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On Target Earnings (OTE)

Definition: On Target Earnings (OTE) is a term used in job offers, primarily in sales, to describe the total expected compensation a salesperson can earn when they achieve all their performance-related goals or quotas.

OTE consists of a combination of a base salary and the potential commission or bonuses one could earn.

For example, if a salesperson has a base salary of $50,000 and can earn up to $25,000 in commission when meeting or exceeding their sales targets, their OTE would be $75,000.

It’s crucial to note that OTE does not guarantee a particular income level, as the actual earnings may vary based on performance. It simply represents the potential total earnings if all targets are met.

Components of OTE

  1. Base Salary: This is the fixed component of the pay package that is guaranteed to the employee, irrespective of their performance.
  2. Variable Pay: This portion of the compensation is contingent upon meeting specific performance criteria, which could include sales targets, customer acquisition goals, etc. It’s usually expressed as a commission or a bonus.

Advantages of OTE

  1. Motivation: Employees are incentivized to work towards achieving and possibly exceeding targets to increase their earnings.
  2. Attraction of Talent: The potential to earn substantial commissions can attract top talent in the industry.
  3. Alignment of Goals: It helps align employees’ personal financial goals with the company’s business objectives.

Challenges with OTE

  1. Income Fluctuations: Employees may face income fluctuations based on their performance, which can sometimes lead to financial instability.
  2. Increased Pressure: There can be increased pressure on employees to meet their targets, possibly leading to stress and burnout.
  3. Complex Compensation Structures: The OTE compensation structures can sometimes be complex, requiring clear communication and understanding between the employer and employee to avoid disputes.

FAQ

What is a good OTE percentage?

A “good” OTE percentage can vary greatly depending on the industry, the specific role, and the organization’s compensation strategy.

Generally, in sales roles, a common OTE structure might involve a 50:50 or 60:40 ratio, where 50-60% is the base salary, and the remaining 40-50% is the variable component, based on achieving targets.

In more aggressive sales environments, the variable component could be even higher, with structures like 70:30 or 80:20, where the majority of the earning potential is tied to performance. It’s important to balance the structure to motivate employees while also ensuring a stable income base.

What does 200k OTE mean?

A 200k OTE means that the total On Target Earnings for a position is 200,000 USD per annum. This figure is the sum of the base salary and the potential earnings from commissions or bonuses if performance targets or quotas are met.

For example, if the structure is a 50:50 ratio, it could mean a base salary of 100,000 USD with the potential to earn another 100,000 USD in commissions or bonuses, totaling 200,000 USD if targets are fully met.

How is OTE structured in a salary package?

OTE is structured as a combination of a base salary (fixed) and variable pay (commissions, bonuses), which is contingent on achieving certain performance targets or goals. The fixed and variable components ratio can vary across companies and industries.

Is the variable component of OTE guaranteed?

No, the variable component of OTE is not guaranteed. It is dependent on the employee meeting or exceeding specified performance targets. If the targets are unmet, the variable component may be reduced or not paid.

Can an employee earn more than the indicated OTE?

Yes, employees can potentially earn more than the indicated OTE, especially in roles with uncapped commissions. If they exceed their performance targets, they might earn commissions higher than what is indicated in the OTE, resulting in higher total earnings.

How often are OTE payments made?

The frequency of OTE payments can vary from company to company. While the base salary is typically paid monthly, the variable component might be paid quarterly or annually, based on the performance assessment period defined by the employer.

Are there any legal protections regarding OTE?

Depending on the jurisdiction, there might be legal protections governing OTE to ensure that the variable compensation components are not used to deny employees fair pay. Employers must comply with labor laws governing wage and hour regulations.

How can employers communicate OTE to prospective employees?

Employers should clearly communicate the structure of OTE in the job offer, specifying the base salary, the potential bonuses or commissions, and the performance targets that need to be achieved to earn the variable component. It promotes transparency and prevents misunderstandings later.

Is OTE beneficial for employers?

Yes, OTE can be beneficial for employers as it creates a performance-driven work culture, aligns employees’ goals with company objectives, and can help in attracting top talent in the industry.