Understanding On-Target Earnings (OTE): A Clear Guide for Employers and Sales Professionals

Key Takeaways

• On-Target Earnings (OTE) combines a fixed base salary with performance-based pay, such as commissions or bonuses.
• OTE helps employers attract and motivate sales talent by showing potential total earnings when quotas are achieved.
• The OTE formula is simple: Base Salary + Target Variable Pay = On-Target Earnings.
• Capped and uncapped OTE plans each have advantages, with capped plans offering predictable costs and uncapped plans rewarding top performers.
• A well-designed OTE plan uses realistic quotas, transparent compensation rules, and metrics aligned with business goals.
• Different sales roles have different OTE structures, with pay mixes and commission opportunities varying by responsibility and seniority.

Hiring salespeople can be challenging, especially when it comes to their pay. Some get a regular salary, while others earn commissions or bonuses based on sales. 

That's where the term On-Target Earnings (OTE) comes in, it's a way to estimate what a salesperson can make if they hit their targets.

OTE shows how much an employee can expect to earn if they hit their sales goals. It helps businesses motivate their teams and gives job candidates a clear idea of what their total income could look like.

What is On-Target Earnings?

When you see a job posting that says "$120,000 OTE", what does that really mean? Let's take a deep dive into what OTE is, why companies use it, and how it differs from a fixed salary.

Definition of OTE

OTE stands for On-Target Earnings. It is the total compensation an employee is expected to earn if they meet their assigned performance targets.

How OTE differs from base salary

A base salary is the fixed amount you earn no matter what. On the other hand, OTE (On-Target Earnings) includes that base salary plus extra money you can earn by hitting specific goals, like commissions or bonuses. So, OTE shows how much you might make if you meet those targets.

Why organizations use OTE models

Companies use OTE, or On-Target Earnings, to tie pay to how well employees perform. It helps attract new hires by highlighting their potential earnings and motivates current employees by clearly showing the rewards they can earn for reaching their goals.

How to Calculate OTE and Structure It

Once you know what OTE is, the next step is understanding how to build one and how to calculate it correctly. This section walks through the key components and steps for the calculation.

Key components: base pay + variable pay

An OTE (On-Target Earnings) model includes two main parts: base pay and variable pay. It starts with a fixed salary, and then adds in potential commissions or bonuses based on performance.

To Calculate OTE:

1. Determine your base salary.
2. Identify any performance-based pay, like commission or bonuses.
3. Add them: OTE = Base Salary + Target Variable Pay.
4. If the base salary is $70,000 and the target commission is $15,000, the total earnings (OTE) would be $85,000.

Pay-mix ratios and their significance

Pay mix is how a salary is split between fixed pay and bonuses. Typical splits are 70% fixed and 30% bonuses or 60% fixed and 40% bonuses. More variable pay means more risk, but also the potential for greater rewards.

Capped vs Uncapped OTE Models

Not all OTE plans are equal. One of the most significant distinctions is whether the variable part is capped (with a ceiling) or uncapped (with no upper limit). Here's what that means for employers and employees.

What a “capped” OTE means

In a capped model, there's a maximum amount an employee can earn even if they exceed their targets. This helps with budgeting but may limit high-achievers.

What an “uncapped” OTE means

An uncapped structure allows employees to earn more if they surpass their goals. This can attract top performers but might result in unpredictable costs for the employer.

Pros and cons for each model

Capped: Easier for employers to budget and less risk, but may demotivate top performers.
Uncapped: High motivation and attracts talent, but costs can be harder to manage for employers.

Best Practices and Considerations for Employers

When building an OTE structure, there are key issues you should keep in mind. Here's what to watch out for and how to set up OTE in a way that works for both employer and employee.

Setting realistic and fair quotas

If targets are too high, employees might feel they can't achieve their goals and lose motivation. It's important to set challenging but attainable quotas.

Make sure there's transparency in compensation plans.

Employees should know how their salary is calculated, what they need to do to reach their goals, and how they can earn bonuses. When you communicate clearly, it helps build trust.

Aligning OTE with business goals

The metrics used for variable pay should reflect what drives business success (eg, new customer revenue, retention, upsell). This aligns the employee's goals with the company's strategy.

Balancing employer budget risk and employee motivation

Employers need to balance offering enough upside to motivate high performance, while keeping financial risk in check (especially in uncapped models).

Examples of OTE Compensation

To bring the concept to life, here are examples of how OTE might look in different roles. These are illustrative and will vary by industry and region.

Sales Development Representative (SDR)

For example, an SDR might have a base salary of $45,000 and a target commission of $15,000 when they hit their quota of qualified leads or meetings set. That would yield an OTE of $60,000.

Account Executive (AE)

An AE responsible for closing deals might have a base of $70,000 plus $30,000 commission for hitting 100% quota. OTE = $100,000. In an uncapped model, if they exceed the quota, they might earn more.

Field Sales Manager

A sales manager overseeing a team might get a base of $80,000 and a target bonus of $40,000 tied to team performance metrics. OTE = $120,000. The plan may include override commissions on team achievement

Frequently Asked Questions

1. What does OTE mean in salary? OTE (On-Target Earnings) is the total amount an employee is expected to earn if they achieve 100% of their performance goals. It includes both a base salary and target commissions or bonuses.
2. How do you calculate On-Target Earnings (OTE)? To calculate OTE, add the employee's base salary to their target variable compensation (such as commission or bonuses). For example, a $70,000 base salary plus a $30,000 target commission equals a $100,000 OTE.
3. Is OTE guaranteed? No. Only the base salary is guaranteed. The variable portion of OTE depends on meeting specific sales quotas or performance targets established by the employer.
4. What is the difference between capped and uncapped OTE? A capped OTE limits how much commission an employee can earn, even if they exceed their targets. An uncapped OTE allows employees to continue earning commissions without a maximum limit, providing greater earning potential.
5. What is a typical OTE pay mix? Common OTE pay mixes include 70/30 (70% base salary and 30% variable pay) and 60/40, depending on the sales role, industry, and expected level of performance risk.
6. Why do companies use OTE compensation? Companies use OTE to reward performance, attract skilled sales professionals, align employee incentives with business goals, and create a transparent compensation structure that encourages revenue growth.

Hiring your next sales professional?

If you'd like to learn more about structuring OTE plans effectively, especially for remote sales teams or offshore support functions, join the free Olamee beta. Sign up now and get access to guidance, tools, and templates to help you build compensation plans that motivate, retain, and support top-performing talent.