On Target Earnings

What are on target earnings (OTE)?

On target earnings (OTE) refer to a compensation package used to incentivize performance and remunerate sales representatives, financial advisors, and senior executives.

OTE represents the total projected compensation for a role, including a base salary component (a fixed amount paid to the employee regardless of performance) and a commission component (variable income based on achieving a predetermined sales quota or target).

How to calculate OTE

Take the following steps in order to calculate OTE:

Step 1: Determine the base salary

Start by first determining the employee’s fixed annual salary.

Step 2: Calculate target variable compensation

Identify all potential variable pay components (including bonuses, commissions, stock options, profit-sharing, or other incentives), then determine the target payout for each element.

For bonuses, this could be a percentage of the base salary, and for commissions, it could be a percentage of sales revenue achieved (e.g., a percentage of sales once a minimum revenue target is reached, such as 10% of every dollar earned after $100,000 in sales per month). For stock options, it could be the number of shares granted.

After determining the target payout, finalize the total target variable pay.

Step 3: Calculate OTE

Calculate OTE using the following formula:

Here is an illustrative example: Imagine an employee earns a base salary of $70,000 per year. They also have the potential to earn a 15% bonus and a 3% commission on their sales if they sell $500,000 worth of products in a year.

As such, their bonus and commission would be as follows:

• Bonus: 15% of $70,000 = $10,500
• Commission: 3% of $500,000 = $15,000

Therefore, their total OTE would be: $70,000 (base salary) + $10,500 (bonus) + $15,000 (commission) = $95,500.

What are the benefits of OTE?

1. Clarity on earnings potential: OTE provides a transparent, upfront understanding of the total potential compensation for a role, helping your business and its employees better plan their finances.
2. Motivation and focus: By linking variable pay to performance goals, OTEs can be a strong driver of employee engagement, productivity, and performance.
3. Attract and retain top talent: Competitive OTE packages (especially those with uncapped commission incentives) can help attract top talent, boost revenue, and reduce turnover among top performers.
4. Improved alignment with business goals: By linking variable pay to company-wide objectives, OTE ensures your employee efforts align with overall business goals. This leads to stronger overall company performance and individual accountability. 

Capped and uncapped OTE: Key differences

When choosing between a capped or uncapped OTE compensation structure, consider factors such as the desired level of employee motivation, budget constraints, and the nature of the role. Below are the key differences between both models:

Examples of positions with OTE compensation

OTE can be applied to various positions where performance-based incentives are used to motivate and reward employees. Here are a few examples:

Sales representatives

These roles heavily rely on OTE, as it directly links a sales executive’s earnings potential to their financial performance outcomes.

Account managers

Account managers often handle existing client relationships and drive revenue growth within those accounts. Their OTE would typically include a base salary and bonuses tied to client retention, revenue expansion, and customer satisfaction.

Financial advisors

Financial advisors’ compensation often includes a base salary, commissions on investment products sold, or fees generated from managing client portfolios.

Executive-level positions

CEOs, CFOs, and other C-suite executives typically drive company revenue and margins. Therefore, they’re often incentivized to use significant OTE components to deliver favorable financial results. These components include large bonuses, stock options, and performance-based incentives linked to company-wide goals.

HR tip

For maximum input, tailor your OTE based on job scopes and performance targets. Here are two options to consider:

• Tiered OTE: Tiered OTE structures can differentiate compensation based on role complexity, seniority, and individual performance. For example, high-performing sales representatives could have higher OTE ceilings than entry-level sales staff.
• Performance-based tiers: Multiple tiers within each role allow employees to move up the tiers based on their performance. This incentivizes and rewards continuous improvement for all team members, not just your best performers.

5 tips to set up your OTE model

By following these guidelines, you can set up your own effective OTE model to incentivize performance in line with your company’s overall business objectives.

1. Align OTE with business goals: Define clear, measurable, and achievable objectives for your OTE model and ensure they’re directly linked to your company’s overall strategic goals. For example, if you want to increase market share, your OTE package should be structured to incentivize sales teams to acquire new customers.
2. Conduct thorough market research: For a compensation plan to be effective, it must be competitive within your market to attract top talent. Analyze OTE compensation data for similar roles in your company’s industry and geographic location. Use tools like salary surveys, benchmarking data, and searching job listings.
3. Define clear performance metrics: Establish clear and measurable performance metrics for each role. Examples include sales targets, customer satisfaction scores, project completion rates, and key performance indicators (KPIs).
4. Set realistic targets: Setting realistic targets ensures achievable performance goals, aligns expectations between employers and employees, and drives sustainable motivation and business growth.
5. Communicate the OTE model clearly: Ensure all employees understand how it works, including the base salary, potential variable pay components, and the performance metrics used to determine payouts. Always confirm the rules and parameters of your OTE program in writing. 

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