On-target earnings (OTE) is one of the most important concepts in sales compensation, and one of the most misunderstood. When a candidate asks “what is OTE for this role?”, they want to know what they will earn if they hit their number. Your answer has to be realistic for the rep and affordable for the business.
OTE matters when you build a new plan, review an existing one, or compare pay across roles. Getting it right helps you attract and motivate good salespeople, and it keeps your compensation plans tied to long-term business goals.
What does OTE mean in terms of salary?
OTE, or on-target earnings, is the total annual compensation an employee can expect to earn by meeting their sales targets. It typically includes a base salary plus sales commission or other variable pay. If an employee falls short of those targets, their actual earnings may be lower than their stated OTE.
Components of OTE
OTE has two parts: a fixed base salary and variable commission. Together, they determine what a sales employee earns by reaching their performance goals. The exact mix varies by company and role, but most sales compensation plans balance guaranteed income with performance-based incentives.
Base salary is the guaranteed portion of a salesperson’s pay. Employees receive it regardless of sales performance, which gives them financial stability and a predictable income. In many sales roles, base salary is roughly 50 to 70 percent of total OTE.
Commission is the variable portion that employees earn by meeting or exceeding their sales goals. It rewards performance and ties earnings directly to results. In many sales roles, commission-based pay makes up the remaining 30 to 50 percent of OTE, although the share depends on the role, the industry, and the company’s compensation strategy.
Why companies use OTE
A well-designed OTE balances financial security with performance incentives. A competitive base salary helps companies attract and keep talented sales professionals, while commission motivates them to reach and beat their targets.
For employers, OTE ties compensation to business performance by paying for measurable results. For employees, it sets clear expectations about earnings and shows how their performance affects their pay.
How companies determine OTE
There is no universal OTE formula. Companies set OTE based on the role, industry, sales cycle, territory, quota, and overall compensation strategy.
The balance between salary and commission varies too. Technical enterprise sales roles often have higher base salaries because of longer sales cycles and greater complexity, while transactional sales roles may put a larger share of earnings at risk through commission. Whatever the structure, a good OTE plan uses realistic quotas, clear commission rules, and attainable targets, so employees know exactly how to earn their full compensation.
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How to calculate OTE
You need two inputs to calculate OTE: the employee’s base salary and the commission they can earn by reaching their sales target. The basic formula is:
OTE = Base Salary + (Commission Rate × Sales Target)
For example, take a sales rep with a $50,000 base salary, a 10 percent commission rate, and a $500,000 sales target:
OTE = $50,000 + (0.10 × $500,000) = $100,000
Under this sample commission plan, the rep would earn $100,000 in total compensation by reaching their full sales target. Compare advertised OTE with what reps actually earn, too. If most reps land well below it, the targets may be unrealistic and the plan isn’t delivering the earning opportunity you promised.
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Why accurate OTE calculations matter
An accurate OTE makes the whole compensation structure more reliable and sets clear expectations for everyone involved.
Employee motivation
Salespeople are more motivated when their targets are clear and attainable and the incentive structure is well defined. When reps know exactly what they need to do to reach their OTE, they stay focused, and productivity and morale benefit.
Budgeting and planning
OTE helps sales managers and CFOs budget and forecast sales salaries and commission expenses. Accurate calculations keep financial projections realistic and in line with the company’s financial plans, which helps prevent budget shortfalls.
Competitive advantage
A competitive OTE helps you attract strong candidates when you hire. A well-structured OTE also helps you keep them, which lowers recruiting costs and keeps the team stable.
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OTE in different sales roles
OTE can vary a lot from one sales role to another. Job responsibilities, sales cycle length, deal size, and compensation strategy all affect how companies set OTE and how they split it between salary and variable pay.
Sales development representatives (SDRs)
Sales development representatives (SDRs) typically have lower OTEs than closing roles because their main job is generating qualified pipeline rather than closing deals. Their pay usually combines a base salary with variable pay tied to metrics such as qualified meetings booked, opportunities created, or pipeline generated.
Account executives (AEs)
Account executives (AEs) typically have higher OTEs than SDRs because they run the sales process and close new business. Their compensation generally includes a base salary and commission tied to revenue or quota attainment, which gives them more earning potential based on sales performance.
Account managers (AMs)
Account managers (AMs) are a different role from AEs. They look after existing customers rather than winning new ones, so their variable pay is usually tied to retention, renewals, and expansion revenue from the accounts they manage.
Sales managers
Sales managers often have OTEs that combine a base salary with incentives tied to team results. Their variable pay is typically based on metrics such as team quota attainment, revenue growth, or other business objectives, so a manager’s earnings rise and fall with the success of the team.
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Common challenges in OTE implementation
A well-designed OTE plan can still fall short if it isn’t implemented well. These are the problems that come up most often.
Longer sales cycles
Companies with long sales cycles often struggle to set realistic OTEs, because revenue may not be recognized until months after the sales process begins.
Plans for these roles should account for the longer timeline by setting achievable quotas and weighting more of the pay toward base salary, so salespeople stay motivated through the whole cycle.
Transparency and communication
Employees need to understand exactly how their OTE is calculated and what they must do to earn it. Complicated plans or unclear commission rules lead to confusion, disputes, and a loss of trust. Clear documentation and simple plan rules go a long way.
Adapting to changing business conditions
Sales compensation plans shouldn’t stay static while markets and business priorities change. Economic conditions, territory changes, product launches, and new company goals can all make existing quotas and OTEs unrealistic.
Review and adjust your plans regularly so they keep motivating employees and support the business’s current objectives.
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Best practices for implementing OTE
A few habits make OTE plans easier to run and easier for reps to understand.
Communicate OTE clearly
Put each rep’s OTE, the formula behind it, and the targets it depends on in writing. Walk new hires through a worked example during onboarding, and repeat the exercise whenever the plan changes.
Review and refine OTE regularly
Review OTE plans on a regular schedule to make sure they still reflect business priorities, market conditions, and sales performance. Use performance data and employee feedback to find what needs to change, and adjust when goals, territories, or compensation strategy shift.
Use technology to improve OTE accuracy
Manual OTE calculations take time and invite errors. Compensation management software can automate the calculations, track sales performance, and give reps and managers better visibility into earnings.
Automation improves accuracy and gives you better data for compensation decisions.
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Setting an OTE your reps can trust
The formula for OTE is simple. The hard part is choosing the right base salary, commission structure, and targets, and checking them against real results every year. A good OTE connects each rep’s performance to business objectives and stays realistic, so reps can actually earn it.
Test your own plan with one question. If a rep asks “what is OTE in my plan, and how do I earn it?”, can they get a clear answer from their plan document in a few minutes? If not, start there.
