What are on-target earnings? OTE definition, examples, and calculations.

A strong compensation strategy is a key driver of motivation and performance. This is especially true for sales teams, where clear, achievable targets and rewards can significantly impact success. Among the various types of compensation, on-target earnings (OTE) stand out for their ability to align personal goals with company objectives. This creates a win-win scenario for both sales professionals and organizations.

When designed thoughtfully, a compensation package with OTE can help attract and retain top talent, motivating teams to deliver their best work. In this article, we’ll explain what OTE means, explore its key components, and examine the benefits and challenges of incorporating an OTE model into your compensation strategy. 

What are on-target earnings (OTE)?

On-target earnings are the total pay a team member can expect to earn when they fully meet their goals. This type of compensation is particularly relevant for certain roles, including salespeople, account managers, or marketing directors. This metric gives people in performance-based roles a clear target and links their success directly to the company’s objectives.

OTE usually includes two parts: a base salary and variable pay, often through commissions or performance bonuses. If a team member has an OTE of $100,000, for instance, they might earn a base salary of $60,000, with the remaining $40,000 coming from hitting their target goal.

It’s important to remember that OTE is a guideline. Actual pay can vary based on performance, market conditions, and other factors.

How to balance base salary and commission in OTE

In OTE, the fixed base salary provides income stability, while the commission depends on performance. For team members whose salary is partially dependent upon OTE, their total pay includes:

• Base salary: This fixed portion of OTE ensures people have a stable income regardless of outcomes. It’s usually paid regularly, like monthly or biweekly, to help provide financial security.
• Variable pay: Commissions or bonuses depend on your team’s performance against their targets. These are usually calculated as a percentage of revenue generated or a fixed amount per sale. The variable pay aspect of OTE encourages your team to exceed their targets, allowing them to potentially earn more than just their base salary.

A person’s earnings can exceed or fall short of their OTE based on performance. For instance, with an OTE of $100,000 comprising of $60,000 base salary and $40,000 commission, the actual income might change depending on performance and commission structure: 

• Achieving 50 percent of their quota would earn them $60,000 (base salary) plus $20,000 (50 percent of the commission), totaling $80,000
• Hitting 100 percent of their quota would result in $60,000 (base salary) plus $40,000 (full commission), totaling $100,000
• Surpassing their quota by 150 percent would bring in $60,000 (base salary) plus $60,000 (150 percent of the commission), totaling $120,000, which exceeds their expected OTE

You can adjust the balance between these two parts based on industry norms and the complexity of your products or services to find the ideal pay mix ratio for your people. 

What are pay mix ratios?

A pay mix ratio refers to the balance between base salary and variable pay. For example, sales roles in the United States often have a 60 percent base salary and 40 percent commission mix. 

When the pay mix contains a higher percentage of base salary than OTE, team members enjoy greater income security but might feel less motivated to perform at their highest level. A higher percentage of variable pay can inspire teams to exceed targets but may also cause income fluctuations.

The ideal pay mix ratio varies based on industry and organizational norms and goals. Industries with longer sales cycles or complex products might prefer a higher base salary to offer stability during lengthy deal closures.

Common pay mix ratios

Some typical pay mix ratios include:

• 50/50: Balances base salary and variable pay equally, offering both income stability and performance incentives
• 60/40: Offers a relatively high performance incentive while still providing income stability
• 70/30: Focuses more on base salary, which may be fitting for roles with longer sales cycles or complex products requiring deep knowledge and relationship-building
• 90/10: Heavily weighted towards base salary, which is ideal for roles where individual performance has less impact on total outcomes

Choosing the right pay mix ratio is key to crafting an OTE package that aligns with company goals and budget while providing motivation and meeting team member’s needs. Payroll automation tools can simplify managing these ratios and ensure precise commission calculations. 

Capped vs. uncapped OTE earnings

Deciding whether to cap or uncap commissions is an important step when planning your OTE structure. Let’s look at the advantages and disadvantages of each option.

Capped OTE

In a capped OTE model, people have a limit on their commission earnings, even if they exceed their targets. For example, if a team member has an OTE of $100,000 with a 60/40 base-to-commission ratio and a cap at 150 percent of their target, their maximum earnings would be $140,000 ($60,000 base + $80,000 commission).

Capped OTE can be beneficial for:

• Keeping compensation expenses predictable
• Reducing the risk of excessive payouts
• Encouraging people to focus on aspects beyond just closing deals

Capped OTE also has some downsides, including:

• Demotivating top performers who consistently surpass targets
• Limiting earning opportunities, possibly leading to turnover
• Promoting a passive approach once team members reach their commission cap

Capped OTE works best in industries with stable sales cycles or when the company prioritizes cost control over maximizing individual sales potential.

Uncapped OTE

With uncapped OTE, there’s no limit on commission earnings. The more people achieve, the more they earn. This approach can attract top talent and keep high-performers motivated.

However, uncapped OTE can still present challenges, including:

• Making compensation costs less predictable
• Risking high payouts that can strain your company’s finances
• Motivating team members to prioritize closing deals over other important tasks

Uncapped OTE is ideal for organizations aiming to maximize sales growth, reward high achievers, and attract top-tier talent. It’s especially effective in fast-growing or competitive industries where exceptional performance drives significant business impact.

How to calculate on-target earnings

Understanding how to calculate OTE is important for setting up a successful compensation plan.

Step 1: Establish the base salary

Start by setting the fixed base salary. The amount typically depends on the role, industry, and experience level. Factors to keep in mind include:

• Industry benchmarks
• Experience level
• Role complexity
• Location

For example, entry-level sales roles may have a lower base salary, while senior account managers command a higher one. Aim to offer a competitive salary that fits within your budget and market standards.

Step 2: Determine the sales quota

Next, set achievable sales quotas based on factors like historical performance, market conditions, and company goals. Effective quotas are challenging enough to drive results but realistic enough to keep team members motivated. Consider:

• Historical data
• Market conditions
• Product complexity
• Sales cycle length

Set quotas that are challenging but achievable, and factor in ramp time for newcomers.

Step 3: Set the commission rate

Decide on the commission rate or bonus structure for meeting the quota. This variable pay incentivizes people to hit or exceed targets. For example, you might offer a 10 percent commission on all sales revenue above a certain threshold. 

Commission rates typically range from five to 30 percent, depending on the industry and role. Find a sweet spot that motivates your team while keeping profits in check.

Step 4: Calculate total OTE

Finally, combine the base salary with the expected variable pay to calculate the total OTE. Here’s a simplified calculation:

OTE = Base salary + Variable pay

For example, if a person earns a base salary of $60,000, has a quota of $500,000, and a commission rate of eight percent, their OTE would be:

$60,000 + ($500,000 × 0.08) = $100,000

OTE represents the potential earnings for hitting targets, but actual earnings may vary based on individual performance.

Once you’ve calculated OTE, you can work with compensation management software to help implement and monitor your OTE plan.

Examples of on-target earnings calculations

Let’s look at some practical examples of OTE calculations for different roles to understand how base salary and variable pay contribute to total earnings.

Sales development representative (SDR)

Consider a sales development representative (SDR) with a base salary of $45,000 and commission earnings of $500 for each qualified meeting they book. With a quota of 60 meetings per year, here’s how to calculate their OTE:

• Base salary: $45,000
• Commission: 60 meetings × $500 per meeting = $30,000
• OTE: $45,000 + $30,000 = $75,000

In this scenario, the SDR’s pay consists of 60 percent base salary and 40 percent commission, totaling an OTE of $75,000.

Account executive

Now, consider an account executive with a base salary of $70,000 and a commission rate of 8 percent on all revenue they generate. With an annual quota of $750,000, their OTE calculation looks like this:

• Base salary: $70,000
• Commission: $750,000 × 8% = $60,000
• OTE: $70,000 + $60,000 = $130,000

The pay mix for this account executive is around 54 percent base salary and 46 percent commission, leading to an OTE of $130,000.

These examples show how OTE calculations can differ based on roles, base salaries, commission structures, and quotas. By assessing various scenarios, organizations can craft competitive and motivating compensation plans for their teams. Tools like compensation analysis templates can help teams compare various OTE structures and find the best fit for their organization.

Benefits and limitations of on-target earnings

On-target earnings can be an effective way to motivate and reward your team. Understanding both the advantages and potential challenges of this compensation model can help you make the most of it.

Benefits of OTE:

• Motivated team members: Linking part of pay to performance encourages team members to hit and exceed their quotas, driving better results and boosting revenue
• Increased transparency: Clear expectations for earnings create a sense of fairness and trust within your team
• Improved budgeting and forecasting: With OTE, organizations determine expected earnings for each role, which helps them plan compensation budgets and predict expenses more accurately

Disadvantages of OTE:

• Overemphasis on short-term goals: A strong focus on immediate targets may cause team members to overlook long-term goals or customer relationships. Balancing short-term achievements with long-term objectives helps sustain client connections and protect your company’s reputation.
• Risk of poor design: Without careful planning, OTE structures may include inflated numbers or unrealistic quotas, leading to dissatisfaction and lower morale. Regularly reviewing performance data and aligning quotas with market realities can help mitigate this risk.
• Variable market conditions: Fluctuations in the market, such as shifts in demand, economic downturns, or increased competition, can make it harder for people to meet their targets. They may need to adjust quotas, revisit compensation structures, or provide additional training and resources to help the team adapt and maintain strong morale. Changes in the market can impact the ability to meet targets.
• Difficulty maintaining balance: It can be challenging to balance motivating performance with maintaining a positive workplace environment. To make OTE effective, set realistic quotas, provide ongoing training and support, and adjust targets regularly based on market conditions and company objectives.

Should you offer on-target earnings?

Offering a well-thought-out OTE plan can help attract talented professionals, enhance productivity, and align personal performance with your company’s goals. However, it may not be the right compensation structure for every business. The best compensation model for your team will depend on your organization’s and people’s needs and goals. 

If you do implement on-target earnings, keep your OTE structure clear, simple, and measurable. Involving your people in the planning process ensures they understand and support the system. Regularly review and adjust your OTE model based on performance data, market trends, and feedback from your team. Continually refining your OTE plan keeps your people motivated and high-achieving, contributing to your long-term success.

On-target earnings FAQs

What does OTE mean in salary?

OTE stands for “on-target earnings,” which is the total salary your people can earn by combining their base pay with any commissions earned by hitting goals. This approach helps team members understand their earning potential in roles where pay depends on performance.

What does $120K OTE mean?

When you see $120K OTE in a job listing, it means the total expected earnings for the role are $120,000, assuming you meet all performance targets. This includes your base salary and any additional pay like commissions or bonuses for achieving goals.

Are on-target earnings realistic?

OTE is realistic as long as your target goals are reasonable. A good OTE is achievable for most of the team, considering market conditions, company objectives, and past performance data. Clear, data-driven targets ensure fairness, build trust, and keep sales professionals focused on delivering results.

What is the difference between OTE and OTC?

OTE, or on-target earnings, is the total compensation you can anticipate, including your base salary and variable pay. OTC, or on-target commission, specifically refers to the commission part of the OTE. If your OTE is $100,000 with a 60/40 split, the OTC would be $40,000.

What is ramp time and how does it affect OTE?

Ramp time is the learning phase for a new person during which they become familiar with the company, products, and sales techniques. During this period, they may not be expected to reach the same targets as experienced team members. 

Some companies provide a draw against future commissions or a lower quota during ramp time to support new joiners, allowing them to earn part of their OTE while they’re getting up to speed.