Here at Sales Cookie, we’re passionate about sales commission and automation. Our blog covers many different aspects of sales commissions: how to structure them, how to automate them, how to calculate correctly, how to pay your reps on time, etc. In this post, we describe what OTE means and answer frequently asked questions about on-target earnings.
What is the exact definition of OTE?
On-target earnings (also known as OTE or “on-track” earnings) represent expected total earnings for a given role when all expected performance goals (ex: quotas) are satisfied. OTEs are quite common in sales positions because they help reps estimate what their commission should be and because they help organizations define a commission budget.
Is the OTE on top of salary?
No. The OTE is the total expected payout for a given role, including base salary and variable payouts (commissions). The OTE represents what the payee should see on their W2 statement as their total earning, should they meet all their goals. Please note that the OTE normally does not include compensation for special situations such as overtime, one-off bonuses, benefits, etc.
What are the benefits of using OTEs?
Here are some reasons why many companies use OTEs when defining commission structures:
- To forecast the cost of sales commissions
- To allow your reps to estimate how much they could earn
- To define a commission rate or percentage (we’ll explain how below)
Defining OTEs helps you define how much you will spend on commissions, how much your reps will earn, and what percentage you should pay in commissions.
How to communicate OTEs?
Your OTEs should be numbers that your payees understand and agree to (ex: defined within your incentive program’s terms and conditions). This will ensure your OTEs are clear and transparent. Also make sure they are realistic and that corresponding sales objectives can be met. Avoid inflating OTEs during the hiring process. This would be unethical and misleading. Solid performers should be able to consistently receive their full OTE. More realistic OTEs will energize your sales team, and reward reps for their work. Note that good reps always ask how many payees actually meet their OTE before accepting a position.
Should commissions be capped to the OTE?
You may be wondering if you should cap earnings to the full OTE. This may discourage your best performers who are looking for “unlimited compensation” (or at least some upside when exceeding goals). In addition, there will be fluctuations over time (some months may be slower than others). Blindly capping monthly payouts based on a pro-rated monthly OTE could unfairly penalize your reps.
Here are different approaches you can use:
- Uncapped – your top performers are free to exceed their OTE without any limit (you may even include accelerators above quota)
- Capped – each pay period, payouts are capped to the OTE multiplied by a value such as 1.5 (i.e. a maximum safety margin)
- Capped with adjustment – same as the above, but there is some “catch up” adjustment at the end of the quarter where you pay the difference
About 50% of your reps should be able to receive their full OTE. Some will underperform, so you will pay less than OTE. Some will overperform, so you will pay more than OTE. Assume things balance out, the average spend per rep will be close to OTE.
How to calculate commission rates from OTE?
One benefit of OTEs is that they help you determine a per-deal commission rate. This is a lot more reliable than trying to figure out whether you should pay 6% commissions vs. 7% commissions.
Simply take each role’s OTE and deduct the base salary. This gives you the on-target variable component for each role. Now, divide this on-target variable component by each rep’s quota. You now have a per-deal commission rate you can use to pay your reps. If they hit 100% of quota, they will receive their full OTE. This approach is more reliable than trying to figure out a commission percentage based on your industry. It also makes spend and earnings more predictable for you and your reps.
Commission Rate = [OTE – Base Salary] / [Quota at 100%]
What questions to ask about OTEs during a job interview?
If you are interviewing for a position, we recommend the following:
- Make sure there is clear agreement regarding the definition of OTE. Some job postings incorrectly state you will receive “salary + OTE” which should be a red flag. OTE always represents total expected earnings (i.e. salary plus variable).
- Ask how many reps met their OTE. Some companies are optimistic and advertise high OTEs. In reality, only a small percentage of reps receive their full OTE. If they don’t know, ask how their OTEs were determined (ex: based on historical payouts?).
- Ensure your OTE is documented within your incentive program agreement. Ask whether your OTE will be used to actually calculate commissions, or whether it’s only informational.
- Check that your OTE is competitive. Check how much of your OTE will be base salary vs. variable (pay mix). Check whether your earnings will be capped to your OTE or can exceed it. See our earlier paragraph about OTE and caps.
How to determine OTEs?
You could base your OTEs on the average yearly earning of your top 50% reps (ex: check their W2 statement). Using this simple approach, your OTEs will be realistic (assuming those “better” reps did meet their goals). Historical payouts provide a reliable benchmark to define how much reps should expect to earn when meeting goals. Note that you may need to pro-rate OTEs based on role, seniority, etc.
If you need to determine OTEs from scratch, start by defining a desired pay mix for each role. Typically, the variable component should be increased as selling gets more difficult. A higher variable helps generate additional rep motivation to close deals requiring more effort because they have more skin in the game.
In our example below, our Account Manager has some account maintenance responsibilities. Therefore, his/her base salary represents the bulk of the OTE (70%). The variable component is much lower (30%). However, our Business Development Manager is expected to adopt a more aggressive sales posture. Therefore, his/her base salary percentage is lower (40%). The variable component is higher (60%). This reflects a “more risk, more upside” approach.
|Business Dev. Manager||40%||60%|
If you know the base salary for each role, and have also defined a pay mix, you can calculate the OTE. For example, if an Account Manager’s base salary is $70K, and this represents 70% of their OTE (based on the pay mix), their variable component should be $30K (since it should represent 30% of their OTE). The Account Manager’s OTE is then $100K ($70K base plus $30K variable). Make sure that your OTE is competitive and meets your budgeting needs.
What about ramped OTEs?
As a new hire, sales cycles can impact your ramp time and ability to close deals. If the sales cycle is long (ex: enterprise software), you may enter a commission cycle mid-period, so your actual OTE may be prorated. As a new hire, it may also take some time to build a pipeline and deliver sales performance matching expectations associated with a full OTE. Therefore, your take-home OTE may be lower than the announced OTE. Either because your full OTE was prorated to your ramp period, or because the initial ramp up makes it hard for you to earn your full OTE. Hiring departments often quote OTEs which are based on fully-ramped rep performance. They do not factor lower OTEs during the ramp up period.
What about OTE expectations?
Some organizations require their sales employees to perform non-selling activities (ex: creating marketing collateral, mentoring interns, configuring a CRM, generating training documentation). While some of those responsibilities may be inevitable, they can add up and take time. It’s important to determine how those activities will impact your OTE, and whether you will be able to attain your full OTE given the additional workfload. Finally, it’s quite difficult to build a pipeline from cold-calling alone. It’s going to be easier if you have marketing and lead-generation support. Optimistic OTE goals may be more attainable if marketing can deliver a reliable stream of inbound leads.
OTEs, when used correctly, are a fantastic tool to build reliable commission structures and improve transparency. If you’re dealing with manually-generated commission spreadsheets, please visit us online and learn how you can automate your sales commissions. Using Sales Cookie, you can easily define and manage OTEs, calculate commissions reliably, and pay your reps correctly and on-time.