Boost Sales with On-Target Earnings: A Guide for Businesses
What is OTE?
On-Target Earnings (OTE) represent the total compensation a salesperson can expect to earn in a year upon meeting all their sales targets. These targets might include monthly sales quotas, such as securing £25,000 in new business each month, or specific performance metrics like closing a set number of deals per quarter. OTE is particularly prevalent in retail and eCommerce settings where sales leaders actively drive revenue.
The OTE structure typically combines a base salary with a variable commission, offering a predictable income floor alongside the potential for higher earnings based on performance. This approach contrasts with purely commission-based models, providing a more stable and motivating compensation plan for sales teams.
How to Calculate OTE
Calculating OTE is straightforward once you understand your base pay and commission structure. Unlike a flat salary or commission-only model, OTE combines guaranteed base pay with performance-based earnings, usually through commissions or bonuses. OTE typically excludes one-time bonuses, overtime pay, or benefits packages, focusing strictly on the base salary plus commission earned at 100% target achievement.
For example, consider an account executive selling office furniture to coworking spaces. Their role may have the following key numbers:
- Base salary: £60,000 per year
- Monthly quota: £50,000 in sales
- Sales commissions: 10% of sales
To calculate their OTE, add their annual base salary to the commission they would earn if they hit 100% of their quota:
OTE = Annual base salary + Annual commission at 100% quota
Scenario 1: Meeting Quota (100% of Monthly Target)
- Monthly sales: £50,000
- Monthly commission: £50,000 × 0.1 = £5,000
- Annual commission: £5,000 × 12 = £60,000
- Total earnings: £60,000 base + £60,000 commission = £120,000
Scenario 2: Below Quota (70% of Monthly Target)
- Monthly sales: £50,000 × 0.7 = £35,000
- Monthly commission: £35,000 × 0.1 = £3,500
- Annual commission: £3,500 × 12 = £42,000
- Total earnings: £60,000 base + £42,000 commission = £102,000
Sales professionals earn commission on every sale, even if they don’t hit their full quota. OTE represents what they would earn if they achieve 100% of their targets. Some companies also offer additional incentives or higher commission rates for sales exceeding quotas to keep top performers motivated.
Benefits of OTE Structure
Creates Direct Incentives
A pure base salary might not motivate sales teams to go the extra mile, as their earnings remain unchanged regardless of performance. In contrast, an OTE model links compensation directly to performance, encouraging sales associates to exceed their targets. For instance, an electronics store associate aware that their sales impact their OTE is more likely to upsell additional products or warranties, driving higher revenue and fostering a high-performance culture.
Attracts and Keeps Top Performers
Top sales representatives seek roles where their skills can translate into higher earnings. A position advertising a fully ramped OTE of £100,000 is more appealing than one offering a £70,000 fixed salary. High performers are likely to stay longer when they clearly understand the performance level required to achieve their target compensation. Consistently hitting targets and achieving full OTE reduces turnover, saving time and resources on recruitment and training.
Simplifies Compensation Planning
While a straightforward annual base salary simplifies budgeting, it doesn’t incentivize sales performance. Conversely, pure commission structures can lead to unpredictable payroll swings. A defined pay mix with OTE creates more predictable compensation costs, allowing finance teams to allocate resources effectively and plan for maximum commission payouts based on each person’s OTE.
Challenges of OTE Structure
While OTE can be a powerful motivator, improper implementation can backfire. Setting unrealistic quotas, promising hefty commissions on unattainable targets, can demotivate staff and increase turnover. For example, a retail store setting an OTE of £100,000 based on selling £1 million in luxury goods annually might discourage staff if their top sales associate never exceeds £700,000. To avoid this, find the sweet spot where targets stretch your team while remaining achievable based on historical performance data, industry averages, and market factors.
OTE FAQ
What is a good OTE?
A good OTE varies by industry, role, location, and company size. When setting OTE, consider what successful sales staff currently earn and what comparable roles offer in your market. The goal is to be competitive enough to attract talent while ensuring targets remain achievable.
How do I calculate my OTE?
Calculating your OTE is simple: Add your base salary to the commission you’d earn by hitting all your targets. For example, with a £70,000 base salary and £30,000 in commission from meeting sales goals, your OTE is £100,000.
Should I ask about OTE in a job interview?
Yes, when interviewing for a sales job, ask detailed questions about the compensation structure. Inquire about the percentage of the team currently hitting targets and the typical ramp-up time for new hires. This helps you assess whether the advertised OTE is realistic or overly optimistic.
In conclusion, implementing an OTE compensation model can significantly boost sales performance and employee retention. By aligning financial incentives with sales targets, businesses can motivate their teams to excel, attract top talent, and simplify compensation planning. However, it’s crucial to set realistic targets and regularly review performance data to ensure the OTE structure remains effective and motivating.
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