OTE combines fixed and incentive pay, giving the sales professional a good understanding of their earning potential. It offers the financial side and assists in the competent evaluation of job offers.
OTE is calculated by adding a fixed base salary to performance-based commissions or bonuses. Sales reps can expect to earn this total if they meet their targets.
Capped OTE restricts how much a sales rep can earn, even if they exceed targets. Uncapped OTE, however, allows unlimited earnings based on performance.
OTE motivates sales reps by tying compensation to performance and rewarding those who achieve or surpass their goals. This drives both financial gain and career growth.
In the sales world, compensation structures can be quite varied and complex. Various metrics are used to determine sales professionals’ compensation. One of the most crucial concepts to understand is OTE (On-Target Earnings).
Today’s article will cover OTE in sales, how it works, and its significance for sales professionals.
Why does it matter to you?
Learning about OTE in sales provides financial clarity, a clear view of potential earnings, and the ability to compare job offers effectively.
Without further adieu, let’s begin!
What does OTE stand for in sales?
OTE (On-Target Earnings) in sales refers to the total expected compensation a sales professional can earn by meeting their sales quota.
It includes a base salary plus commission or bonuses. If a salesperson meets or exceeds their targets, they achieve their full OTE, but earnings may vary if quotas are not met.
It is the average rep of earnings you can expect after achieving your target sales quota. This annual figure is based on two components, explained below:
Base Salary: This is the fixed part of your compensation that is paid regularly, irrespective of your targets or performance. It gives financial stability and ensures a guaranteed income independent of sale graphs.
Variable Pay: Now comes variable pay based on performance. This pay consists of commissions and bonuses relative to your sales targets. Your variable pay reflects your sales performance, such as hitting or exceeding a target.
Let’s take a brief example to understand it better:
Example: Suppose your OTE is $100,000 with a base salary of $60,000. If you meet your sales quotas, you earn an additional $40,000. But how does it work, exactly?
How does OTE work in sales?
OTE in sales is a compensation model for sales organizations, employees, and employers. It is a compensation model that incentivizes sales professionals by linking their earnings to performance.
Here’s how the OTE model of compensation also works in sales:
OTE structure
OTE mainly consists of two components: Base salary and Variable compensation. As mentioned earlier, the Base salary is a guaranteed amount paid to the sales representative, regardless of performance. Variable compensation includes commissions and bonuses.
Defining sales targets
Sales targets should be defined for sales reps to help them understand the performance expectations of sales organizations’ hiring managers. These targets must be:
Realistic: Targets should be attainable and aligned with market conditions and historical performance. If goals are set too high, they may demotivate employees rather than inspire them.
Challenging: While targets should be achievable, they should also push employees to stretch their capabilities, fostering a competitive spirit and encouraging personal growth.
Calculate OTE
If your OTE is $80,000, you can earn $80,000 annually if you meet 100% of the target quota.
OTE = Base Salary + Commission
For example:
Sales Manager – OTE: $132,000
Base Salary: $60,000
Commission from Team Sales: $72,000 (5% sales commission, on $120,000 monthly sales team quota)
So,
OTE = $60,000 + $72,000 = $132,000
For Different Sales Roles:
1. Account Executive
Base Salary: $70,000
Commission Rate: 8%
Quota: $500,000
Calculation:
Commission = Quota × Commission Rate
Commission = $500,000 × 0.08 = $40,000
OTE = Base Salary + Commission
OTE = $70,000 + $40,000 = $110,000
2. Sales Development Representative
Base Salary: $45,000
Commission Rate: 5%
Quota: $200,000
Calculation:
Commission = Quota × Commission Rate
Commission = $200,000 × 0.05 = $10,000
OTE = Base Salary + Commission
OTE = $45,000 + $10,000 = $55,000
3. Customer Success Manager
Base Salary: $80,000
Commission Rate: 3%
Quota: $1,000,000
Calculation:
Commission = Quota × Commission Rate
Commission = $1,000,000 × 0.03 = $30,000
OTE = Base Salary + Commission
OTE = $80,000 + $30,000 = $110,000
Purpose of OTE
The primary purpose of OTE in sales is to encourage sales professionals to achieve their goals. Such incentives help sales reps understand their potential earnings and alleviate financial uncertainty.
What is capped and uncapped OTE?
While discussing OTE in Sales, it’s crucial to understand capped and uncapped OTE.
Capped OTE:
This limits variable compensation, meaning a sales rep cannot earn beyond a set limit. Even if you exceed the sales target, your compensation is limited.
Uncapped OTE:
As its name suggests, it allows sales reps to earn as much as they can generate commissions. It simply means the more you sell, the more you earn!
Now, which is better?!
For Sales Reps: Uncapped OTE is the best of all odds, giving you unlimited earning potential.
For Employers: Now capped OTE works better for employers for obvious reasons.
Benefits of OTE for sales reps
OTE (On-Target Earnings) sets a clear expectation for potential earnings for sales professionals. Here are the key benefits of OTE for sales reps.
1. Gives financial clarity
The OTE model clearly outlines potential earning expectations for sales professionals. It gives a transparent view of total compensation and a clearer picture of variable pay.
2. Provides motivation
Who doesn’t want to be rewarded for achieving targets? OTE in sales is the compensation plan that rewards you for hitting and exceeding targets on the target sales commission amount. It gives immense motivation to work better at your job.
3. Career growth potential
When sales leaders and account executives are rewarded with their OTE targets and projected salary amounts, top-performing sales reps and high achievers excel in their career journeys. They get increased OTE targets or are promoted to roles with higher earning potential.
4.Rewards extra efforts
OTE ensures that sales reps are fairly compensated based on their performance for baseline responsibilities and sales achievements. The more you achieve targets, the more you can earn!
5. Greater job satisfaction
A nice compensation brings work-life balance and greater job satisfaction. OTE in sales is designed to incentivize consistently high-performing sales reps.
Frequently Asked Questions
1. Why is OTE important for a salesperson?
OTE gives sales reps a clear idea of their potential earnings if they perform well. These earnings are directly tied to the performance, i.e., meeting or exceeding targets.
2. What does Ramp time mean for new sales reps?
Sales reps require ramp time to meet their sales targets consistently. This phase typically lasts one sales cycle or about three months.
3. What is fully Ramped OTE?
Fully ramped OTE represents the total compensation package for a sales representative who has completed their ramp time. During the ramp phase, they usually earn a draw rather than commissions.
4. How are On-target commissions (OTC) defined?
On-target commissions (OTC) depict the total compensation a sales rep can earn upon reaching 100% of their sales quota. Knowing your OTC is essential for calculating your overall OTE compensation, which combines your annual base salary and OTC.
5. What Is Variable Compensation in Sales Roles?
Variable compensation refers to earnings that supplement a sales employee’s base salary based on performance, such as closed deals. This can include commissions, performance bonuses, and other incentives that motivate sales representatives to exceed their targets.
6. What is the difference between OTI and OTE in sales?
OTI (On-Target Income) and OTE (On-Target Earnings) are often used interchangeably, but they can differ slightly. OTE refers to the total compensation a sales representative can expect to earn if they meet their sales targets. OTI might highlight the actual income a salesperson can expect to take home after taxes and deductions.
Suprabhat Biyani
Electronics Engineer turned an SEO specialist, Suprabhat has a proven track record in delivering consistent profit growth for the business website through high-quality traffic and leads. Risk taker and Adventurer guy who is living his dream. Loves cricket and badminton.
Share this article
Close deals faster with the CRM designed for sales success.Try Salesmate FREE
Without a streamlined process of managing tasks, an agent might miss out on essential tasks. To prevent such errors, you need insurance CRM software that is intuitive and adds value to your company.
In this guide, we cover how parallel dialers enhance sales efficiency by dialing multiple numbers simultaneously, connecting reps only to live prospects. This boosts productivity, improves engagement, and helps scale outreach efforts effectively.
Key Takeaways
In the sales world, compensation structures can be quite varied and complex. Various metrics are used to determine sales professionals’ compensation. One of the most crucial concepts to understand is OTE (On-Target Earnings).
Today’s article will cover OTE in sales, how it works, and its significance for sales professionals.
Why does it matter to you?
Learning about OTE in sales provides financial clarity, a clear view of potential earnings, and the ability to compare job offers effectively.
Without further adieu, let’s begin!
What does OTE stand for in sales?
OTE (On-Target Earnings) in sales refers to the total expected compensation a sales professional can earn by meeting their sales quota.
It includes a base salary plus commission or bonuses. If a salesperson meets or exceeds their targets, they achieve their full OTE, but earnings may vary if quotas are not met.
It is the average rep of earnings you can expect after achieving your target sales quota. This annual figure is based on two components, explained below:
Let’s take a brief example to understand it better:
Example: Suppose your OTE is $100,000 with a base salary of $60,000. If you meet your sales quotas, you earn an additional $40,000. But how does it work, exactly?
How does OTE work in sales?
OTE in sales is a compensation model for sales organizations, employees, and employers. It is a compensation model that incentivizes sales professionals by linking their earnings to performance.
Here’s how the OTE model of compensation also works in sales:
OTE structure
OTE mainly consists of two components: Base salary and Variable compensation. As mentioned earlier, the Base salary is a guaranteed amount paid to the sales representative, regardless of performance. Variable compensation includes commissions and bonuses.
Defining sales targets
Sales targets should be defined for sales reps to help them understand the performance expectations of sales organizations’ hiring managers. These targets must be:
Calculate OTE
If your OTE is $80,000, you can earn $80,000 annually if you meet 100% of the target quota.
OTE = Base Salary + Commission
For example:
Sales Manager – OTE: $132,000
Base Salary: $60,000
Commission from Team Sales: $72,000 (5% sales commission, on $120,000 monthly sales team quota)
So,
OTE = $60,000 + $72,000 = $132,000
For Different Sales Roles:
1. Account Executive
Base Salary: $70,000
Commission Rate: 8%
Quota: $500,000
Calculation:
Commission = Quota × Commission Rate
Commission = $500,000 × 0.08 = $40,000
OTE = Base Salary + Commission
OTE = $70,000 + $40,000 = $110,000
2. Sales Development Representative
Base Salary: $45,000
Commission Rate: 5%
Quota: $200,000
Calculation:
Commission = Quota × Commission Rate
Commission = $200,000 × 0.05 = $10,000
OTE = Base Salary + Commission
OTE = $45,000 + $10,000 = $55,000
3. Customer Success Manager
Base Salary: $80,000
Commission Rate: 3%
Quota: $1,000,000
Calculation:
Commission = Quota × Commission Rate
Commission = $1,000,000 × 0.03 = $30,000
OTE = Base Salary + Commission
OTE = $80,000 + $30,000 = $110,000
Purpose of OTE
The primary purpose of OTE in sales is to encourage sales professionals to achieve their goals. Such incentives help sales reps understand their potential earnings and alleviate financial uncertainty.
What is capped and uncapped OTE?
While discussing OTE in Sales, it’s crucial to understand capped and uncapped OTE.
Capped OTE:
This limits variable compensation, meaning a sales rep cannot earn beyond a set limit. Even if you exceed the sales target, your compensation is limited.
Uncapped OTE:
As its name suggests, it allows sales reps to earn as much as they can generate commissions. It simply means the more you sell, the more you earn!
Now, which is better?!
Benefits of OTE for sales reps
OTE (On-Target Earnings) sets a clear expectation for potential earnings for sales professionals. Here are the key benefits of OTE for sales reps.
1. Gives financial clarity
The OTE model clearly outlines potential earning expectations for sales professionals. It gives a transparent view of total compensation and a clearer picture of variable pay.
2. Provides motivation
Who doesn’t want to be rewarded for achieving targets? OTE in sales is the compensation plan that rewards you for hitting and exceeding targets on the target sales commission amount. It gives immense motivation to work better at your job.
3. Career growth potential
When sales leaders and account executives are rewarded with their OTE targets and projected salary amounts, top-performing sales reps and high achievers excel in their career journeys. They get increased OTE targets or are promoted to roles with higher earning potential.
4. Rewards extra efforts
OTE ensures that sales reps are fairly compensated based on their performance for baseline responsibilities and sales achievements. The more you achieve targets, the more you can earn!
5. Greater job satisfaction
A nice compensation brings work-life balance and greater job satisfaction. OTE in sales is designed to incentivize consistently high-performing sales reps.
Frequently Asked Questions
1. Why is OTE important for a salesperson?
OTE gives sales reps a clear idea of their potential earnings if they perform well. These earnings are directly tied to the performance, i.e., meeting or exceeding targets.
2. What does Ramp time mean for new sales reps?
Sales reps require ramp time to meet their sales targets consistently. This phase typically lasts one sales cycle or about three months.
3. What is fully Ramped OTE?
Fully ramped OTE represents the total compensation package for a sales representative who has completed their ramp time. During the ramp phase, they usually earn a draw rather than commissions.
4. How are On-target commissions (OTC) defined?
On-target commissions (OTC) depict the total compensation a sales rep can earn upon reaching 100% of their sales quota. Knowing your OTC is essential for calculating your overall OTE compensation, which combines your annual base salary and OTC.
5. What Is Variable Compensation in Sales Roles?
Variable compensation refers to earnings that supplement a sales employee’s base salary based on performance, such as closed deals. This can include commissions, performance bonuses, and other incentives that motivate sales representatives to exceed their targets.
6. What is the difference between OTI and OTE in sales?
OTI (On-Target Income) and OTE (On-Target Earnings) are often used interchangeably, but they can differ slightly. OTE refers to the total compensation a sales representative can expect to earn if they meet their sales targets. OTI might highlight the actual income a salesperson can expect to take home after taxes and deductions.
Suprabhat Biyani
Electronics Engineer turned an SEO specialist, Suprabhat has a proven track record in delivering consistent profit growth for the business website through high-quality traffic and leads. Risk taker and Adventurer guy who is living his dream. Loves cricket and badminton.