What is OTE (On-Target Earnings)? Definition, salary calculation, and examples
On-Target Earnings (OTE) refer to the total potential salary an employee can earn, which includes their base salary and the maximum commission available. This payment structure is commonly used in sales roles to motivate performance and reward success.
What we’ll cover
In this article, we explain what OTE is, how to calculate OTE, explore examples of both capped and uncapped OTE structures, discuss the benefits of OTE and how to create an OTE structure. We will also answer the most common OTE questions.
What is OTE?
OTE, or On-Target Earnings is when commissions or bonus is part of an employees pay package. OTE is typically tied to performance, where hitting 100% of targets will result in the full salary being paid.
In job advertisements, OTE is often displayed prominently (e.g., £51,000 OTE). However, it’s important to note that OTE is not guaranteed. The base salary is fixed, while the additional earnings depend on the percentage of targets an employee meets.
For instance, in the UK, a job might offer a base salary of £25,000 with an OTE of £10,000, making the advertised total potential earnings £35,000 OTE’.
In the UK, commission is an extra payment earned based on sales or performance, usually on top of a base salary.
How do you calculate OTE?
The OTE salary calculation is simple. Just take the base salary and add it to the maximum possible commission.
Research suggests that many OTE jobs have the same percentage split as the above – 15% commission and 85% base salary. However, this can differ from company to company and will depend on the role.
How to calculate OTE in salary:
An employee earns £25,500 base salary. Their on-target commission from their sales role is £4,500. That means their OTE salary is £30,000.
Capped vs. uncapped OTE
When it comes to On-Target Earnings (OTE), employers can choose between two different structures: capped and uncapped.
Understanding the difference between these two models is essential for determining which approach best suits your organisation’s needs.
What is capped OTE and how does it affect salary?
Capped OTE means there is a limit to the earnings an employee can receive. Even if they exceed their target (e.g., 150% of the goal), they will not earn beyond the set maximum. This structure is typically used to manage salary budgets.
What is uncapped OTE and how does it affect salary?
Uncapped OTE, on the other hand, places no limit on additional earnings. Employees can exceed their sales targets and earn more than the predicted OTE. This structure is often used to incentivise high-performing employees.
What are the benefits of OTE?
Implementing an OTE (On-Target Earnings) structure offers several key benefits for both employers and employees:
Motivates performance: On-Target Earnings directly ties an employee’s earnings to their performance. This incentivises staff to meet and exceed targets, which can lead to increased productivity and revenue growth.
Attracts top talent: Offering OTE can make your job roles more appealing to high-performing candidates, especially in competitive fields like sales and recruitment, where commission-based roles are common. You can read Moorepay’s recruitment guide here.
Clear earning potential: Employees have a transparent understanding of their total potential income, which can foster goal-driven behaviour and align personal success with company objectives.
Balance between stability and reward: OTE provides a balance between a stable base salary and the opportunity for additional earnings, reducing financial risk for employees while still offering significant upside potential.
Thinking about other employee benefits? Look no further than this handy guide: The ultimate guide to employee benefits | Moorepay
OTE vs. other salary structures
While On-Target Earnings is a popular salary structure in sales and commission-based roles, it’s important to understand how it differs from other types of pay. Below, we outline the key differences between OTE and other common payment structures, such as base salary, bonus, and commission-only jobs.
Base salary
A base salary is the fixed amount an employee earns, regardless of performance. It’s guaranteed income that forms the foundation of many salary packages.
Bonus pay
Bonus payments are separate from on-target earnings and are typically offered as an additional reward for meeting or exceeding goals. A bonus can be a one-off or recurring payment that doesn’t always tie directly to employee performance. For instance, bonuses may be awarded for exceeding department targets, or when a company is doing well and they wish to share their profits, but they aren’t always calculated into the advertised OTE salary.
Commission-only jobs
In commission-only jobs, there is no base salary – earnings are entirely dependent on sales. Commission-only jobs are riskier but can offer higher rewards for top performers. OTE, by contrast, offers a balance between stability (via base salary) and performance-driven rewards (via commission).
For Payroll Managers, it’s crucial to ensure that employees on commission-only pay structures are still compliant with National Minimum Wage (NMW) regulations. Even if an employee doesn’t make any sales, their total earnings, including commission, must meet or exceed the NMW for the hours they’ve worked. Failure to comply can result in legal penalties for the company. Make sure you’re up to date with all payroll legislation. Download the guide here: Payroll Legislation Changes 2024 | Moorepay
Competitive pay
The term competitive pay often refers to salary packages that are in line with or better than industry standards. A competitive salary could include a base salary, bonus, and OTE, designed to attract top talent. Employers use competitive pay to offer a well-rounded compensation package that incentivises performance while providing a reliable income stream. Read more on ‘competitive pay’ here.
Examples of jobs with OTE
Offering OTE in certain roles is a great way to attract top talent. Below are examples of common jobs with OTE-based compensation:
Sales
From Sales Representatives to Telesales, these roles often come with a commission-based salaries. This rewards top performers and incentivises employees to reach their sales targets.
Account Executives
Account Executives also commonly work towards a commission-based bonus, although their targets might focus more on customer retention than on pure sales.
Business Development
Business Development teams often earn a commission on top of their base salary. Business Development professionals typically need to generate a certain percentage of new business to reach their full earnings.
Marketing
Marketing professionals can also earn an OTE salary based on the number of leads they generate for the sales team. By driving interest in products or services, marketers directly contribute to the sales process.
Recruitment
Typically, the more placements agency recruiters make, the more commission they receive — and therefore the more they earn overall. Here’s a commission example based on revenue generated:
Commission based on revenue example:
- £0-£6,000 — 6% commission
- £6,001-£11,000 — 11% commission
Other roles
While OTE is most common in the roles mentioned, it’s also found in other roles, for example;
- Mortgage Brokers
- Estate Agents
- Electricians
These job roles might work towards targets that unlock additional earnings. Considering OTE in any role will encourage top talent to apply, widening the recruitment pool.
Moorepay have a range of opportunities currently, some of which may include an OTE salary. Interested? Find out more: Join us | Moorepay
How to create an OTE (On-target earnings) structure
Creating an On-Target earnings (OTE) structure involves several key steps. The aim is to design a compensation plan that aligns with company goals, motivates employees, and balances base salary with performance-based incentives. Here’s some quick steps to get you started:
1. Define the role and targets
Identify the key performance indicators (KPIs) for the role, such as sales volume, revenue targets, or customer acquisition numbers.
Ensure that targets are realistic but challenging, based on historical data, market conditions, and the role’s responsibilities.
2. Establish base salary
Research industry standards for base salaries in the role. This ensures your offering is competitive while leaving room for performance-related incentives.
Choose a base salary that provides financial stability but still motivates employees to strive for higher earnings through commission.
3. Determine commission structure (Capped vs. Uncapped OTE)
Decide whether you want to cap the OTE (limit earnings at 100% target) or offer uncapped OTE, where employees can earn more if they exceed targets.
Based on your profit margins and role expectations, determine what percentage of sales or deals closed will be awarded as commission.
Balance base and commission, a common split is around 70-85% base salary and 15-30% commission, but this can vary based on the industry and position.
4. Create tiered targets (optional)
Set up tiers where employees can earn extra bonuses if they exceed 100% of their targets. For example:
- 100% target = Full commission
- 110% target = Bonus commission
- 120% target = Higher commission rate
5. Align with company budget
Ensure the OTE structure aligns with your company’s budget. Determine how much you’re willing to pay top performers without negatively impacting your profit margins.
Use historical performance data to estimate the total cost of commission pay-outs over the year. Involving an internal or external finance team at this point will allow for all bases to be covered and ensure that you are not exceeding budget.
6. Communicate clearly
- Make the OTE structure transparent and easy to understand for employees. Explain how base salary, targets, and commissions are calculated.
- Periodically review the OTE structure to ensure it remains competitive and aligned with your business goals.
By following these steps, you can create an OTE structure that motivates employees, rewards performance, and drives your company’s success.
FAQs
What does OTE mean in salary?
OTE, or On-Target Earnings, represents the total potential salary an employee can earn, including both their base salary and the commission they can receive for hitting their sales targets.
For example, if a job advert lists a salary as £40,000 OTE, this means the employee could potentially earn up to £40,000, but part of that depends on achieving performance-based targets.
How does OTE impact earnings?
OTE directly affects potential earnings by combining the base pay with commission. While the base salary is guaranteed, the additional OTE portion is dependent on employees meeting sales targets. The closer an employee gets to their sales goals, the more of the OTE you can achieve. It provides an incentive to increase performance but doesn’t guarantee an employees full salary unless targets are hit.
Can OTE be uncapped?
Yes, OTE can be uncapped, meaning there’s no upper limit to how much an employee can earn in commission. In an uncapped OTE structure, the more an employee sells, the more they can earn, even beyond the projected on-target earnings. This system is often used to motivate high-performing employees by offering unlimited earning potential.
Is OTE guaranteed in sales jobs?
No, OTE is not guaranteed. The base salary is guaranteed, but the OTE component is conditional upon achieving 100% of your sales targets (where OTE is capped). If you fall short of your target, you’ll only receive part of the OTE. Therefore, OTE represents the maximum potential salary you can earn, not a fixed or guaranteed amount.
In summary
On-Target Earnings (OTE) is a key component of many sales and commission-based roles, offering a powerful incentive to drive performance. Whether capped or uncapped, understanding how OTE works can help both employers and employees set realistic goals and expectations around earnings.
By clearly defining base salary and commission structures, OTE offers transparency, motivation, and the potential for high rewards, making it an attractive salary scheme for competitive industries.
