What is OTE?

On-target earnings (OTE), also known as on-track earnings, is the sum of an employee’s base salary and target variable pay if they meet their performance targets. It’s part of an employee’s broader total compensation package. While commonly used to motivate sales teams to hit individual quotas, employers also leverage OTE packages to incentivize executives and managers to reach broader business milestones.

Providing financial incentives demonstrates that employees are directly rewarded for driving success. To implement this effectively, clearly define the performance metrics, such as quarterly sales targets or operational milestones, and deadlines during the onboarding process. If the employee reaches this goal, they’ll receive additional compensation for successfully completing the job.

OTEs can come as lump-sum payments, commission percentages or a combination of both. Deciding how much on-target earnings to give varies based on the competitiveness of your industry, your company’s gross revenue and the employee’s experience.

Benefits of on-target earnings

Implementing a structured OTE framework provides clear advantages for both budget forecasting and talent retention. Some common benefits of OTE include:

• Team member motivation: Defining clear performance targets and transparent payouts aligns individual efforts with organizational objectives. This clarity eliminates ambiguity, keeping employees focused on high-impact tasks that directly influence company growth.
• Increased productivity: Financial milestones can shorten production cycles and increase output quality. When variable pay is directly tied to output, team members naturally optimize their workflows and prioritize deliverables that actively move the company toward its revenue benchmarks.
• Employee engagement: When compensation is tied to measurable company goals, employees have a personal stake in the business’s success. This alignment can encourage greater accountability, stronger performance and a shared commitment to company results.

What is included in OTE?

On-target earnings only include fixed base pay and performance-related variable pay. For sales and executives, an OTE package typically combines:

• Base salary: Any fixed, guaranteed compensation paid to the employee regardless of performance as set out in their contract of employment.
• Variable pay: Any extra compensation they earn by meeting performance targets. For sales employees, this might be structured as a sales commission. For executives, this is often structured as a performance bonus tied to company revenue goals.

You don’t usually include regular allowances, health benefits and shift premiums as part of your OTE calculation.

How to calculate OTE

Follow these steps to properly calculate OTE:

1. Determine your employee’s base salary

You’ll first want to set the base salary for your employee. This baseline provides the employee with a fair living wage and reflects the overall quality of their work. Review regional salary benchmarks for the position to ensure the base pay offer remains competitive in the local job market.

2. Define clear performance targets or quotas

The second component of an OTE package consists of the specific performance targets assigned to the role. When utilizing target multipliers, companies typically calculate performance milestones based on a ratio tied directly to the employee’s variable pay or base salary.

For example, if a salesperson has an OTE of $100,000, their annual quota will typically sit between $500,000 and $800,000. You might adjust these performance baselines depending on an employee’s experience level or specific industry margins. The objective is to establish an incentive structure that requires standard operational effort to reach while remaining realistic enough to sustain long-term productivity.

3. Establish company performance targets for executives

To calculate the variable portion of OTE for executive employees, ensure clear company performance metrics are in place. While frontline roles, like sales, generally focus on individual or team performance quotas, executive bonuses typically align with macro-level objectives that track overall corporate performance.

Some examples of executive performance metrics include:

• Reaching a set annual gross margin percentage
• Reducing operational overhead by a set percentage

4. Calculate the total OTE package

Once you establish the base salary and variable targets, combine them to calculate the total OTE package.

• Sales OTE formula: Base salary + projected sales commission
• Executive OTE formula: Base salary + target bonus amount

OTE examples

Sales representative

Entry-level sales representatives at Champion Solutions have an OTE of $50,000. Their base salary is $32,000 per year, leaving a variable commission potential of $18,000 per year. Because the annual quota is set at six times the total OTE, the annual sales target for this role is $300,000. This equals a monthly sales quota of $25,000.

If the representative achieves 100% of their monthly quota, they earn $1,500 in commission each month. This results in $18,000 in commission annually, which combines with the $32,000 base salary to equal the $50,000 on-target earnings.

Vice president of merchandising

The vice president of merchandising at Gardenia Valley Veterinary Services has an OTE of $350,000. The base salary is $200,000 per year. There are two components involved in the incentive portion of the VP’s OTE: target sales and gross margin.

If the company reaches its target for comparable store sales, the VP receives $100,000. Additionally, if the store reaches its gross margin target, the VP will receive $50,000. This means that if the VP reaches both the target sales and gross margin target, they will receive $150,000 in addition to their $200,000 annual salary, making the OTE $350,000.

Retail store manager

A retail store manager at Beta Experts has on-target earnings of $88,000 per year. There are three components involved in their OTE: base salary, monthly sales target and payroll productivity target.

Their base salary is $50,000 per year. They have a quarterly sales incentive of $1.3 million with a 0.5% commission upon reaching a minimum of 95% of the target. This equals $6,500 a quarter, which amounts to $26,000 per year.

Additionally, the retail store manager receives $3,000 per quarter if they reach the payroll productivity target. This amounts to $12,000 per year. Add the $26,000 sales commission and the $12,000 productivity bonus to the $50,000 base salary to reach the total OTE of $88,000 per year.

Is OTE guaranteed?

OTE earnings aren’t guaranteed pay. This figure shows what an employee could earn if they meet all their performance targets. The base salary is fixed, and the variable portion depends on results, so actual earnings can be higher or lower than OTE. As such, it helps to clearly explain the breakdown of an employee’s salary when you make them a job offer.