On-target earnings (OTE) is a compensation metric that represents the total potential earnings a sales professional can achieve if they meet their sales quota or targets. It is a crucial component of sales compensation plans in the SaaS industry, as it provides a clear financial incentive for sales reps to strive for their sales goals and aligns their interests with the company's revenue objectives.
In SaaS organizations with recurring revenue models, OTE plays a vital role in attracting and retaining top sales talent. It typically offers a combination of base salary and variable pay like commissions, contingent upon achieving specific sales milestones or quota attainment.
OTE serves as a powerful motivator for SaaS sales teams, encouraging them to prioritize activities that drive new customer acquisition and existing customer retention/expansion. By setting achievable yet stretching OTE targets, SaaS companies can foster a high-performance sales culture laser-focused on revenue growth.
How is OTE related to Pay Mix?
In SaaS sales compensation, OTE and pay mix are closely interlinked concepts that feed into each other. The pay mix determines what proportion of the OTE comes from base salary versus variable components.
The pay mix refers to the ratio between fixed base pay and incentive/variable pay like commissions and bonuses. A 70/30 pay mix means 70% base salary and 30% variable, while a more aggressive 50/50 split allocates an equal weightage to each component.
This pay mix has a direct impact on the structure and motivating nature of the OTE:
A higher base salary percentage lowers risk/volatility but provides less upside.
Increasingvariable pay raises the OTE upside potential but also risk.
For example, a $120,000 OTE could be split:
- Standard Split-> 70/30: $84,000 base salary + $36,000 variable OTE
SaaS companies leverage different pay mixes across sales roles based on factors like:
Role's quota difficulty and performance expectations
Typical ramp/sales cycle for that product
Market pay benchmarks for attracting/retaining talent
Company's cash flow and risk preferences
By carefully balancing the pay mix, sales leaders can design OTE packages that attract top reps, drive the desired behaviors, and align with the company's overall compensation philosophy.
How to calculate OTE
The calculation of OTE in SaaS sales compensation plans typically involves two components: the annual base salary and the annual commission earned at 100% quota attainment.
The formula is:
Sales OTE
For sales roles like account executives or sales development representatives (SDRs), the OTE calculation often includes a base pay and a commission rate tied to the sales quota. For example, if an AE has a base salary of $60,000 and a 10% commission rate on a $500,000 quota, their OTE would be:
Base Salary: $60,000
Commission at 100% Quota Attainment (10% of $500,000): $50,000
OTE: $60,000 + $50,000 = $110,000
Executive OTE
Executive sales roles like sales managers or directors may have a different OTE structure with a higher base salary component and a bonus based on team performance metrics or company goals.
For instance, a sales manager with an annual base salary of $120,000 and a potential $30,000 bonus for achieving team targets would have an OTE of $150,000.
The actual total earnings of a SaaS sales professional may vary from the OTE based on their individual quota attainment and performance. OTE represents the target or expected total compensation when sales goals are fully met.
Practical OTE examples
To better understand how OTE works across different roles, let's look at some examples from typical SaaS sales organizations.
On-Target Earnings For Account Executives
For account executives in SaaS sales, a typical OTE structure could look like:
Base Salary: $60,000
Commission Rate: 10% of closed deals
Quota: $1,000,000 in Annual Contract Value (ACV)
With this compensation plan, if the account executive achieves their $1M quota, their OTE calculates as:
Base: $60,000
Commission (10% of $1M): $100,000 OTE: $160,000
Higher quotas increase potential OTE. For example, a $1.5M quota at 10% commission yields a $210,000 OTE.
SaaS companies need to carefully balance quota difficulty with lucrative OTE to attract and motivate closers capable of selling their product.
On-Target Earnings For Sales Development Representatives
For an entry-level role like a sales development rep (SDR), the OTE tends to be lower with a higher base/variable split:
Base: $45,000
Commission: $10,000 (at 100% of qualified leads quota)
OTE: $55,000
This accounts for the ramp time required for new SDRs while still providing a path to higher earnings as they become fully productive.
On-Target Earnings For Director of Marketing
For a non-sales role like a marketing leader, the OTE model is often more heavily weighted towards base salary:
Base: $130,000
Bonus: 15% of base ($19,500) for achieving marketing goals
OTE: $149,500
This ties variable pay to their ability to hit lead generation numbers that fuel the sales funnel while providing a higher base compensation.
The ideal OTE model varies across roles, accounts for relevant performance metrics, and balances salaries vs variable pay appropriately.
On-Target Earnings For Sales Managers
As a sales leader, this manager's OTE is heavily weighted towards a base salary to account for their oversight and leadership responsibilities.
OTE: $132,000
Base Salary: $90,000
Performance Bonus: $42,000 (for achieving team quota of $5M ARR)
However, their annual bonus potential of $42,000 ties a significant portion of their compensation to the sales team's ability to hit an aggressive $5M annual recurring revenue (ARR) number.
On-Target Earnings For Customer Success Managers
Customer success roles are critical for SaaS revenue retention.
OTE: $80,000
Base: $65,000
Bonus: $15,000 (for under 10% annual churn)
This compensation model incentivizes low annual churn rates through a $15,000 bonus, while providing a solid $65,000 base salary. Maintaining and expanding the customer base impacts the OTE.
These examples highlight how OTE is adapted for different roles, aligning incentives with the desired behaviors and outcomes for each function.
The role of OTE in job offers
When hiring for sales roles in the SaaS industry, OTE plays a pivotal role in job offers and negotiations. Here's how:
OTE numbers are prominently featured in job descriptions and postings to attract top sales talent by showcasing the potential earnings.
During the hiring process, candidates evaluate OTE as a key component of the total compensation package being offered.
SaaS companies use competitive OTE offers to hire the best talent, especially for roles with longer sales cycles.
The pay mix (split between base salary and variable commission) impacts the OTE structure and helps set realistic OTE targets.
Higher OTE targets align with more aggressive sales goals and quotas for closers and account executives.
By clearly communicating the OTE upfront, SaaS organizations can ensure transparency, manage candidate expectations accurately, and position themselves as attractive employers in the competitive sales job market.
Benefits and drawbacks of OTE
Like any compensation model, OTE has its pros and cons that SaaS sales leaders should carefully evaluate:
Striking the right balance through best practices in OTE modeling, transparent communication, and continuous monitoring is key for SaaS sales organizations.
Regularly auditing and optimizing your OTE models is crucial for SaaS companies to ensure their sales compensation plans remain competitive, motivating, and aligned with business goals.
Here are some best practices:
Benchmark your OTE ranges against industry standards and competitors to attract top sales talent.
Analyze quota attainment and payout data to identify misaligned OTE targets.
Gather feedback from sales reps on the motivating impact of the current OTE structure.
Model different compensation structures to understand their impact on sales behavior.
Leverage compensation planning software to accurately forecast OTE costs.
Continuously monitor and adjust OTE as your product, pricing, and go-to-market evolve.
An objective internal audit combined with external benchmarking allows sales leaders to course-correct OTE before it negatively impacts sales performance, employee motivation, or causes talent attrition.
OTE Glossary: Terms You Need to Know
Like any domain, OTE modeling and sales compensation planning has its own set of key terms. Understanding this glossary will help ensure you're fully conversant:
Base Salary/Pay: The fixed cash component of a rep's total compensation, paid regardless of performance.
Commission Rate: Percentage of a deal's value paid to the rep as incentive compensation.
Commission Structure: The specifics of how commissions are calculated based on attainment of quotas or metrics.
Pay Mix: The ratio between base pay and variable/incentive pay components.
Quota: Revenue or other performance metric target that reps must achieve.
Quota Attainment: Percentage of assigned quota achieved by a rep over a period.
On-Target Earnings (OTE): Total earning potential when 100% of quota is attained.
Average Attainment: Avg % of quota a rep profile achieves - used to set realistic OTEs.
Accelerators/Decelerators: Commission rate adjustments for over or under-achievement.
Ramp Time: Period for new hires to reach full productivity factored into OTE.
Mastering these terms will enable you to design transparent, motivating OTE models that supercharge your SaaS sales team!
Leveraging OTE Modeling with Visdum's Sales Compensation Software
While OTE is a powerful tool for motivating and retaining top SaaS sales talent, managing compensation plans can quickly become complex as your company scales. This is where Visdum's sales compensation software can be a game-changer.
With Visdum, you can:
Design customized OTE models tailored to your sales roles and processes
Automate commission calculations for accurate real-time OTE visibility
Provide transparency to reps on precisely how their efforts impact earnings
Model scenarios to optimize pay mix, quotas, accelerators, and more
Integrate seamlessly with your CRM for data integrity
Analyze payout metrics to continually refine your compensation plans
Spend less time on manual comp plan administration
By leveraging Visdum's intuitive platform, SaaS companies can ensure their OTE programs remain competitive, drive the right behaviors, and allow sales teams to focus on closing deals rather than decoding compensation.
OTE or On-Target Earnings represents the total potential compensation a sales professional can earn by achieving their sales quota or goals, including base salary and variable components like commissions or bonuses.
What does OTE mean in a salary?
In a salary context, OTE denotes the total target earnings of base pay and performance-based incentives like commissions or bonuses that an employee is eligible for when hitting their goals or quota.
How do you calculate OTE?
Calculate OTE by adding your base salary to potential bonuses or commissions based on meeting sales targets.
OTE is typically calculated as: Base Salary + Commission/Bonus at 100% Quota Attainment = On-Target Earnings
For example: $60,000 base + $50,000 commission (at 100% of $500K quota) = $110,000 OTE
Is OTE (on target earnings) paid monthly?
No, OTE itself is not paid out monthly. The base salary component is paid per payroll cycles, while commissions or bonuses that make up the variable part of OTE are paid out per the compensation plan's frequency (monthly, quarterly, annually etc.)
What does $100,000 - $200,000 + OTE mean?
This type of range listing in a job posting denotes a base salary between $100,000 - $200,000 in addition to the performance-based variable compensation (OTE) that can be earned on top of base salary.
What is the average quota for a SaaS sales rep?
Average annual quota for SaaS sales reps can range from $500K - $2M in new annual contract value (ACV) for account executives, based on factors like product pricing, sales cycle lengths, and territory/market factors.
Does OTE include base salary?
Yes, OTE (On-Target Earnings) includes both the base salary and additional bonuses or commissions a salesperson can earn if they meet their sales targets.
What does 150K OTE mean?
A 150K OTE means that a salesperson has the potential to earn a total of $150,000, including their base salary and any additional bonuses or commissions if they achieve their sales targets.
What is a good OTE percentage?
A good OTE percentage varies by industry and company. In sales, OTE percentages often range from 10% to 20% of the sales target. It's crucial to consider factors like industry standards, sales cycle length, and individual performance expectations when determining a good OTE percentage.
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