What Is On-Target Earnings (OTE)? And How to Calculate It
By Indeed Editorial Team
Published November 14, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Many sales professionals earn a considerable amount of their income from commissions, not just their salary. Therefore, it's important for professionals working in sales to consider how commissions can alter their final pay. If you work as a sales representative or are considering a job in sales, learning how to calculate a position's on-target earnings (OTE) can help you predict your take-home pay. In this article, we define this term, explain how it works, discuss its benefits, provide steps for calculating it with examples, and discuss how to evaluate on-target earnings.
What is OTE?
OTE is the compensation a sales representative can expect to earn if they achieve or exceed performance goals. It includes the base salary and commission but may not include certain compensation, such as one-time bonuses, overtime compensation, and benefits. Calculating on-target earnings can help salespeople estimate their potential commission for a position.
Overtime earnings help sales professionals and businesses estimate the total amount of income sales staff might earn if they achieve their sales targets. Because the calculation includes a salesperson's base salary and performance-based commissions, companies rarely guarantee specific targeted earning calculations. This type of earnings works well when companies provide a realistic and attainable figure that each sales team member can achieve.
Benefits of OTE
On-target earnings can be useful to both companies and salespeople. Calculating these potential earnings offers several benefits, including when:
Forecasting sales commissions
A business's leadership and accounting teams can more accurately forecast sales commissions by calculating on-target earnings. By budgeting for each of its sales representative's targeted earnings, a company can prepare to accommodate each salesperson financially. This can help a company forecast revenues, expenditures, and profit.
Estimating earning potential
Sales professionals can also benefit by understanding their targeted earnings. While salary is a key factor in any position, sales representatives often expect to make a large portion of their income from commissions. By calculating these earnings, a salesperson can gain a realistic idea of their expected earning potential.
Defining a realistic commission rate
Calculating the sales staff's potential earnings can help create a more harmonious relationship between the sales representatives and the company's management. By defining the targeted earnings figure that's realistic and achievable, sales managers can determine an appropriate commission rate or percentage for each sales representative. This rate may depend on the base salary of each professional.
How to calculate on-target earnings
It's important to know how to calculate on-target earnings to understand your potential earnings as a sales professional or what a company can expect to pay its sales staff. These calculations depend on the ratio of the base salary of a sales representative to their projected commissions. Here are some steps you can follow to calculate these earnings:
1. Determine your pay mix
The pay mix is the ratio of the base salary of a salesperson to their projected commissions. For example, if you're a sales representative and your pay mix is 60/40, your base salary comprises 60% of the total mix, and your commissions cover 40%. Figuring out your pay mix can help you decide on a good base salary to commission ratio.
2. Calculate your base salary
The next step is to work out the base salary for the position. If you're considering accepting an offer for a position, it's crucial to negotiate a competitive base salary. This is especially true if that salary comprises a majority percentage of the pay mix.
Because the base pay is what the company guarantees you as a salary, it's often wise to negotiate a high percentage of base salary in your pay mix. If you're an experienced sales professional and a company offers a high commission rate, you may prefer to discuss a lower base salary and higher commission rate. This type of pay mix might result in higher earnings overall if you meet or exceed sales targets.
3. Add commissions
Last, you can add your commissions to your base pay to determine your on-target earnings. To predict your projected commissions and determine a realistic quota, it might be helpful to evaluate your performance in comparison to other salespeople on your team. You may also wish to evaluate the company's annual sales data to learn the length of the sales cycle and identify the company's busiest sales season.
Examples of OTE in sales
It can be beneficial to look at some examples to understand how on-target earnings works and how it may be helpful. This can give you an idea of some real-world applications for this calculation. Here are some examples of such earnings in sales:
Here's an example of on-target earnings with a 20% commission rate:
A sales representative position has an on-target earnings of $40,000. That figure is the sum of the base salary and the overall projected commissions. In this role, the sales representative earns a base salary of $28,000 with a monthly quota of $5,000 in sales and a 20% commission on every sale they make. If they achieve 100% of their quota, they can earn $1,000 in commissions every month. If they reach their quota every month, they earn $12,000 in commissions annually. The total amount for the base salary plus commission payments is $40,000 yearly.
Here's an example of on-target earnings with a 10% commission rate:
A sales professional has an on-target earnings of $70,000. They earn a base salary of $46,000 and have a monthly quota of $20,000 in sales. This company administers a 10% commission to each sales representative on every sale they make. If the salesperson achieves their quota in a given month, they earn $2,000 in commissions. If they meet their quota every month, they earn $24,000 in commissions for the year. Adding this $24,000 to the base salary of $46,000 equals a total on-target earnings of $70,000.
Tips for evaluating on-target earnings
Knowing how to calculate, assess, and evaluate potential earnings is important for sales professionals and those considering applying to or accepting a sales position. Here are some ways to evaluate the on-target earnings for a role:
Understanding how on-target earnings apply to the role
It's often beneficial to ask the hiring manager or interviewer how OTE works at the company. For example, some companies like to provide a conservative estimate so their salespeople have a better understanding of what they can make. This also gives the company a more accurate revenue and expenditures forecast.
Other companies like to use on-target earnings as a motivator. Such companies are happy to reward their most productive sales representatives considerably more than those who don't meet sales quotas. Asking about the company's philosophy on these earnings can give you a clearer idea of its approach toward targeted earnings and its workplace culture.
Request to see the current sales team's performance analysis
If you can review the existing sales team's performance, you might project your success at the company more accurately. You can ask the hiring manager or interviewer how many sales representatives are above, below, and at the median on-target earnings. This can teach you how realistic the company's targeted earnings are. You may also want to ask how often new hires meet their targeted earnings and how long it takes for a typical new sales representative to begin regularly achieving theirs.
Understand the difference between ramp time and fully ramped on-target earnings
Ramp time is the period a company allows for achieving sales goals. Fully ramped earnings are the targeted earnings after a sales representative achieves all their assigned quotas. For example, if a company's sales cycle is six months, it might be reasonable to expect a small number of completed sales transactions.
On-target earnings often operate in a way that allows sales representatives to achieve their goals during their second cycle, making up for a slower first cycle. Hiring managers often quote on-target earnings based on fully ramped performance. You can separate the two parameters to assess your yearly performance accurately. It may be beneficial to ask the hiring manager or another employee about the ramp time in the company.
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