Imagine this. It’s nearing the end of Q4, and your team has met their sales quotas — maybe even exceeded them. Each one of your reps has consistently demonstrated product knowledge in meetings and built strong relationships with clients, leading 100% of your customer base to renew their contracts. By all accounts, your team’s performance meets (even exceeds) your expectations. This means you can deliver good news: They can expect to receive OTE, or on-target earnings, this year. Hurray!

But wait. What does that mean? And how do you calculate it? Read on to learn how to develop a competitive OTE package that attracts and retains top talent so you can deliver good news this year.

What you’ll learn:

• What is OTE in sales?
• How does OTE work?
• Benefits of the OTE sales model
• How to calculate OTE
• Examples of different pay mix structures in OTE
• 4 examples of positions with OTE compensation
• OTE FAQs

What is OTE in sales?

OTE (on-target earnings) is what a salesperson can expect to earn in a year if they meet all of the requirements, objectives, and target metrics for their position. It’s a projected salary based on a combination of base salary and commissions and is not guaranteed.

Depending on the proportion of base salary to commissions, OTE can fluctuate quite a bit. If your team is paid based largely on commissions, OTE will change depending on quota and likely quota attainment. If base salary is a large piece of the pie, OTE won’t throw things off that much.

A well-designed sales compensation plan — with OTE as an earnings guide — can keep your team excited and motivated. Let’s dive into how it works and how you can use it on your team for the greatest impact.

(Back to top)

How does OTE work?

Typically, OTE is a split between base salary and commissions. For example, let’s say a candidate is applying for a sales rep role with an OTE of $250,000. During the interview, they learn that the base salary is $150,000, but if they hit quota, they’ll earn the other $100,000 in commission. And if they exceed the quota, they could make even more. OTE gives them a sense of what kind of earnings to expect in the role. OTE calculation (more on that below) varies, but many companies set parameters based on position and tenure.

(Back to top)

Benefits of the OTE sales model

The primary benefit of OTE is transparency: Reps know what to expect and leaders know what to plan for.

There’s also a talent attraction and retention element to OTE. Talented salespeople will look for opportunities to work for companies that offer attractive OTE potential.

Lastly, OTE helps your accounting department forecast sales commissions accurately. With a simplified calculation process, they can set a benchmark for what salespeople can expect to earn and what the company can expect to pay out.

(Back to top)

How to calculate OTE

While there’s some research involved in determining OTE numbers, the actual calculations are straightforward. Here are the steps to take to determine your team’s OTE:

1. Determine your team’s base pay: This will vary depending on your industry, the kind of products or services you sell, and the experience of each sales rep. As a jumping-off point, find out what your competitors are offering but be sure to factor in industry standards.

2. Establish sales quotas: Once you know your base pay, you can set the sales quota reps must meet to be eligible for incentives, including commissions. There is not a fixed formula for this. Instead, you want to find the right balance between your revenue goals and your rep’s selling capacity.

3. Set commissions: The reason for including commissions in the OTE is to increase the potential earnings, motivating reps to achieve their sales goals. The time required to complete these goals (and their difficulty) should help you determine the commission component of OTE.

4. Add it up: When you’ve decided on a base salary and commission, add these two figures together to get the OTE. Here’s the basic formula: Annual base salary + annual commission earned when 100% of quota is hit = On-target earnings

For example, if a rep’s base salary is $80,000 and their on-target commissions based on quota are $5,000, their OTE would be $85,000, assuming they hit 100% of their quota.

(Back to top)

Examples of different pay mix structures in OTE

A very general rule of thumb for the ratio of OTE plans is 65% base salary and 35% commission, but pay mixes can be all over the map. Here are some examples, starting with straight commission:

• 0/100: This pay mix — which is based on 100% commissions and no base salary — is for independent, highly motivated salespeople. High-end department stores may offer this type of OTE plan, with commissions ranging from 5% to 10% on every product sold.
• 50/50: When you’re not sure where to start, this pay mix encourages sales reps to meet and exceed their quotas while providing a base salary safety net. With this baseline, you can follow the performance of your sales team and adjust the pay mix as necessary.
• 70/30: A bit less aggressive than more commission-forward pay mixes, this ratio is good for reps who sell products or services that are complex and require lengthy explanations or demonstrations, such as enterprise software sales. This pay mix also works for industries with longer sales cycles, like telecommunications and financial services.
• 90/10: Offering more security with a majority base salary, this pay mix works for employees whose main responsibilities lie outside of sales. It offers just enough incentive for support staff — like those in finance or service — to go that extra mile and close deals when possible.

(Back to top)

4 examples of positions with OTE compensation

On average, sales reps in the United States earn an OTE of $80,000 per year with a pay mix of 69/31, translating to about $55,000 in base pay and $25,000 in variable pay, according to RepVue. Here are some examples of OTE compensation for various roles:

Sales Development Representative (SDR)

SDRs connect sales reps with leads that seem like good candidates for a sale. They’re responsible for cold calling potential clients, sales prospecting, and setting up initial meetings to make connections.

Here’s what an OTE would look like for a k

Sales Development Representative (SDR)

SDRs connect sales reps with leads and other business opportunities. They’re responsible for cold-calling potential clients, sales prospecting, and setting up meetings.

Here’s what an OTE would look like for a 70/30 pay mix (fairly standard for SDRs):

Base salary: $57,000 + Commission: $25,000+ (uncapped) = OTE: $82,000+

Account Executive

Responsible for building ongoing relationships with clients, account executives work in many industries, including tech, healthcare, and financial services.

Here’s what a 50/50 pay mix may look like for an account executive earning 10% commission with a monthly quota of $75,000:

Base salary: $90,000 + Commission: $90,000 = OTE: $180,000

Field Sales Representative

Field sales representatives work outside the office, building customer relationships and following up on leads in person. For an entry-level position like this, a typical field sales rep may have a pay mix of 70/30 with an uncapped commission.

Here’s how that might break down:

Base salary: $48,000 + Commission: $20,000 = OTE: $68,000

Sales Director

Sales directors are responsible for managing the entire sales cycle, including evaluation, proposal, negotiation, and closing.

Typically these roles are paid using a 70/30 pay mix with a high base salary, but some also have uncapped commissions. Here’s a look at how that might play out:

Base salary: $150,000 + Commission: $64,000+ = OTE: $214,000+

(Back to top)

On-target earnings FAQs

OTEs can be confusing. Here are answers to common questions teams ask about OTEs and compensation plans:

What are average rep earnings?

Average rep earnings are what a typical sales rep earns during a given period. Some employers may offer examples of the salaries of their highest earners to potential candidates as a hiring tactic, which is why you should always ask what the average rep earns for more transparency.

What is commission?

A commission, or in this case a sales commission, is a sum of money paid to an employee upon meeting a goal, usually selling a certain amount of goods or services. Typically, it’s a percentage of total sales. For example, a person who sells clothing in a department store may earn a 5% commission on the items they sell.

What is a draw and how does it affect OTE?

A draw is an advance a company pays a sales rep against their anticipated earned commissions. Businesses will often offer a non-recoverable draw or guarantee for a few months to ease reps into their role. This is also known as a ramp-up.

An example of a draw against commission would be a salesperson who earns $1,000 per week. If they earn $2,000 in commissions during that pay period, they will earn $3,000 total that week. But if they have a slow week and only earn $250 in commissions, they will earn $1,250 for that pay period.

Ultimately, a draw does not affect OTE — it is subtracted from future commissions.

What is ramp time?

Ramp time is the time needed for a sales rep to consistently hit their sales targets. Many companies offer new sales reps an initial period to ease into the role where they aren’t expected to sell anything. This period can vary, but typically it’s one sales cycle or three months.

What is fully ramped OTE?

During the ramp time, a new sales rep will spend time learning about the products or services they’re selling, understanding the company’s sales process and building a pipeline. Since the rep is not making sales during this time, they’re not earning a commission. Instead, they’re typically earning a draw. Once a sales rep is fully ramped, they are making sales independently and achieving their assigned sales quota.

What are on-target commissions (OTC)?

On-target commissions (OTC) are the compensation sales reps can earn if they hit 100% of their quota. You need to know your OTC to calculate your OTE (base salary plus OTC).

What is variable compensation?

Variable compensation is pay that’s added to an employee’s base salary, dependent on their sales activities, including deals closed. Commissions, or pay earned based on sales, bonuses, fixed or lump sum rewards for hitting goals or high performance, and any other compensation a sales rep earns for meeting or exceeding sales goals, are forms of variable compensation.

Attract strong candidates with OTE

Offering a competitive OTE compensation plan can attract strong candidates to your sales team — and keep top talent on board. When reps know exactly how much they’ll earn if they hit their sales quotas, they’ll be incentivized to work hard to reach those goals. That benefits both you and your business.

(Back to top)