If you are considering the best way to structure or re-structure your commission plan, then OTE is an essential place to start. Having a defined OTE ensures your Sales team have transparency of the commission plan and are motivated to hit sales targets. It also ensures your business can effectively plan and manage its budget.
OTE (On-target earnings or on-track earnings) refers to an employee's total pay structure, which can be made up of their basic salary as well as an additional variable component like commissions and or bonuses.
So, if your sales rep’s annual base salary is $60,000 and their on-target commission is $40,000, their OTE will be $100,000, provided they hit all sales goals. If they don't reach all their goals, they would still receive the base salary plus whatever portion of the commission they did earn.
These same amounts can also be discussed as a ratio of the base + variable, this is often called a pay mix. and it's simply the % make up of the base salary figure and the variable component that ads up to 100%. So in the above example this pay mix looks like this 60/40 and is an easy way to discuss the compensation plans with your staff.
OTE helps a company to determine the fully-loaded cost for a sales rep, but it's also a really good bellwether around the certainty vs risk that an employee takes on joining your business. Having this certainty and predictability of the costs of a fully-loaded sales team assists with budget forecasting and target setting.
Here are 3 more reasons to use OTE as a sales compensation model:
Transparency: For both the company and the sales rep, it is an easy way to understand causality between hitting targets and the payout or cost to business.
Motivation: Having a clear goal set out right from the beginning allows a salesperson to know where they are heading and feel motivated that they can hit those targets.
Target setting: In David Skok’s analysis of sales comp, he discusses the Unit Economics of a Salesperson and concludes that 'when your sales process starts to work well, quotas should be at least 5x the OTE (On Target Earnings), which includes base salary + bonus. Ideally quotas are 6-8X OTE to be considered high performing. These are guidelines we’ve observed based on empirical data from a number of successful companies we’ve worked with. But, this is just a guideline. The complexity and difficulty of your sale will determine the ratio your business can support.'
The higher the base, the greater the certainty or security this employee will have around their compensation. On the flip-side the businesses will also want to highly motivate sales staff to achieve their targets - in this case a lower pay mix of 50/50 may drive motivation and the desired behaviour.
To help calculate OTE, you first determine the pay mix (the ratio of a base salary to commissions).
There are several factors that influence the way a company will decide on pay mix ratio:
In short, yes. OTE is for budget planning so a business understands what the fully-loaded costs are for each member. However, many companies will have a commission structure that rewards a Sales Rep for exceeding their quota. If a business implements accelerators that reward high achievers, you can expect a small number of them to earn more than their OTE. Without these accelerators, Harvard Business Review research suggests 'that caps on commissions, which most large companies use, decrease high-performing reps’ motivation and effort.'
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