Imagine this: Q4 is coming to an end, and your team hasn’t met their quotas. They exceeded them.

Each one of your reps has consistently demonstrated value in meetings and built strong relationships with their clients, leading 100% of those customers to renew their contracts. By all accounts, your team’s performance surpassed your expectations.

You get to deliver some great news: They can expect to receive OTE, or on-target earnings, this year.

But wait. What does that mean? And how do you calculate it?

Read on to learn how to develop a competitive OTE package that attracts and retains top talent, among other business benefits.

What you’ll learn:

• What is OTE in sales?
• How does OTE work?
• Benefits of the OTE sales model
• How to calculate OTE
• Examples of different pay mix structures in OTE
• Positions with on-target earnings compensation
• Average OTE for sales reps
• How to set up your OTE sales model
• OTE FAQs

What are on-target earnings (OTE) in sales?

OTE (on-target earnings) is the compensation a salesperson can expect to earn in a year when they meet all the requirements, objectives, and target metrics laid out for their position. It’s a projected salary based on a combination of their guaranteed base salary plus their non-guaranteed commissions.

Depending on the proportion of base salary to commissions, OTE can fluctuate. If your team’s pay is based largely on commissions, OTE will change depending on quota and likely quota attainment. If their base salary is a large piece of the earnings pie, then OTE won’t throw things off that much.

A well-designed sales compensation plan — with OTE as an earnings guide — can keep your team excited and motivated. By putting your reps in the driver’s seat for their earnings, you encourage them to perform at the top of their game.

Let’s dive into how it works and how you can use it on your team.

How does OTE work?

Typically, OTE is a split between base salary and commissions. For example, let’s say a candidate is applying for a sales rep role with an OTE of $250,000. During the interview, they learn that the base salary is $150,000. However, if they hit quota, they’ll earn the other $100,000 in commission. And if they exceed the quota, they could make even more.

OTE gives them a sense of what kind of earnings to expect in the role. OTE calculation varies, but many companies set parameters based on position and tenure.

Benefits of the on-target earnings sales model

One clear benefit of OTE is transparency. Reps know what to expect and leaders know what to plan for.

There’s also a talent attraction and retention element to OTE commission structures. Talented, self-motivated salespeople look for opportunities to work for companies that offer attractive OTE potential. The Salesforce State of Sales reveals that when asked why they’d consider leaving their job for a new one, the No. 2 reason sales professionals gave (behind lack of career advancement opportunities) was uncompetitive pay.

Just behind that was lack of clarity from leaders. OTE can help take care of both issues.

With an OTE ratio that tilts toward commissions, you can afford to offer reps higher compensation without risking financial hardship because their higher pay is tied to higher sales. And with a well-laid out OTE plan, reps get clarity: They know exactly which targets they must hit to earn their highest possible pay.

Plus, when you provide OTE compensation plans, you attract high-quality reps — go-getters with a natural proclivity toward optimism who are also likely to be friendly competitors. In fact, I’d argue that offering OTE helps you build and promote a culture of optimism. You’re attracting people who know their goals and want to chase them down.

OTE also helps your accounting department forecast sales and related commission payouts accurately. With a simplified calculation process, they can set a benchmark for what salespeople can expect to earn and what the company can expect to pay out.

How to calculate OTE

While there’s some research (e.g., industry benchmarks and your own financial reporting) involved in determining OTE numbers, the actual calculations are fairly straightforward. Here’s how to determine your team’s OTE:

1. Determine your team’s base pay: This will vary depending on your industry, the kind of products or services you sell, and the experience of each sales rep. As a jumping-off point, find out what your competitors are offering, but be sure to factor in industry standards.

2. Establish sales quotas: Once you know your base pay, you can set the sales quota reps must meet to be eligible for sales incentives, including commissions. There is not a fixed formula for this. Instead, you want to find the right balance between your revenue goals and your reps’ selling capacity.

3. Set commissions: The reason for including commissions in the OTE is to increase the potential earnings, motivating reps to achieve their sales goals. The time required to complete these goals (and their difficulty) should help you determine the commission component of OTE.

4. Add it up: When you’ve decided on a base salary and commission, add these two figures together to get the OTE.

Here’s the basic formula: Annual base salary + annual commission earned when 100% of quota is hit = On-target earnings.

For example, if a rep’s base salary is $65,000 and their on-target commissions based on quota are $20,000, their OTE would be $85,000, assuming they hit 100% of their quota.

Examples of different pay mix structures in OTE

The ratio of OTE plans is generally 65% base salary and 35% commission. However, pay mixes can be all over the map. Here are some examples, starting with straight commission (base pay/commission pay):

• 0/100: This pay mix — which is based on 100% commission with no base salary — is for independent, highly motivated salespeople. Some high-end department stores offer this type of OTE plan, with commissions ranging from 5% to 10% on every product sold.
• 50/50: Not sure where to start? Try this pay mix to encourage sales reps to meet and exceed their quotas while providing them with a base salary safety net. With this baseline, you can follow the performance of your sales team and adjust the pay mix as necessary.
• 70/30: A bit less aggressive than more commission-focused pay mixes, this ratio is good for customer success managers, as they have a mix of CSAT and upselling targets. This pay mix also works for industries like telecommunications and financial services, which have longer sales cycles.
• 90/10: Offering more security with a majority base salary, this pay mix works best for employees whose main responsibilities lie mostly outside sales. It offers just enough incentive for support staff — like those in finance or service — to go that extra mile to help close deals whenever possible.

Positions with on-target earnings compensation

Here are some examples of OTE compensation for various roles:

Sales development representative (SDR)

SDRs connect sales reps with leads that seem like good candidates for a sale and other business opportunities. They’re responsible for cold calling potential clients, sales prospecting, and setting up meetings to make connections.

Here’s what an OTE would look like for a 70/30 pay mix (fairly standard for SDRs):

Base salary ($55,000) + Commission: ($22,000) + (uncapped) = OTE ($77,000+)

Account executive

Responsible for building ongoing relationships with clients, account executives work in many industries, including tech, health care, and financial services.

Here’s what a 50/50 pay mix may look like for an account executive earning 10% commission with a monthly quota of $75,000:

Base salary ($90,000) + Commission ($90,000) = OTE ($180,000)

Field sales representative

Field sales representatives work outside the office, building customer relationships and following up on leads in person. For an entry-level position like this, a typical field sales rep may have a pay mix of 70/30 with an uncapped commission.

Here’s how that might break down:

Base salary ($48,000) + Commission ($20,000) = OTE ($68,000)

Sales manager

Sales managers are responsible for hiring and leading sales teams, including training and setting goals. They may offer guidance to reps throughout the entire sales cycle, including evaluation, proposal, negotiation, and closing.

Depending on the organisation and industry, these roles are typically paid somewhere between a 50/50 and a 70/30 pay mix. Some also have uncapped commissions. Here’s a look at how that might play out:

Base salary ($135,000) + Commission ($115,000+) = OTE ($250,000+)

Average OTE for sales reps

The Bureau of Labor Statistics reports that the average pay in 2023 for sales representatives (wholesale and manufacturing, not including scientific or technical product sales) in America was $65,630. When you include technical and scientific products, the average American sales rep’s pay jumped to $99,710 in 2023. This includes total wages, including base salary and commissions.

U.S. News & World Report says the median annual salary for sales representatives is $63,280, while the top 25% of sales rep earners made $93,280+ in base salary. These numbers track with reports from the Bureau of Labor Statistics.

OTE ratios vary from industry to industry. If we use average earnings for sales reps from the U.S. News & World Report findings, then a rep with 70/30 OTE likely gets a base salary of $44,296 with OTE commission targets nearing $19,000. Top-earning sales reps with a 70/30 split get an annual base salary of about $65,300 with commissions nearing $28,000. For those who earn 80/20, median earners get $50,600 in salary with about $12,700 OTE commissions, while top earners receive base salaries of about $74,600 and OTE commissions of about $18,700.

How to set up your OTE model

If you’re not sure where to start when setting up your OTE model, consider the following four factors to guide you.

1. Determine what your company is trying to achieve.

What are your company’s current goals? Remember: Behaviours follow incentives. So, the rewards you offer to your sales team must tie back to strategic company objectives. These could relate to growth, margins, or market expansion. Once you have those pillars defined, you can better ensure your OTE goals link back to them.

2. Understand your sales cycle and your ideal rep’s risk appetite.

Your OTE should be heavily based on the length of your sales cycle. Sales reps who can close on products and services relatively quickly may be able to operate on 100% commission. This can even be good for reps who have a strong hunting mentality.

The more transactional the sale and the less complex the sales cycle, the more you can rely on commissions. Just keep in mind that reps who sell offerings with longer sales cycles may need a ratio closer to 50/50 or even 70/30. For instance, selling hardware to the public sector involves a lengthy procurement process. In this case, the organisation would likely offer reps a 70/30 OTE.

Finally, while some reps may be excited to accept a 50/50 OTE, others might want something like 80/20. Consider the profile and goals of your ideal reps’, including their risk appetite, to understand what they are comfortable with or might expect.

3. Ensure your OTE plan is sustainable for your company and your reps.

This one should involve a collaborative conversation between your finance and sales leaders. Consider the funding style of your company and ask whether your OTE plan will allow it to achieve profitability (or keep it from doing so). Then consider whether the targets tied to your OTE are achievable. At least 30% of your sales reps should be hitting their quotas; otherwise, you’ve set an unrealistic goal and risk losing them.

4. Look at market benchmarks to make sure your OTE package is competitive.

Good sellers have transferable skills. This means they also have options. Look at what your peers are offering and make sure you’re not at risk of losing out on the best talent. You can also ask people to express their expectations during your recruitment process. Finally, include a salary range in your job descriptions and get a feel for how people respond.

On-target earnings FAQs

OTEs can be confusing. Here are answers to common questions teams ask about OTEs and compensation plans:

What are average rep earnings?

Average rep earnings are what a typical sales rep earns during a given period. Some employers may offer examples of the salaries of their highest earners to potential candidates, which is why you should always ask what the average rep earns.

What is a draw and how does it affect OTE?

A draw is an advance a company pays a sales rep against their anticipated earned commissions. Businesses will often offer a non-recoverable draw or guarantee for a few months to ease reps into their role. This is also known as a ramp-up.

An example of a draw against commission would be a salesperson who earns $1,000 per week. If they earn $2,000 in commissions during that pay period, they will earn $3,000 total that week. But if they have a slow week and only earn $250 in commissions, they will earn $1,250 for that pay period.

Ultimately, a draw does not affect OTE — it is subtracted from future commissions.

What is ramp time?

Ramp time is the time needed for a sales rep to consistently hit their sales targets. Many companies offer new sales reps an initial period to ease into the role where they aren’t expected to sell anything. This period can vary, but typically it’s one sales cycle or three months.

What is fully ramped OTE?

During the ramp time, a new sales rep will spend time learning about the products or services they’re selling, understanding the company’s sales process, and building a pipeline. Since the rep is not making sales during this time, they’re not earning a commission. Instead, they’re typically earning a draw. Once a sales rep is fully ramped, they are making sales independently and achieving their assigned sales quota.

What are on-target commissions (OTC)?

On-target commissions (OTC) are the compensation sales reps can earn if they hit 100% of their quota. You need to know your OTC to calculate your OTE (base salary plus OTC).

Attract strong candidates with OTE

Offering a competitive OTE compensation plan can attract strong candidates to your sales team — and keep top talent on board. When reps know exactly how much they’ll earn if they hit their sales quotas, they’ll be incentivized to work hard to reach those goals. That benefits you and your business as well as your team.