How to Calculate OTE
The formula used to calculate OTE is relatively simple. You simply add annual base salary to the amount of commission a rep can expect to earn at 100% quota attainment.
How to Determine On Target Earnings (OTE)
When determining on-target earnings for a role, there are several factors you must take into consideration.
- The company’s goals and revenue targets. Consider the size and depth of your sales organization. Across all roles, on-target earnings should be enough to cover your organization’s revenue targets.
- Industry benchmarks. Consider what other companies in your industry pay in terms of on-target earnings. If you offer far below the industry average, you will find it difficult to attract and retain sales talent.
- Territory, account coverage, and business segment. The size of a rep’s sales territory and the number of accounts they cover should influence OTE. If the territory is large, if the deals are significantly larger, or the rep owns a large number of accounts, it may make sense to set OTE higher.
- Employee tenure and experience. On-target earnings, like any salary, should be commensurate with experience and tenure. For example, newer or ramping reps might start with a lower OTE than a rep who has years of experience.
Average On Target Earnings (OTE) by Job Function
On-target earnings will vary across compensation plans, industries, job functions, location, experience and more. The numbers we reference below are meant to be used as broad benchmarks and are all sourced from builtin.com.
- Average annual on-target earnings for an Account Executive in the US is $185,580 typically made up of 50% base pay and 50% commission pay.
- Average annual on-target earnings for an Account Manager in the US is $115,163 typically made up of 70% base salary and 30% variable pay
- Average annual on-target earnings for a Business Development Manager in the US is $148,570 made up of 70% base and 30% incentive compensation
- Average annual on-target earnings for a Business Development Representative– or BDR– in the US is $81,425 made up of 70% base salary and 30% commission pay.
- Average annual on-target earnings for an Inside Sales Manager in the US is $127,457 made up of 65% base salary and 35% incentive compensation.
- Average annual on-target earnings for a Sales Development Representative in the US is $81,610 typically made up of 70% base salary and 30% commission.
- Average annual on-target earnings for a Sales Director in the US is $251,287 made up of 60% base salary and 40% variable compensation.
- Average annual on-target earnings for a Sales Engineer in the US is $166,752 typically made up of 75% base salary and 25% commission.
- Average annual on-target earnings for a Sales Manager in the US is $159,576 typically made up of 65% base salary and 35% commission pay.
Remember, your own sales compensation plans should be based on more factors than benchmarks alone, but these will give you a rough idea of expected total pay for different sales roles.
Why is OTE important?
Although most people who work in sales will automatically assume some part of their annual salary will come from commission or performance based pay, the benefits of clearly defining your OTE are both strategic and necessary.
For one, a clearly defined pay structure and OTE help employees understand the direct link between their performance and their compensation. This can be a powerful motivator for sales professionals, who often thrive on competition and a desire to achieve more.
OTE is also important because it can be used as a tool to help companies attract and retain top sales talent. In a competitive job market, companies that offer attractive OTE packages are more likely to win over talented candidates who are motivated by financial incentives.
And arguably the most important benefit of having a clearly defined OTE is that it’s a critical component of compensation strategy and sales planning. Without established target earnings, it’s impossible to understand how sales reps and teams will contribute to overall revenue goals.
If you’re doing the necessary leg work to set your organization up for success, you’re likely already used to calculating and understanding OTE.
Should OTE Be a Realistic Goal or Stretch Target
There is some debate among sales professionals about how realistic OTE should be. Some argue that setting an overly ambitious OTE can lead to burnout and lack of motivation. Think about it this way, if employees feel like their goals are impossible to achieve or that they have no chance of hitting their targets, it will be incredibly difficult to motivate and incentivize reps.
Others argue that a slightly higher OTE can be a powerful motivator for high-performing sales professionals, who may be more likely to stay engaged and motivated if they feel that there is always more to achieve. Ultimately, the best approach may depend on the specific company culture, industry, and employee base.
One potential compromise is to set OTE targets that are challenging but achievable, with room for additional incentives or accelerators for exceptional performance. This approach can strike a balance between motivating employees and avoiding demotivation or burnout.
At Spiff, we believe that OTE should always be realistic and achievable. Incentivize your sales representatives with other elements of your comp plan. Don’t set sales quotas too high just to see how far you can push your sales team and then pretend those numbers are realistic targets. Doing so will set you and your team up for failure and will create an environment of distrust in your sales organization.
Benefits of OTE in Sales
There are several benefits to using OTE to determine salary structure in sales roles.
First, it can motivate sales professionals to work harder and achieve more by setting the expectation for “normal” performance. By tying compensation directly to performance, and providing a benchmark like OTE, sales professionals understand what’s expected of them and have a target to work towards.
Second, it can help companies attract and retain top sales talent. In a competitive job market, companies that offer attractive OTE packages are more likely to win over talented candidates who are motivated by financial incentives.
Third, it can help companies achieve their revenue goals. Using data to calculate OTE and aligning OTE to overarching revenue targets, is the only way to ensure you have the resources and sales reps you need to achieve your goals as an organization.
Examples of OTE in Sales
Here are some real life examples of how OTE is used in job descriptions– all pulled from active listings on LinkedIn:
Example 1: Commercial Account Executive
OTE: $90,000 to $100,000 with a 50/50 split
Example 2: Enterprise Account Executive
OTE: $200,000 to $250,000 with a 50/50 split
Example 3: Business Development Executive
OTE: $75,000 to $100,000 with a tiered commission structure
As previously discussed, OTE will vary for any given role based on a number of factors including longer sales cycles, commission percentage, industry, product pricing, and more. These examples are just meant to illustrate the variety of ways OTE can be expressed in a job listing.
If you’re preparing your own job descriptions, remember to include OTE, commission rate, and employee base salary to paint the most accurate picture.
How to Audit OTE
Auditing OTE can help you ensure that your sales pay is fair and adequate. An OTE audit may involve reviewing commission structures, sales targets, and performance metrics periodically to ensure that they are aligned with the company’s overall revenue goals and are motivating sales professionals to perform at their best.
It may also involve reviewing the OTE packages of individual employees to ensure that they are being compensated fairly based on their performance and the company’s overall compensation structure.