Every company wants to maximize sales revenue, and that means motivating reps to perform. How do you do that most effectively? One of the best ways is with a competitive compensation plan.
Enter: on-target earnings (OTE).
Using a mix of base salary and goal-dependent commission, OTE-based compensation plans are effectively used by sales organizations in every industry to boost sales performance, earn more revenue, and drive company growth.
In this guide, we’ll cover what you need to know about OTE sales compensation, including:
- What it is and why it’s effective
- The benefits of using OTE
- Considerations for using OTE in practice
- OTE represents the total earnings a rep will earn if they hit 100% of their sales targets.
- The success of OTE depends largely on striking the right balance between base salary and commission.
- Benefits of an effective OTE compensation plan include clear employee expectations, motivated sales reps, and a balance between compensation risk and reward.
- Important considerations for implementing an OTE-based program include accounting for ramp-up time, the control employees have over actual conversions, bonus earnings reps may earn, and competitor compensation plans.
What are On-Target Earnings (OTE) in Sales?
On-target earnings (OTE) are the total earnings a sales rep can expect to earn if they hit 100% of their annual sales targets. It includes a set base salary plus all additional commission that will be earned by hitting sales goals for the year.
On a job description or contract, you’ll typically see OTE displayed as a single number — for example, “Annual salary is $75,000 OTE.” Applicants and employees then know that their total earnings are dependent on reaching individual sales goals.
Actual earnings can end up being much lower (if quotas aren’t reached) or higher (if they’re exceeded) than OTE, so it’s up to sales leaders to determine an accurate and achievable OTE.
The Benefits of Using OTE in Sales Compensation
Using OTE in your sales compensation strategy sets clear expectations for both the organization and the employee. Companies set targets and have a strong estimate of how much they’ll pay sales reps should they hit all of their goals. In turn, sales employees have clear targets and know exactly how their earnings will be impacted by performance.
OTE puts employees in control of their own compensation destiny — and thus it engages them in the sales process and makes them motivated to succeed. This is particularly true for organizations that offer high-paying, competitive compensation packages and support reps with the right sales process and enablement materials.
Sales compensation plans vary greatly in how much they depend on base salary vs. commission incentives. Most reps want to find a company that balances risk and reward across the two.
In other words: reps want the security of a solid base salary and the opportunity to earn more if they perform well. When implemented well, an OTE compensation plan can strike this desired balance and attract high-potential sales talent to an organization.
Using OTE in Practice
By definition, OTE is a straightforward compensation concept. In practice, however, there are several considerations sales leaders should keep in mind as they set and manage OTE for their sales teams. These include:
Sales employees — especially those early in their careers — can rarely hit the ground running and start hitting long-term sales targets right away. They require ramp-up time during which they learn the company, its offerings, the customers, and the sales process.
Companies need to account for this as they budget and set timelines for reps to be hitting full OTE. Further, it’s important to educate applicants on the growth potential offered by the OTE model so they don’t dismiss you in favor of the immediate gratification of a higher base salary.
A conservative ramp-up time estimate is 6-9 months, but for talented and/or experienced reps this is often shorter. Companies can shorten ramp-up time by providing effective onboarding and training programs that quickly get new sales employees quickly acclimated and up to speed.
Employee control over sales wins
Depending on your company, industry, or product offerings, a sales rep’s control over the actual conversion will vary.
For example: Sales reps for a straightforward SaaS product with automated lead gen and a well-oiled sales process can be expected to close at a high rate — as long as they’re executing, a sales qualified lead is likely to convert.
On the other hand, premium offerings with an expensive price tag and/or that serve highly regulated industries may not close for reasons totally out of the rep’s control, even if they do everything right.
In the former scenario, base salary can be lower and commission percentage higher. In the latter case, it makes more sense to have a higher base salary and lower commission percentage.
The pay mix
Getting the pay mix between base salary and commission is absolutely essential to the success of your OTE-based sales compensation plan. So how do you determine the right one for your business? We already covered one of the biggest factors — employee control over sales wins — and the rest depends largely on your industry and what’s being sold.
For example: Sales earnings in industries like real estate or travel sales are mostly (often totally) based on commission. SaaS and general technology sales typically have more conservative 60/40 or 50/50 salary vs. commission ratios.
To set a fair and optimized pay mix, know your industry standards and continuously work to determine what’s most effective for your organization and sales team.
Overtime and bonuses
OTE typically does not account for overtime and other bonuses, but both should be taken into account as you set OTE, develop your overall sales compensation plan, and communicate total earnings potential with employees.
It’s not a great idea to build your OTE or compensation plans based completely (or even mostly) on your competitors — but it is best practice to monitor what they’re offering and ensure you’re staying competitive. Doing so enhances your ability to recruit top sales talent.
Sales targets and goals
Remember — it’s your job as the employer to set the sales targets and goals that determine whether a rep will reach full OTE. This is another place where balance is important. Goals should be realistic and achievable while also presenting a challenge that’s motivating to pursue.
Develop Smart Sales Compensation Plans with Xactly
Xactly Incent® compensation management software is built to empower organizations to successfully automate, implement, and manage complex incentive compensation management programs.
With Xactly Incent® you’ll get:
- Smart Compensation Plan Configuration - Create and manage any type of plan.
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- Powerful Integrations - Easily integrate with your CRM, ERP, HCM, and other systems in your stack.