What is OTE in sales? A beginner’s guide
Topics
More than just industry jargon, OTE – which stands for “on target earnings” – has advantages for all sales professionals.
In this article, we answer the question “What is OTE in sales?” so you can start reaping the benefits of this earnings calculation model for yourself – whether you’re a rep, manager or employer.
We also show you how to work out OTE and provide some best practice tips to help you start applying it effectively.
What is on target earnings?
On-target earnings (or sometimes “on-track earnings”) is a method in sales for calculating the amount of money an employee can expect to earn upon hitting their quota. The term is typically abbreviated to OTE.
OTE is most often presented as a full year’s earnings, although monthly and quarterly OTEs are possible too. These are useful for short-term contracts.
For example, a sales job advert may read “$80,000 on target earnings”, meaning the applicant could expect to earn $80,000 annually in the role if they hit 100% of their quota.
Here’s an example from a job ad on Indeed.com:
The ad includes “uncapped commission” because the OTE number isn’t a limit, as representatives can earn more than the stated amount by exceeding their quotas.
Base salary + commission earned at 100% of sales quota = on-target earnings (OTE)
Once you have the relevant salary and compensation figures, you can enter them into a calculator or spreadsheet to work out the OTE.
For example, you could determine the OTE for a sales position like this:
$50,000 (base salary) + $22,000 (commission earned at quota attainment) = $72,000 (OTE)
3 ways the OTE model benefits sales representatives
When employers apply it properly by presenting realistic figures, OTE helps sales reps in various ways.
Here are three of the model’s key advantages for sales team members:
1. It can provide financial clarity and predictability
The alternative to OTE (and the norm in many fields) is for employers to present a base salary or a low “minimum guaranteed earnings” figure, leaving the real figure as a mystery.
However, by having an accurate, attainable figure in mind (their OTE), reps are likely to experience less money-related stress, meaning they can focus more intently on work.
Understanding likely or potential earnings allows high-performing reps who regularly hit their targets to plan personal budgets and financial goals more effectively, which applies to a significant portion of the global salesforce.
In fact, our State of Sales and Marketing Report 2023 found that 86% of sales professionals report hitting their quotas regularly, usually or always despite economic uncertainty in 2022.
The data demonstrates that even in a volatile economy, OTE was still attainable by the majority of surveyed respondents.
2. It boosts motivation and aids goal-setting
The knowledge that meeting or exceeding targets leads to higher earnings can be a significant motivator. It helps sales professionals to set and strive for realistic but challenging sales targets.
In roles with uncapped sales commission, this is especially true. Reps can build their lifestyles around their OTE knowing that if they exceed their quota they’ll have more money for saving, luxuries or countering slower months.
Note: Cash incentives aren’t everything. The Incentive Research Foundation (IRF) found that many US and European companies motivate employees with non-cash rewards such as travel, beauty products and event tickets. For example, 80% of IRF survey respondents said they found group travel rewards to be “very” or “extremely” motivating.
3. It enables more informed career decisions
Many employers quote OTE numbers in job ads when hiring. Understanding these figures makes it easier for reps to compare positions and evaluate job offers.
For example, say you’re considering three sales positions with companies that only advertise base pay. One appears to pay more than the others, so you take the role.
What you don’t see is that the two lower-paying positions have much higher commission percentages, so when you calculate the total compensation package, they offer greater earning potential.
OTE solves this problem because it puts a realistic figure on that earning potential, empowering you to make better career decisions.
3 ways the OTE model benefits sales and hiring managers
OTE is a win-win for sales organizations. Here are three ways that it helps team leaders and hiring managers.
1. It boosts employee engagement and motivation
In fields like sales where commission is a standard, OTE is the clearest and most accurate way to portray a position’s compensation. Clarity matters as compensation is a key motivator for employees.
An IRF study found compensation was the most effective way to increase employee engagement and retention, ahead of working environments and tangible incentives (e.g., gifts).
Most effective for increasing employee engagement and retention
For sales leaders, the increased engagement that comes from having clear, easily understandable compensation plans (communicated via a simple OTE figure) leads to more productivity, reduced staff turnover and better overall sales performance.
2. It streamlines the hiring process
OTE saves hiring managers from having to explain complex sales compensation plans in their job ads. Instead, they can give a single figure knowing most candidates will understand what it means.
There are two beneficial outcomes to this:
It makes job ads more easily digestible and engaging to potential candidates, increasing the likelihood that candidates will apply for the role
It frees space for other helpful information, like detailed job descriptions and examples of sales goals
Streamlining the job posting process like this reduces the time and effort spent on recruiting. It helps companies hire stronger candidates faster, minimizing disruption when team members leave.
3. It enables accurate forecasting and budgeting
OTE gives employers a predictable way to forecast commissions and budget for sales expenses. The financial predictability OTE provides is essential for long-term planning and sustainability.
Business owners can manage company finances assuming that all salespeople will get their on-target earnings, meaning any shortfall in sales will leave extra funds to spend in other areas. Alternatively, they can be more precise by budgeting based on historic quota attainment data.
On-target earnings in action: 3 OTE examples
The OTE model can apply to any sales or marketing role that involves commission, even if the incentive doesn’t directly tie to an individual’s number of deals closed or revenue generated.
Here are three examples of how OTE can work for different positions.
1. Sales manager – OTE: $132,000
Company A’s sales manager leads a team of sales development representatives (SDRs) to achieve a collective monthly sales quota of $120,000. For every successful deal closed by their team, the Sales Manager receives a 5% commission.
Consistently meeting this monthly quota translates to a commission of $6,000 per month, resulting in $72,000 in annual commission earnings. Combined with a $60,000 base salary, their OTE reaches $132,000.
The calculation: $60,000 (base salary) + $72,000 (commission earned at 100% of sales quota) = $132,400 (OTE)
| Base Salary | $60,000 |
Commission earned | $72,000 |
| OTE | $132,400 |
2. Account executive – OTE: $105,400
Company B’s account executives are responsible for closing deals and driving sales revenue. They have a monthly quota of $60,000 in sales and earn a 7% commission on the revenue from the deals they close.
Achieving 100% of their monthly quota results in earnings of $4,200 per month, leading to $50,400 in commission earnings annually. Combining this with a $55,000 base salary makes their OTE $105,400.
The calculation: $55,000 (base salary) + $50,400 (commission earned at 100% of sales quota) = $105,400 (OTE)
| Base salary | $55,000 |
| Commission earned at 100% of sales quota | $50,400 |
| OTE | $105,400 |
3. Customer success manager – OTE: $80,000
Company C’s customer success manager (CSM) is responsible for managing customer sentiment and retaining client relationships. They earn quarterly bonuses for retention and upselling, $2,000 for achieving a 95% customer retention rate and $3,000 for a 15% upsell rate.
Meeting both targets each quarter means they can earn an additional $20,000 in bonuses annually. Add that to the employee’s base salary of $60,000 and the CSM has an OTE of $80,000.
The calculation: $60,000 (base salary) + $20,000 (commission earned at 100% of sales quota) = $80,000 (OTE)
Base salary | $60,000 |
Commission earned | $20,000 |
| OTE | $80,000 |
OTE best practices for managers and team members
It’s important to apply OTE with care, otherwise you risk setting unrealistic expectations for yourself or new hires and ultimately damaging valuable working relationships.
Here are some best practices to help both parties use OTE effectively.
Managers: Never inflate OTEs
Inflating OTEs to attract talent can lead to unrealistic expectations and disappointment.
You may find this approach helps you get more applications at first. However, in the long term, it’ll negatively affect your employee turnover and potentially damage your employer brand.
Honesty in job advertisements sets the foundation for trust and helps attract individuals who genuinely align with your compensation structure.
Managers: Adapt your pay mix
Adapting your compensation model to suit your industry and ideal candidates can help you retain top talent and optimize sales performance.
Industries with long sales cycles and high-value deals, like real estate, lend themselves to a commission-heavy pay mix because reps in these sectors typically invest significant time and effort into closing high-value contracts. The commission component is a potent incentive, motivating salespeople to work hard over longer periods to secure substantial deals.
On the other hand, companies that experience marked fluctuations in sales throughout the year benefit from offering higher base salaries to give reps a more consistent, predictable income. In retail, sales this is a common approach, especially for companies that sell fast-moving consumer goods (FMCG).
Team members: Set realistic expectations
Maintaining a realistic perspective on OTE can prevent unwarranted disappointment and make financial management easier.
The key thing to remember is that OTE figures are projections, not guarantees. They provide a framework for earnings, but actual results may vary based on individual performance, working environment and market conditions.
Researching potential employers can help you determine the accuracy of advertised OTEs.
The easiest way is to check other salespeople’s ratings on employment review sites like Glassdoor and Indeed. If an employer regularly inflates their figures, you’ll likely see people commenting about it.
If you have the contacts, you can also seek insights from current or former employers.
Team members: Ask employers about the typical “ramp time”
Ramp time is the time it takes for a salesperson to become fully productive and consistently meet their sales quotas.
Asking employers about their typical ramp times will help you learn about their onboarding processes and, more importantly, understand how long it’ll likely take to start seeing substantial commissions or bonuses.
For example, an OTE of $100,000 may sound appealing but if it’s a technical role that requires extensive sales training, you may not fulfill that earning potential for six months or longer.
Another less technical position with an OTE of $85,000 and a shorter typical ramp time of one month may be more suitable.
OTE glossary: Terms you need to know
There are various related terms you’ll encounter when reading or talking about OTE. Knowing these will help you discuss the model confidently, whether you’re an employer or employee.
Variable compensation: The part of a salesperson’s earnings that can fluctuate based on their performance. It includes commissions, bonuses and other incentives directly tied to achieving or exceeding sales goals.
Pay mix: The combination of base salary and variable compensation (commissions, bonuses, etc.) in a salesperson’s total earnings, as measured by a percentage.
Commission: A variable component of a salesperson’s earnings, typically a percentage of their sales. It serves as an incentive for achieving and exceeding sales targets.
Fully-ramped OTE: A salesperson’s on-target earnings once they’ve completed training and onboarding and have reached peak performance.
Ramp time: The time it takes for a new salesperson to become fully productive and consistently meet their sales quotas. Ramp time includes training, learning about products or services and building a client base.
On-target commission (OTC): The commission a salesperson can expect to earn when they meet their sales targets. It’s a key part of their OTE.
Average rep earnings: A measure of what the typical salesperson in a specific role or company earns. It helps both reps and employers set realistic expectations for OTE.
Final thoughts
It’s a straightforward concept but OTE affects sales roles at all levels. Understanding it can help you make better decisions around hiring, goal-setting, career development and more.
Whatever your position, be it a sales manager, sales representative or account executive, use what you’ve learned in this article to have more productive conversations with other professionals in your field.
