.
FAQs
Q1. What does OTE mean?
A1. On-target earnings or OTE define the total sum of money a salesperson can make by achieving 100% of the given sales quota. It includes base salary and commissions.
Q2. Does OTE include overtime?
A2. No, OTE does not include overtime. It only includes salary and allowances earned during normal working hours.
Q3. Is OTE on top of salary?
A3. No, the base salary is a part of OTE.
Q4. Does OTE include a bonus?
A4. Yes, OTE includes bonuses, incentives, allowances and shift loadings.
