On-Target Earnings (OTE): What It Is and How It Is Calculated
Many people new to sales are unsure what’s meant by on-target earnings or OTE, which is often used in job postings and employment contracts. Essentially, on-target earnings refers to the total amount of compensation you can expect to receive if you meet your performance targets.
For example, if you’re a salesperson, your OTE might include a base salary plus commission. If you meet or exceed your sales targets, you’ll earn more money. However, if you don’t hit your targets, you may not earn as much as you expected. OTE is a way for companies to incentivize their reps to sell more and achieve better results.
While you may be offered a certain OTE in your employment contract, there’s no guarantee that you’ll actually earn that amount. Your earnings will depend on your performance and the success of the company. That being said, OTE can be a useful tool for negotiating your salary and understanding the potential earnings associated with a particular job.
How to Calculate On-Target Earnings
Every salesperson should know how their on-target earnings are calculated. To do so, you’ll need to know the components that make up your OTE and the factors that can influence it.
Components of OTE
OTE is usually made up of two parts: a base salary and a variable component, such as commission or bonuses. The base salary is the fixed amount of money you’ll receive regardless of your performance. The variable component, on the other hand, is the part of your compensation that can fluctuate based on your performance. For example, if you’re a salesperson, your commission may be a percentage of the total sales you make.
Factors Influencing OTE
Several factors can influence your OTE. These factors can vary depending on the industry, company, and position. Here are some common things to consider when calculating OTE:
- Quota: This is the minimum amount of sales revenue an employee is expected to generate in a given period. It can be calculated on a monthly, quarterly, or annual basis.
- Territory: This refers to the geographical area an employee is responsible for selling in. The size and potential of the territory can influence the employee’s OTE.
- Product Mix: This refers to the types of products or services an employee is selling. Different products can have different profit margins and commission rates.
Examples of OTE Calculations
Let’s say you’re a new sales representative for your company. Here are some examples of how your OTE might be calculated:
- Example 1: Base Salary of $50,000 + Commission of 5% on Sales Revenue + Quota of $500,000 = OTE of $75,000
- Example 2: Base Salary of $40,000 + Commission of 10% on Sales Revenue + Quota of $250,000 + Territory of Northeast Region + Product Mix of High Margin Products = OTE of $80,000
OTE can be a useful way to incentivize a sales team. By considering the factors that influence OTE and understanding your targets, you calculate your full earning potential.
Importance of OTE in Sales Compensation
Sales compensation is a crucial part of any business. And OTEis a way to motivate and reward sales reps for their hard work and contribution to the company’s success.
Motivation and Performance
OTE is an essential factor in motivating sales reps to perform at their best. It provides a clear understanding of what a sales rep can earn if they meet or exceed their performance objectives. This clarity can be a strong motivator for sales reps to work harder and achieve their targets. By setting clear and achievable OTE goals, sales reps can feel more motivated to perform at their best and contribute to the company’s success.
Setting Realistic Expectations
OTE is also important in setting realistic expectations for sales reps. It helps them understand what they can expect to earn in a given role and what performance is required to achieve that level of compensation. By setting realistic expectations, sales reps can focus on achieving their targets and avoid becoming demotivated by unrealistic goals.
Challenges with OTE
When working with on-target earnings (OTE), there are certain challenges that both employers and employees must be aware of. Here are a couple of the most common challenges that can arise with OTE:
Misalignment of Goals
One of the biggest challenges with OTE is the potential for misalignment of goals between the employer and the employee. For example, an employer may set unrealistic sales targets that are difficult for employees to achieve. This can lead to frustration and demotivation among employees, as they feel like they are being set up to fail. On the other hand, if the targets are too easy to achieve, employees may not feel motivated to work harder and may become complacent.
To avoid this challenge, it’s important for employers to set realistic goals that are based on data and analysis. Employers should also communicate clearly with employees about what is expected of them and provide regular feedback to ensure that everyone is on the same page.
Most salespeople have a high-degree of self-confidence — tThey expect to hit their goals. This is generally a good thing. However, it also means that when they are considering or they accept a new sales role, most salespeople will expect their year-end W2 to match the OTE for the role. But at many companies, this is far from likely. Just take a look at the percent that attain quota for different sales roles:
- Account Executives: 39.4%
- Account Managers: 48.2%
- Sales Development Representative: 53.9%
- Sales Engineer: 53.4%
As you can see, of all of the people in these roles expecting to hit their OTE, about half or more will end up falling short. It’s also notable that according to this data, the higher OTE roles (Account Executives) seem to be the least likely to achieve their quota attainment goals.
Changes in Market Conditions
Another challenge with OTE is that it can be affected by changes in market conditions. If there is a sudden shift in the market that makes it more difficult to sell a particular product or service, employees may struggle to meet their sales targets. This can lead to a decrease in morale and motivation among employees. At the end of 2023, for example, the percentage of Account Executives hitting quota was down about 9% compared to the previous year.
To address this challenge, employers should be aware of market conditions and adjust their sales targets accordingly. They should also provide additional training and support to help employees adapt to changes in the market.
While OTE can be a powerful motivator for employees, it’s important to be aware of the potential challenges that can arise. By setting realistic goals and staying aware of changes in the market, employers can help ensure that OTE remains an effective tool for motivating their sales teams.
Another consideration when thinking about OTE is whether there is any consideration for the time it takes a new salesperson to get trained and up to speed on the new company offerings that they’ll be selling.
In many roles, it might take anywhere from 6–18 months for a sales rep to become fully productive. This is usually due to the time it takes to learn all of the different elements of the sale — from the sales pitch and demos, to objection handling and negotiation tactics.
New reps also need to learn their way around the other parts of their own organizations that are critical to getting deals done. What are the expectations around entering data in a CRM? How about working with legal to get a new contract? How much flexibility does upper management or finance offer in contract terms to bring on a new customer? All of these things are critical to success,but they all take time and experience to learn.
Unless the comp plan factors in this natural ramp-up period, it’s likely that reps will miss quota the first couple of quarters – or even longer. The best sales orgs will take this into account and will offer a ramp-up period with lower quota that account for this learning curve. It’s very important to ask about the ramp-up period when interviewing — especially if you’re considering a role with an enticingly large OTE.
Legal and Ethical Considerations
When it comes to on-target earnings agreements, there are several legal and ethical considerations that both employers and salespeople must take into account.
Transparency in OTE Agreements
Transparency is crucial in any employment agreement, but especially with OTE agreements. You have the right to know exactly how your earnings will be calculated and what you need to do to earn your OTE. This includes understanding the sales targets or other performance metrics that are used to calculate your earnings.
To ensure transparency, employers should provide clear and concise OTE agreements that clearly outline the terms of the agreement. This includes detailing how OTE is calculated, what performance metrics are used, and what happens if you don’t meet your targets. Employers should also be willing to answer any questions you have about the agreement and provide regular updates on your progress towards your OTE.
Compliance with Labor Laws
OTE agreements must also comply with labor laws. This includes ensuring that the minimum wage and overtime laws are followed. Employers must also ensure that their OTE agreements do not discriminate against any protected class, such as race, gender, or age.
It’s essential to understand your rights under labor laws and to ensure that your employer is following them. If you have any concerns about your OTE agreement, you should speak with your employer or a labor law attorney.
By doing so, you can ensure that you are being treated fairly and that you are earning what you deserve.