It's a very popular question in sales industry, "What is on target earning"? OTE is the total amount of compensation a salesperson can earn if they meet their sales quota. Basically an OTE includes both their base salary and any additional bonuses or commissions they may be eligible for based on their performance.
From a salesperson’s perspective, OTE is a crucial metric that provides salespeople with a clear understanding of what they can earn if they meet their sales targets. This motivates them to work harder and be more productive, which ultimately leads to increased revenue for the company. It also helps the sales team stay focused on their goals and track their progress toward achieving them.
From a company's perspective, OTE is essential because it enables the sales team to focus on selling the company's products and services instead of worrying about its compensation structure. It also helps the company attract and retain top talent by offering competitive compensation packages that include clear and achievable OTE targets.
How is OTE (on target earnings) calculated?
Base + Commission Model
OTE is calculated by adding together a salesperson's base salary and their potential commissions or bonuses based on achieving their sales targets.
Here's an example of how to calculate OTE:
Let's say a salesperson has a base salary of $50,000 per year and they are eligible for a commission of 10% on all sales they generate from their sales cycle. If their sales quota is $500,000 per year, then their OTE would be calculated as follows:
Base Salary = $50,000
Commission = 10% of $500,000 = $50,000
OTE = Base Salary + Commission = $100,000
So the salesperson's OTE would be $100,000 per year.
It's worth noting that OTE can vary based on a salesperson's performance and the specific compensation plan offered by the company. For example, some companies may offer higher commissions or bonuses for exceeding sales targets, which would increase a salesperson's OTE. Conversely, if a salesperson consistently falls short of their sales targets, their OTE may be lower than initially projected.
Base + Variable Model
To calculate OTE from a base salary and variable pay, you'll need to determine the amount of variable pay that's included in the OTE calculation.
Here's an example of how to calculate OTE from base and variable pay:
Let's say a salesperson has a base salary of $60,000 per year and is eligible for a performance-based bonus of up to $20,000 per year. The bonus is calculated as a percentage of the sales generated by the salesperson, with a target of $500,000 per year.
To calculate the OTE for this salesperson, you would add their base salary to their expected bonus for hitting their sales target:
Base Salary = $60,000
Expected Bonus = 10% of $500,000 = $50,000
OTE = Base Salary + Expected Bonus = $110,000
So the salesperson's OTE would be $110,000 per year.
It's important to note that the actual bonus earned by the salesperson may vary based on their performance, and the OTE may be adjusted accordingly. Additionally, some companies may include additional factors in the OTE calculation, such as equity or other forms of variable compensation.
How is OTE related to Pay Mix?
OTE and pay mix are related because OTE is typically made up of a combination of base salary and variable pay, which make up the pay mix for a salesperson.
The pay mix is the combination of base salaries and variable pay, such as commissions or bonuses, that a salesperson receives as part of their compensation. The pay mix can vary widely depending on the company, the salesperson's experience, and the industry.
OTE is the total amount of compensation a salesperson can earn if they achieve their sales targets. It is calculated by adding together the base salary and the variable pay that a salesperson can earn through commissions or bonuses.
The pay mix can impact the OTE, as a higher percentage of variable pay can lead to a higher OTE if the salesperson is able to achieve their sales targets. However, a higher percentage of base salary can provide more stability in the salesperson's income, even if they do not achieve their sales targets.
For example, a salesperson with a pay mix of 50/50 (50% base salary and 50% variable pay) may have an OTE of $100,000, while a salesperson with a pay mix of 70/30 (70% base salary and 30% variable pay) may have an OTE of $80,000. However, the salesperson with the 70/30 pay mix may feel more secure in their income, even if they do not achieve their sales targets, because they have a higher base salary.
Overall, OTE and pay mix are related because they both impact the total compensation a salesperson can earn. The pay mix determines the percentage of base salary and variable pay a salesperson can earn, while OTE is the total amount of compensation they can earn if they achieve their sales targets.
How is OTE related to sales quotas?
OTE and sales quotas are closely related because OTE is typically tied to a salesperson's ability to meet or exceed their sales quota.
Sales quotas are specific targets that are set for salespeople based on the amount of revenue or sales they are expected to generate over a given period of time, such as a quarter or a year. A salesperson's OTE is based on their ability to meet or exceed these quotas, and it typically includes a combination of a base salary and variable pay, such as commissions or bonuses.
If a salesperson meets or exceeds their sales quota, they may be eligible to receive additional variable pay, which would increase their OTE. However, if they fail to meet their sales quota, they may receive less variable pay, which could result in a lower OTE.
OTE serves as a motivator for salespeople to work hard and achieve their sales targets, which can ultimately lead to increased revenue for the company. It also helps to align the goals of the sales team with the overall revenue goals of the company. By setting clear sales quotas and tying OTE to those quotas, companies can incentivize their sales teams to work harder and be more productive, which can help them achieve their revenue targets.
Importance of OTE during Salary negotiation
As a salesperson negotiating an offer from a SaaS company, OTE can be a powerful tool to help you understand the compensation package being offered and negotiate for a fair salary.
Understand the OTE structure: Before negotiating, make sure you fully understand the OTE structure being offered by the company. This includes knowing how the base salary and variable pay are calculated, what the sales quota is, and how commissions or bonuses are earned. This will help you understand how much you can earn and what you need to do to achieve your OTE.
Use OTE as a benchmark: Research the market to see what other salespeople in similar roles are earning in terms of OTE. Use this information to negotiate for a fair salary that's competitive with other companies in the industry.
Negotiate for a higher base salary: If you're concerned about the volatility of variable pay, you can negotiate for a higher base salary to help stabilize your income. This can help you achieve a more consistent income while still earning a fair OTE.
Negotiate for a higher commission rate: If you're confident in your sales skills and your ability to exceed your sales quota, you can negotiate for a higher commission rate to earn a higher OTE. This can be a good option if you prefer a performance-based compensation structure.
Clarify performance metrics: Finally, make sure you understand the performance metrics used to calculate your OTE and negotiate for metrics that are fair and achievable. This will help ensure that you're incentivized to work hard and achieve your sales targets, while still earning a fair salary.
Why is OTE/Quota ratio important for a SaaS company?
The OTE/Quota Ratio is a metric used to measure the effectiveness of a company's sales compensation plan. The ratio compares the OTE of a salesperson to their sales quota.
The formula for calculating the OTE/Quota Ratio is:
OTE/Quota Ratio = OTE / Quota
For example, if a salesperson has an OTE of $100,000 and a sales quota of $500,000, their OTE/Quota Ratio would be 0.20, or 20%.
A high OTE/Quota Ratio indicates that a salesperson is earning a high percentage of their potential earnings, which can be an indicator that the company's compensation plan is working effectively. On the other hand, a low OTE/Quota Ratio can indicate that the company's compensation plan may not be providing enough incentives for salespeople to achieve their sales targets.
The OTE/Quota Ratio can also be used to compare the performance of individual salespeople or sales teams within a company. For example, if one salesperson has an OTE/Quota Ratio of 0.30 while another has a ratio of 0.15, this may indicate that the first salesperson is performing more effectively or that their compensation plan is more favorable.
Overall, the OTE/Quota Ratio is an important metric for evaluating the effectiveness of a company's sales compensation plan and can help companies make data-driven decisions about how to structure their sales incentives to maximize sales performance.
On-Target Earnings is a critical metric that helps align the goals of the sales team with the company's revenue targets. It is essential to motivate salespeople to work harder and achieve their sales goals, leading to increased revenue for the company.