Is commission ote?
On-target earnings (OTE) is a common compensation model that companies use to pay and motivate salespeople. Also known as “on-track earnings” or “on-target incentive,” OTE is the expected total pay from a job: a combination of fixed salary and variable income.
When done right, an OTE model will keep your sales force motivated and your commissions expense forecasts accurate. To help you get a handle on how OTE models work, this guide covers the following topics:
OTE models mix an employee’s base salary (fixed income) with commissions that are earned by performing their job. An employee’s OTE is the total amount of money they should expect to make in a year if they hit their quotas (i.e., if they’re “on-target”). Determining your OTE model is a key component of creating your sales compensation plan.
The subject of OTE usually comes up in conversations around hiring salespeople. It’s common for hiring managers to list OTE in sales job descriptions to give hopeful candidates an idea of how much money they can expect to earn if they win the role.
For example, a candidate might apply for a sales rep role with a listed OTE of $100,000. During the interview process, the candidate might find out that the role’s base salary is actually $75,000—but if they hit their sales quotas, they can expect to make an additional $25,000 in commission. (And if they exceed their quotas, they could earn even more.)
OTE is used to properly compensate or reward sales reps for hitting their quotas. However, one of the biggest benefits of OTE is increasing employee engagement, motivation, and participation.
A good sales commission OTE that is easily achievable can create brand ambassadors and long-term employees. If your organization struggles to improve productivity, establishing a new OTE could make a substantial change.
In its simplest form, OTE is calculated by adding your base salary and on-target commissions. You can think of it as a simple formula:
[Yearly base salary] + [Yearly commission earned at 100% of quota] = On-target earnings
Calculating OTE gets more complicated when you start looking at all the different ways that commissions are assigned. For example, a sales rep in SaaS might earn a 10% commission rate for new customer accounts and a 2% commission rate for any professional services sold on top of the SaaS subscription.
Payment periods can complicate OTE calculations, too—you need to account for when these commissions are considered “earned,” when they’re paid out, and when you balance for attrition (such as a new customer that unexpectedly terminates their engagement).
When it comes to sales commissions, OTE is almost never guaranteed. This is important to understand both as a sales comp administrator (or hiring manager) and as an aspiring sales rep. Salespeople should be told up front that OTE isn’t exactly what someone will earn with a job. It’s a way of letting potential hires know approximately how much they can expect to earn if they hit their targets.
This is why it’s important for hiring managers to not only share OTE, but also the average percentage of salespeople who actually get their OTE. Doing this helps set expectations with a new hire, and mitigates confusion when variables outside the salesperson’s control come into play.
OTE should be considered the possible (and achievable) project commission that a sales representative can earn in a year if they hit all of their sales targets. So when setting up your compensation plan, you should not treat OTE as a stretch goal in disguise. Commission targets should be reasonably achievable—this keeps your sales force motivated, and makes for much more accurate forecasting of both revenue and commission expenses.
Remember: your OTE model should motivate your employees and properly compensate them for their hard work. A high OTE with a high achievement rate will attract and retain the best talent.
Sales comp administrators and stakeholders who want to determine the best course of action for a sales role’s OTE should consider a few general guidelines.
To start, it is usually a good idea to base the OTE on approximately a fifth of the total annual sales quota. Standard commission rates vary across industries, and your own OTE model should be informed by your internal sales processes, your unique industry, your sales representatives’ experience, your management teams, your unique sales process, revenue, sales role popularity, and much more.
Pay mix is the ratio of base salary to commission: it describes how much of an employee’s OTE is guaranteed (base salary) and how much is dependent on their performance. In the example we used earlier, a sales rep was paid $75,000 as a base salary, with expected commissions of $25,000—which translates to a pay mix of 75/25.
As a general rule, a pay mix of 50/50 is a good starting point. It’s a common mix and provides a good balance between base rate and commission. A high pay mix is weighted more toward fixed income, while a low pay mix is weighted toward variable income. Neither is inherently better or worse than the other—they just appeal to different kinds of salespeople.
A well-balanced pay mix not only helps you project expenses and keep employees motivated—it helps you attract the right kind of salespeople to your company in the first place.
For example, a pay mix of 10/90 means the majority of the employee’s pay will come from commissions. This can be very appealing to people who embrace a “high risk, high rewards” mentality, but it’s going to turn away folks who want a steadier paycheck.
On the other hand, a pay mix of 90/10 communicates a lot of stability, but much lower expectations around commissions. This can be a turnoff for more achievement-oriented candidates.
OTE pay mix can vary from role to role, and it’s usually smart to set pay mixes differently for the various roles involved in the sales process. When determining a role’s OTE pay mix, it’s best to consider these important factors.
High-risk roles like account executive or new business executives are often more directly responsible for signing new business. Conventional wisdom tells us that these types of roles need a low pay mix (commission-heavy) to encourage a more aggressive approach.
If your company has a short sales cycle, a lower mix makes sense: the sales team should be closing plenty of deals in any given period. However, for longer sales cycles, a higher pay mix may be necessary to motivate salespeople to stick with it. (A higher commission percentage is often in order, too.)
The more complex your offering is, the more likely it is you’ll need your salespeople to really understand the industry they’re selling into. Experience and expertise don’t come cheap, so these kinds of candidates will expect a higher base salary.
In many sales commission scenarios, reps will need additional time to get the hang of the role. It’s considered good practice for sales organizations to offer sales reps a draw (or pump up their overall commission rate) to compensate for initial low quotas.
OTEs are usually “fully ramped,” that is, the OTE figure doesn’t take on-ramping quotas and payouts into consideration.
Common issues with OTE models
Even large enterprises can struggle with calculating OTE for sales candidates. Typically, there are two points during the hiring process at which issues with OTE arise.
In either situation, the OTE number boils down to little more than a cheap persuasion tactic, which breeds discontent and bad will among employees. The best way to avoid this is to ensure that the employer, the candidate, and any third parties involved in the hiring process all agree on a singular OTE. That number will be what a new sales rep expects to earn if they reach 100% of their quota every year, and that number should reflect the truth of their compensation. Otherwise, you can expect a high turnover rate and the loss of good sales reps once the truth comes out.Realistically, the best solution to keeping good reps that churn out quotas with gusto is to keep your company’s OTE simple and honest. Ensure that it’s the only number your potential hires understand and can agree to, and try to base it as closely as possible on the candidate’s established earnings via their W2 paperwork. If you want to make your offer more attractive than your competitors’, bump the OTE up a bit higher than their past earnings—but be clear that this assumes they will continue to grow as a salesperson. And maybe save the extremes of a free Cadillac and a set of steak knives for the movies.
It’s easy to see why, as it allows businesses to plan their finances better. Apart from that, it also makes it easier for sales representatives to see how much they’ll be able to earn if they achieve their sales quotas. In turn, this increases their motivation and allows businesses to up their performance, revenue, and growth.
To be most effective, however, there are several vital considerations businesses need to take into account when using OTE in their compensation plans. If they don’t, it could lead to reduced morale, poor performance, and, ultimately, a loss of revenue for the business.
What should you consider when using OTE? In this post, we’ll look at this question in more detail and show you how to create a compensation plan using it.
In simple terms, OTE or on-target earnings is the sum of a sales representative’s annual base salary and their on-target commission. In turn, OTC or on-target commission is simply the commission sales reps earn if they reach their sales targets.
In simpler terms, OTE is the total compensation sales employees can expect to earn if they manage to achieve 100% of their targets or quotas. Typically, this quota will be an annual figure, rather than a monthly or weekly number.
Now, that's a lot to unpack. So, to illustrate the concept better, let's look at an example. Let's say you place an ad to find a new sales employee. You intend to pay the employee an annual base salary of $80,000 provided, of course, that they reach their annual sales quota. The job description in your ad will then typically refer to the compensation for the job as “$80,000 OTE”.
In turn, this means, if a sales rep gets the job, they'll be able to earn $80,000 a year. This compensation is then subject to them reaching 100% of their sales targets for that year. Keep in mind, though, that the on-target earnings figure of $80,000 is an approximate number. So, it can, in some cases, end up being larger.
There are several benefits to using on-target earnings in your compensation plan, both for you and your sales reps.
When using on-target earnings, you'll be in a better position to forecast sales commissions accurately. This, in turn, makes it easier to budget and manage your finances.
For your sales reps, using OTE means they can see exactly how much they'll be able to earn if they manage to achieve their sales targets. An added benefit is that, if your OTE is competitive, your sales reps will be more eager to achieve their quotas.
When you use an OTE number that's both realistic and competitive, you'll be able to determine a commission rate that's appropriate. In other words, you'll be able to determine the right base salary for your sales reps.
Now that we've recapped what on-target earnings is and what its benefits are, it's time to look at how you can use on-target earnings in your compensation plan. There are three important things to consider when you intend to use this incentive compensation structure:
As mentioned earlier, to attract and keep the best talent, it’s vital that you get your OTE right. So, the first thing you need to consider is what the market-related compensation is for your industry. This is because sales reps must feel like they’re earning a similar compensation compared to employees at other companies. If they don’t and your OTE is not comparable to other companies in your industry, you’ll struggle to hold on to good sales reps.
Keep in mind, though, there are no hard and fast rules when calculating OTE. So, it will differ based on the market you’re in, the type of products you’re selling, how complex the sale is, and how much experience you want the sales rep to have. Here, a website like Glassdoor can be very helpful. It can give you some insights into what a market-related compensation for the job and your industry looks like.
Another consideration when setting your OTE is that it should be comparable to other sales and non-sales roles in your company. The key here is to ensure that you offer similar levels of pay for similar levels of impact that a specific position has on your company and its profitability.
As a result, you should avoid overpaying or underpaying for sales performance. When overpaying, your customer acquisition costs will be unnecessarily high while underpaying could lead to poor performance, low morale, and reduced employee retention rates. Ultimately, it’s about finding the perfect balance.
As mentioned earlier, Pay Mix is the ratio of base salary to the commission payout. This ratio is used to determine what the on-target earnings will be for specific roles. In our experience, OTE plans are on average, 65% base salary and 35% commission, but will differ based on factors like the specific industry or the experience of the sales rep.
However, the most important thing to consider when determining the ratio is the degree to which a sales rep can influence a sale which will, in turn, affect the ratio. For example, if a sales rep, generally, has little to no control over the outcome of a sale, the base salary should make up a bigger portion of the OTE. In contrast, if a sales rep can heavily influence a sale, commission should make up a higher percentage of the OTE.
From a sales reps’ perspective, one of the main considerations for them, when they are evaluating their compensation plans, is the sales quota or target. This is because, to earn the expected total pay, they’ll need to achieve their sales quotas. As a result, a sales quota should be achievable. If not, sales reps will, as mentioned earlier, simply discount them. In other words, they’ll calculate their compensation based on not meeting their quotas.
In our experience, sales quotas should be attainable by about 60 to 70% of your sales reps. This will give most of them the opportunity to earn their OTE while those who don’t will see that it’s possible. In turn, they’ll be motivated to perform better.
On the other hand, if your quotas are achievable by less than 60%, it will have the opposite effect. As a result, overall morale will suffer. In contrast, if it’s higher than 70%, you’ll likely overpay for performance.
Keep in mind, though, like setting the OTE and determining the pay mix, many factors could influence your quotas. Here, most companies start with historical performance and adjust the quotas based on market conditions.
However, this means, for newer products and less mature markets, it could be more challenging to set quotas. Often the best solution here is to set quarterly quotas and adjust them during the year as more data becomes available.
Using on-target earnings or OTE in your compensation plan is an excellent way to increase your sales reps’ performance and drive them to make more sales. However, you need to carefully set the OTE, determine the pay mix, and set sales quotas.
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