What Is On-Target Earnings (OTE)?: A Comprehensive Guide For Employers

Designed to motivate employees and reward them for achieving specific sales quotas over the course of a year, on-target earnings (OTE) packages form an important part of many modern compensation plans.

They offer numerous benefits for both you and your workforce. However, offering on-target earnings plans to your team requires careful planning and a strategic approach.

In this guide, you'll learn everything about what an OTE is, how to calculate one, which best practices to follow, and how to design an effective plan that works.

What is On-Target Earnings (OTE)? 

OTE means on-target earnings. It is a type of compensation plan commonly used in sales, recruitment, and performance-driven roles. It represents an employee's total potential earnings for achieving 100% of certain performance targets (e.g. sales quotas) within a year.  

They differ from profit sharing bonuses in that OTEs incentivize employees to achieve predetermined targets, while profit sharing models give employees a portion of the overall company profits.

OTEs consist of something known as a "pay mix", combining an employee's annual base salary and variable pay such as commissions or bonuses. Payouts hinge on meeting sales quotas or predetermined benchmarks and objectives and are not always guaranteed.

For example, a sales rep job posting might say $85,000 on-target earnings. This figure shows the potential amount of money an employee can take home annually, provided they've met all quotas for the year. An OTE salary is often rounded up or down in job postings for simplicity, so the number might actually be closer to $85,450.

By setting clear expectations, OTEs put employees in charge of their earnings, motivating them to perform at the highest level while offering transparency in compensation structures. In fact, 83.6% of employees in a Nectar survey felt that workplace recognition motivates them to succeed.

This performance bonus structure aligns sales reps' performance with your business goals, creating a mutually beneficial relationship.

Components Of OTE 

An OTE pay mix consists of two main components:

1. Base salary
2. Variable pay (like commission or bonuses)

1. Base Salary

An annual base salary is the fixed amount an employee is guaranteed to receive for the year, regardless of performance. It provides them with stability and is an important part of attracting talent. Factors that influence base pay include:

• Industry standards: Competitive salaries within the sector.
• Role responsibilities: The duties and demands of the position.
• Experience levels: The employee's qualifications, years in the field, and track record.

2. Variable Pay (Commission)

Variable, or incentive pay, is a fluctuating payment model added to an employee's base salary when specific objectives have been met. Used to incentivize employees to meet or exceed targets, variable pay can take various forms, such as bonuses or commissions.

Here are a few examples:

• Percentage of sales: Employees earn a set percentage on each sale made.
• Tiered commissions: Different commission rates apply as sales volume increases.
• Bonus structures: Lump-sum payments awarded for reaching specific milestones.

How To Calculate OTE 

Here is a basic OTE calculation formula to help you determine your team's OTEs:

• On-target earnings = Annual base salary + annual commission earned at 100% quota attainment

Step-by-Step Calculation

1. Determine base salary: Specify the fixed annual salary for the position. This might fluctuate based on your industry, the nature of your offerings, and each sales rep's experience.
2. Set performance targets: Determine the sales targets reps must achieve in order to receive incentive-based earnings. This involves balancing achievable quotas with broader business objectives.
3. Establish commission rates: Decide on the percentage or amount of commission earned for achieving predetermined benchmarks. Consider higher commission potential for longer sales cycles or more difficult targets.
4. Add it up: Once you've finalized the base salary and commission structure, simply add them together using the formula above to determine the OTE.

Example Calculation

Scenario: A sales representative has:

• Base salary: $50,000
• Annual sales target: $500,000
• Commission rate: 5% of sales

Calculation:

• Expected Commission: $500,000 x 0.05 = $25,000
• OTE: $50,000 (base salary) + $25,000 (commission) = $75,000

The Importance Of OTE Compensation Structures 

On-target earnings (OTE) bonus plans are important for both employers and employees.

On one side, they help businesses attract top talent and align individual performance with broader organizational goals. On the other, employees are motivated to strive for excellence as their efforts directly impact their earning potential. It's a win-win.

How much of a win? Let's take a closer look:

For Employers

• Attracting/retaining talent: Offering a competitive OTE structure helps attract skilled professionals and retain top performers, as high achievers are drawn to roles with strong earning potential. Additionally, 69% of employees report greater loyalty to a company when they feel recognized and rewarded, making a well-structured OTE plan a key factor in both recruitment and retention.
• Performance motivation: OTEs are a great way to motivate employees not only to meet but also exceed expectations, fostering a results-driven mindset. When teams can clearly see how their efforts translate to their earnings, they're more inclined to give their best.
• Budgeting and forecasting: By anticipating the potential earnings of employees based on historical performance data, you are better equipped to forecast and budget compensation costs.

For Employees

• Earning potential transparency: OTEs give employees a clear breakdown of their potential total income. This helps them evaluate job offers, set realistic financial expectations, and consider career progression.
• Clear roadmap: OTEs provide a clear outline for new recruits, ensuring they know what's expected of them from the start.
• Goal setting: Well-structured on-target earnings models motivate employees to meet or exceed their sales quota, as their efforts directly reflect their total annual income. This helps employees set realistic objectives to achieve personal (and company) goals.
• Financial planning: Having a predictable income and potential earnings allows employees to budget correctly and make more informed financial decisions.

Best Practices For Implementing OTE

Implementing an effective on-target earnings plan is crucial for businesses aiming to motivate their sales teams and align compensation with performance.

When executed correctly, it can drive higher revenue and boost employee engagement. However, if poorly designed, it can lead to misaligned company objectives, low employee morale, and high turnover rates.

Here are a few best practices to follow:

1. Setting Realistic Targets

Even before setting realistic targets, define your company goals. What is it you want to achieve? Clarify specific, measurable key performance indicators (KPIs) that align with these objectives.

While industry benchmarks may vary, some of these metrics could include revenue generated, sales volumes, gross margins, or customer retention.

A good way to ensure targets are well-structured is to consider the SMART framework, whereby targets are:

• Specific: A clear and precise goal.
• Measurable: Easily tracked to evaluate success or failure.
• Achievable: A target that can be reached within a reasonable timeframe.
• Realistic: Targets that are attainable.
• Time-bound: A goal with a specific deadline or timeframe.

It's worth mentioning that unrealistic targets can demotivate employees as they feel the goal is too far out of their reach. On the flip side, when targets are too easy, it can prevent employees from reaching their full potential.

The best way to figure out realistic targets is to analyze historical data and market conditions and conduct thorough market research.

2. Clear Communication

Transparency is key when it comes to on-target earnings structures. In order for them to work efficiently, employees must know the ins and outs and what is expected of them.

Here are our suggestions:

• Provide comprehensive documentation that clearly outlines every aspect of the OTE plan. This includes defining targets, how they are calculated, target timeframes, and what measures are taken to track them.
• One-on-one meetings or group sessions can add a personal touch and provide a chance for employees to raise any questions or concerns. Incorporate OTE discussions into performance meetings regularly so your team is always kept in the loop.
• Utilize technology such as KPI tracking systems to keep employees updated on their efforts and total compensation earnings in real time.

3. Regular Review And Adjustment

OTEs are not a one-off thing. They require constant reviewing and adjusting to fit the needs of your evolving business and/or changing market dynamics.

A few tips include:

• Schedule regular reviews of the OTE package such as quarterly or annual assessments. This helps evaluate its effectiveness and identify any hiccups along the way. As a point of reference, sales reps should be hitting at least 30% of their quotas. Otherwise, you’ve set an unrealistic goal.
• Look at performance data and market insights during these reviews, and assess what your competitors are doing to gauge industry standards. Be rigid in your goal setting and expectations but flexible enough to tweak on-target earnings to find a happy medium.
• Get feedback from your employees, such as sales development representatives, customer success managers, and any others involved in OTEs. This provides invaluable insights into the inner workings of the earnings structure and pinpoints areas for improvement.

Common Misconceptions About OTE 

Here are two common misconceptions about on-target earnings (OTE):

1. OTE is Guaranteed Income

Many believe that OTE represents a guaranteed annual income. In reality, they only represent potential earnings.

Actual income is determined by whether or not an individual hits performance targets. So, if an employee fails to meet the required objectives, they might earn less than the OTE salary.

Employees should assess how attainable the performance targets are carefully when considering OTE-based roles.

2. Higher OTE Always Means Higher Earnings

It's often assumed that a higher OTE automatically means more money––but this is not entirely true.

Often, these higher figures come with tougher targets or higher variable pay ratios. While the OTE salary structure may lead to significant gains, it also means the employee's actual income could be lower if these objectives are not reached.

It's important for employees to understand the balance between base salary and variable components to understand income stability such as:

• 70-30 ratio: This might be better in terms of financial stability as 70% of the annual base salary is guaranteed, while the remaining 30% is determined by performance.
• 50-50 ratio: This ratio can be harder to achieve but may offer higher rewards.

Create Effective OTE Structures With ShareWillow Today

An on-target earning structure is undoubtedly one of the best employee incentive ideas for your business. It's a surefire way to keep employees motivated, attract top talent, and align performance with company goals.

While metrics may vary between sectors, the basis of OTEs is simple. All you need to do is determine a base salary, set objectives and commission rates, then add them up using the calculation formula.

By defining realistic targets, clearly explaining how OTEs work, and using technology like ShareWillow's software to manage your incentive plans, you can motivate employees to act like owners and achieve organizational success sooner than you think!