The Point: The most frequently asked inquiries that we receive at The Zeroing Agency — Tip of the Spear Ventures’ consulting side of the firm — is regarding OTE or on-target earnings. It’s clear why, because if you show us a salespersons’s compensation plan, we’ll show you what it is that they are going to do (and what will get done as a result!) On-target earnings allow companies to better plan their budgets. Additionally it helps sales reps to know the amount they’ll be able to earn should they reach their sales goals. This in turn increases the motivation of both sales leaders and their sales representatives to help boost their efficiency, revenue and increase growth to make the most of OTE. However, there are many important factors that companies must be aware of when implementing OTE within their incentive compensation pay plans. If they do implement the OTE methodology improperly it could result in lower morale, low performance, and eventually the loss of revenue for the business. What factors should you take into consideration when you are using OTE? In this article, we’ll discuss the OTE considerations in greater detail and guide you through the process of creating an effective compensation plan with it… Enjoy!
What is OTE?
In simple phrases, OTE or on-target earnings is the total of a sales rep’s annual base salary as well as their on-target commission. Then, OTC or on-target commission is essentially the commission sales reps receive if they achieve their sales targets.
In simple words, OTE is the total amount of compensation that sales professionals are expected to receive if they meet the 100% mark of goals or the quotas. The majority of the time, this quota is going to be an annual number, instead of the weekly or monthly numbers.
That’s an enormous amount of information to decode. In order to understand the concept more clearly let’s examine an illustration. Suppose you post an advertisement in order to locate an employee for sales. You plan to give the employee a starting salary of $100,000, provided you can prove that they meet their annual sales target. The job description you include in your advertisement will typically mention the compensation for the position by the number “$100,000 OTE”.
That’s why that, if a salesperson is interviewed and is hired, they should realistically expect to make $100,000 annually. The compensation will be contingent upon them meeting 100 percent of their sales targets for the year. Remember, the on-target earnings (OTE) figure of $100,000 is only an approximate figure. It could be a bit off, but it could be higher or lower depending on their performance to goals.
Benefits of using On-Target Sales Earnings in Compensation
There are numerous advantages of using on-target earnings in your compensation program both for you as well as those who sell:
- Forecasting Sales Commissions – If you are able to calculate on-target earnings you’ll be better placed to accurately forecast sales commissions. This will make it simpler to plan and budget your financials.
- Estimating Earning Potential – Your sales reps using OTE allows them to see the exact amount they’ll be earning should they be able to meet their sales goals. Another benefit is that when you have an OTE is competitive sales reps will be motivated to reach their quotas.
- The Process of Determining the Realistic Commission Rate – If you choose an OTE number that is both realistic and competitive and realistic, you’ll be able decide on a commission rate that is suitable. That is you’ll be in a position to decide on the appropriate base amount for the sales reps you employ.
Employing OTE as a Part of Your Incentive-based Compensation Plan
We’ve now covered what on-target earnings (OTE) are and the benefits it offers. Now it’s time to consider ways to utilize OTE to enhance your compensation strategy. There are three key aspects to take into consideration when you plan to employ this type of incentive structure for compensation:
- Set the Compensation for OTE. As mentioned previously, OTE is the total of sales rep’s annual base salary as well as the commission on-target, OTE is the total earnings that sales reps will be capable of earning. This means that it is essential to get this figure correct if you wish to retain and attract the top talent.
- Calculating the Pay Mix. This is simply the ratio of base salary to the on-target commission. It reveals sales reps the level of risk that comes in reaching their OTE. The higher the ratio, the greater the risk.
- Quotas and Setting Sales Goals. These sales targets are the objectives which sales reps must achieve in order to earn the entire OTE as compensation. In this case, it is essential that the goals you set are accountable and achievable, or sales reps may lower them in line with the goals they receive.
Set the Compensation for OTE
In order to retain and attract the top-tier talent, it’s essential you get your OTE in order. The first thing you should be aware of is what your market-based compensation is for your particular sector. Sales reps have to feel as if they’re receiving an equivalent amount to employees of other companies. If they’re not and your OTE isn’t in line with other businesses in your industry, it will be difficult to hold your sales reps’ good qualities and turnover will result.
Be aware, there aren’t any strict and fast rules for calculating OTE. Therefore, it can vary depending on the industry you’re operating in, the kind of products you’re selling, the complexity of the sale, and the amount of expertise you’d like your sales reps to possess. In this case, a site like Glassdoor is a great resource. It can provide information about what market-based compensation plan for your job and the industry you work in looks like.
Another factor to take into consideration in determining the OTE must be the fact that your OTE needs to be similar to other sales and other non-sales positions within your business. The most important thing is to make sure that you provide similar pay rates for the same amount impact a particular job position can have on your business and its profit.
This means that you must be wary of overpaying or underpaying for the performance of your sales team. If you overpay you will incur costs for customer acquisition that will be excessively high. Likewise, underpaying can result in poor results, low morale, and lower retention rates for employees. In the end it’s all about finding the right balance.
Calculating the Pay Mix
As previously mentioned the Pay Mix is the ratio of the base salary to commission paid. The ratio determines what actual earnings will be for particular roles. Our experience suggests that OTE plans average 65% base salary and 35% commission. However, the Pay Mix ratio will vary based on the particular market or the expertise of the sales representative.
But the most important aspect to take into account when determining the Pay Mix ratio is the extent to which a sales representative is able to influence sales that, in turn alter the ratio. For instance, when a sales representative generally has no control over the result of a transaction, their base pay should comprise an increased portion in the OTE. If, however, the sales rep is able to significantly influence sales and influence the outcome of a sale, commissions should constitute more of the OTE.
Quotas and Setting Sales Goals
From a sales rep’s standpoint, one of the primary aspects they should consider when they’re evaluating their compensation plans are the sales targets, or the goal. In order to achieve the anticipated total salary (OTE) and to earn it, they must meet their sales targets. This means that sales targets must be achievable. However, if it’s not so, the sales representatives are likely to, as previously mentioned, simply reduce their sales. That is, they’ll calculate their pay by calculating their targets — More proof for the previously mentioned “show us a salespersons’s compensation plan, we’ll show you what it is that they are going to do (and what will get done as a result!)”
Based on our experiences, sales quotas must be achievable for 60 – 70 percent of your sales representatives. This gives the majority of them the chance for them to achieve their OTE. However, those who aren’t will realize the possibility of it. They’ll also be driven to be more efficient — Think “stretch” goals here!
However when your quotas and/or goals are not achievable in less than 60 percent, it’ll result in the opposite. The result is that morale overall will decline. If the percentage is higher than 70 percent, you’ll probably overpay for the performance.
Remember, when setting the OTE and setting the Pay Mix various factors can affect the quotas you set. In this case, the majority of companies begin with their historical performance, and then adjust the quotas according to the market conditions.
But, that means for more recent products and markets that are less developed this could make it more difficult to set limits. Considering the COVID-19 pandemic, this is an extremely important point. The most effective solution is to establish quarterly quotas , and then adjust them over the course of the year as information becomes available.
The use of on-target earnings (OTE) in your compensation plans is a great option to improve the performance of your sales reps and encourage them to generate more sales. But, it is important to be careful when setting the OTE as well as the pay structure, and establish sales limits. Once you’ve finished this, you must determine the salary for each employee. This is where we can help. We can streamline the process of commissions for sales, which means you’ll be able to concentrate on developing your company.
We love helping businesses lessen the burden of the process of calculating sales commissions. If you’d like more information more about the concept of OTE and how we can assist you in improving your sales, we’d love to talk. Contact Us today to learn more.