Calculating On-Target Earnings for New Hires

Motivating your employees is an effective way for your business to increase its revenue and overall performance. By offering on-target earnings to your employees, you’ll encourage them to bring in impressive results and submit valuable work. Learn what on-target earnings are, their benefits and how to calculate them.
 
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What is OTE?

On-target earnings (OTE), also known as on-track earnings, is the total compensation an employee can make if they meet all of their performance targets. An OTE salary system is a compensation strategy often used as a commission incentive to encourage sales employees to reach their quotas.
 

Sometimes you need more than just words to motivate your employees. Employers also use on-target earnings to motivate their executive employees to meet certain company goals. Upon hiring them, employers give executive staff members a specific number to reach by a certain deadline. 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 depending on the position and company. 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

On-target earnings are a great way to reward employees for delivering results for your company. Some common benefits of OTE include:
 

  • Team member motivation: Having a set goal and compensation in mind allows your employees to more easily picture themselves with this reward. This motivates them to work harder and provide your company with quality results.
  • Increased productivity: The potential for a bonus encourages employees to stay on task. They’ll consistently submit impressive work that significantly increases your company’s performance.
  • Employee engagement: With the potential for a financial reward, employees will feel more excited to complete their tasks and accomplish goals. This makes them feel more engaged at work and creates a positive atmosphere.

What is included in OTE?

OTE is the complete compensation package that your employees potentially earn if they perform well during work hours. The OTE for both sales and executive employees includes shift loadings and allowances. For the sales team, an OTE package also usually consists of:
 

  • Base salary
  • Commission based on a percentage of the products they sell

The OTE package for an executive team member typically includes:
 

  • Base salary
  • Set bonuses they earn after meeting specific company goals

How to calculate OTE

Calculating how much OTE to give your employees usually depends on the revenue your business earns, your employees’ experience and the goals your company needs to hit. Follow the steps below to properly calculate OTE:
 

1. Determine your employee’s base salary

You’ll first want to set the base salary for your employee. This should be a number that compensates the employee enough to provide them with a fair living wage and matches the quality of work they’ll be doing. Look at average salary amounts for the role you’re hiring to help you select an appropriate amount to offer.
 

2. Figure out the sales quota you’d like the employee to hit

The next part of your OTE package for salespeople is the quota they need to meet to earn a strong commission. Many employers base OTE on one-fifth of their annual sales quota. In other words, the quota is generally six to eight times higher than OTE. You could also base it on their work experience. It’s important to ensure the commission percentage is one that’s attainable but also challenges your employees to grow in their role.
 

3. Establish the company’s projected goals 

Determining the bonus portion of OTE for executive team members usually depends on the projected company goals you want to meet. Examples of possible executive employee goals are:
 

  • Redesign the QA process for your business’ product development 
  • Build a new department by onboarding a strong team of staff members 
  • Increase the company’s efficiency and productivity by a certain percentage

Sit down to determine the difficulty of hitting these goals and how long they could take. Come up with a bonus number that matches the difficulty level of these goals.
 

4. Add the base salary together with the commission or bonus amount

Once you have a base salary and project amounts decided, add them together to get your entire OTE package.
 

For sales, it looks like:
 

Base salary + projected sales commission = Sales OTE
 

For executive team members, it looks like:
 

Base salary + bonus amount = Executive OTE
 

OTE examples

 

Sales representative

Entry-level sales representatives at ABC Company have an OTE of $50,000. Their base salary is $32,000 per year. They have a 1.5% commission on sales with a target of $100,000 sales per month. If they hit 100% of their quota every month, they earn $1,500 per month. This means sales representatives at ABC Company earn $18,000 in commission every year. Add that $18k to the $32k base salary, and you get the $50k on-target earnings.
 

Vice president of merchandising

The Vice President of Merchandising at ABC Grocery 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 hits the comparable store target sales, the VP receives $100,000. Additionally, if the store hits its gross margin target, the VP will receive $50,000. This means that if the VP hits both the target sales and gross margin target, they will receive $150k in addition to her $200k annual salary making the OTE $350k.
 

Retail store manager

A retail store manager at ABC Retail 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 target of $1.3 million with a .005% 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 he hits the payroll productivity target. This amounts to $12,000 per year.
 

If the retail store manager hits both the sales quota and productivity target, they will receive $26k and $12K in addition to their $50k salary resulting in an OTE of $88k per year.
 

Frequently asked questions about OTE

 

Is OTE on top of salary?

Many employers wonder what is OTE and if it’s part of their workers’ annual salary. OTE compensation is not a part of the salary. OTE represents the total expected payout for an employee, including their base salary as well as their sales commission and/or projected bonus amount.
 

Is OTE guaranteed?

Since OTE is based on whether or not employees meet their performance targets, it’s important to make it clear to employees that OTE is not guaranteed. It’s imperative for employers to make the sales commission percentages or executive bonus rates realistically attainable for employees. Another thing for employers to consider is that since an OTE salary is not guaranteed, potential employees should be aware of average quota attainment rates.
 

What does 200k OTE mean?

200k OTE refers to the expected total pay an employee may receive in one year if they meet all expected performance requirements. For example, if an executive’s annual salary is $150k with a variable bonus amount of $50k, said employee will only receive $200k if they hit 100% of their quota.
 

What’s the difference between OTE and a bonus?

OTE compensation represents an employee’s total annual salary combined with any annual bonus or commission. Therefore, an employee bonus is only one element of OTE.

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