If you see the phrase OTE in the salary of a job advert, it means On Target Earnings, or sometimes On Track Earnings.
This means that the salary advertised is only achieved if the employee meets the performance targets associated with the job
Whether you are looking for a job or recruiting to hire somebody on an OTE basis – here is everything you need to know…
How does OTE work?
OTE salaries are usually advertised for sales job where part of the employee’s earnings are earned through performance related commission or bonuses.
A typical sales position OTE salary is normally made up of 3 elements. A basic salary which is fixed, and commission and bonuses which will vary depending on performance.
- Basic salary – a fixed yearly amount paid regardless of performance (also known as base salary)
- Sales commission – a percentage of the sales revenue made by the employee through the products and services they have personally sold to customers (For example if they are on a 10% commission deal and they sell £10k worth of products, they will be paid 10% of £10k, which is £1,000)
- Bonuses – Fixed amounts paid for hitting specific targets set by the company
For example, here’s how this might look for a typical car sales person in a year of selling cars for their employer.
- Basic salary – £25K
- Sales commission – £9K (10% commission of £90k revenue generated through car sales made by them)
- Bonuses – £2K bonus for being the top seller in their region.
- Total OTE:£36K (£25k + £9k + £2k)
Benefits of OTE pay
The benefits of commission and bonus pay within a salary is that somebody who performs well and makes plenty of sales has the potential to earn more money. Commission is sometimes “uncapped” meaning that there is no limit to how much an employee can earn.
And for employers, the benefit of performance related pay is that companies are not obligated to pay high salaries to staff who are not generating enough revenue for the business. It also encourages staff to achieve better results for the business by rewarding them accordingly.
OTE salary is never guaranteed
Ultimately, OTE salaries advertised in job descriptions are never guaranteed, they are simply an indication of how much money can be earned if the employee meets all of the targets set for the role by their employer.
In cases where the employee is not meeting any of their targets, they may not earn any additional money on top of their guaranteed basic salary, which is often relatively low.
The targets that employees need to meet in order to make their on-target-earnings will differ greatly depending on the industry and job. However, most targets are linked to sales of products and services.
For example, employers may set the following types of targets for staff to hit their OTE.
- An office furniture sales Rep needs to sell £50K of furniture per year
- A recruitment consultant must bill £120K of recruitment fees
- An estate agent must generate £5,000 house sales per month
How to calculate OTE?
On target earnings are calculated by adding an employee’s performance-related commission and bonuses, to their basic salary.
Here’s an example to illustrate.
Basic salary of £16K + Commission of £5k + Bonus of £1K = Total earnings of £22K
How to calculate commission
Commission is one of the largest components of OTE and sometimes it can be much bigger than the base salary. Commission is normally paid as a percentage of revenue generated by the employee via sales of products or services they make for their employer.
So, to calculate commission earned by an employee, you multiply the revenue their sales have generate by the percentage of the commission deal they are on.
- An IT sales rep on a 15% commission deal who has sold £200k worth of software will earn £30K commission (£200,000 X 0.15)
- A mortgage advisor on a 20% commission deal who has generated £100k worth of fees will earn £20K commission (£100,000 X .20)
- An insurance call centre staff member on a 25% commission deal who sells £10K worth of insurance packages will earn £2,500 commission (£10,000 X .25)
When are bonuses paid?
Performance bonuses are paid when an employee hits a specific target or reaches a milestone set by the employer. Bonuses are usually pre-determined fixed amounts, as opposed to commission which is a percentage of revenue generated by the staff member.
Some examples of bonuses are:
- A “top performer” bonus of £500 for the sales person who generates the most sales out of everybody in the sales team
- A target achievement bonus of £1,000 to every sales person who makes 10 sales or more
- A project completion bonus of £5,000 for completing a project on time and within budget
What is the OTE pay mix?
The pay mix is the ratio of basic salary to commission and bonuses in relation to the total amount of money earned in one year. For example, if an employee earns £40K which is made up of £20K base salary + £20K commission, then the pay mix is 50/50.
Examples of OTE salaries
Here are some examples of employees on performance-related pay mixes, showing how they achieve their on target earnings.
Tony – Tech customer service – OTE £30K
Tony works on the shop floor of a consumer electronics company, advising customers on which purchases to make, and he is incentivised to sell products like TVs and laptops to customers with a mixture of commission and bonuses.
Targets: To hit his OTE of £30K, Tony’s employer have set him a target of selling £28,000 worth of consumer electronics on a commission rate of 25% and they also offer a bonus of £500 to anybody who sells more than 25 TVs.
Performance: Tony made sales of £32,500 which included 52 TVs, surpassing his targets.
- Basic salary: £23K
- Commission: £8,125 (£32,500 X 0.25)
- Bonus: £500
Total earnings: £31,635 – Tony hit his OTE plus a bit extra
Laura – Office furniture sales rep – OTE £65K
Laura works for an office furniture retailer, liaising with business customers to identify their office needs and provide them with suitable furniture packages. She is incentivized to make sales by her employer offering commission on all furniture sales she makes to customers.
Targets: To make her OTE of £65K, her employer has set her a target of selling £200,000 worth of office furniture at a commission rate of 15%.
Performance: Laura sold £150,000 of furniture, falling short of her target by £50K.
- Basic salary: £35K
- Commission: £22.500 (£150,000 X 0.15)
- Bonus: None offered
Total earnings: £57,500 – Laura was short of her OTE by £7,500
OTE earnings – the last word
OTE earnings consisting of a base salary, sales commission and bonuses can be an excellent way for employers to boost staff performance, and for employees to earn high salaries. But its worth noting that OTE salaries are not guaranteed unless performance targets are hit – and they will normally require a lot of hard work to reach.