What Does Salary OTE Mean?

An OTE salary might be something you’ve heard of before in business, but not many people know what it is or if it’s suitable for their business. In basic terms, OTE stands for On-Target-Earnings (or On-Track-Earnings). It’s essentially a way of measuring how much an individual could earn when you factor in your base salaries and sales commission rates, for example, which you could receive so long as target earnings are met. OTE isn’t a guaranteed income, but it can be useful when negotiating salaries and discussing what an employee could earn, so long as all targets are met.

This incentivises staff to meet their goals so that their OTE salaries can be received. Without meeting the proposed targets, the employee’s base salary will be all they receive typically. For example, if a sales team has OTE salaries, then by hitting their sales quota and targets, they’ll receive their full salary structure as outlined with OTE. Sales reps who don’t meet those targets won’t receive the fully capacity of their salary.

Important Info For Employers

Here are 3 key takeaways about OTE and it’s meaning:

1. OTE refers to On-Target Earnings, this is the total annual compensation an employee can expect to earn when hitting 100% of the goals set for them by management. It includes base salary plus target commission. This is especially relevant to a sales job, where a sales rep will receive sales commissions for their work.
2. To calculate OTE, start with guaranteed base pay, then add the potential incentive commission for meeting predefined quotas or objectives – such as sales commission for a sales representative based on revenue generated by their contribution to the business. For example, £30,000 base + £7,000 target commission = £37,000 OTE.
3. OTE structures can be capped or uncapped. Capped OTE limits commission earnings but provides predictability in any role. Uncapped OTE enables exceeding targets and higher commissions, motivating top performance and incentivising the employee to work to achieve the targets being set. Companies weigh predictability vs. incentives based on their needs, and this ought to be communicated to the hiring manager so they know what’s on offer to workers.

Additional Points:

• OTE only factors base salary and target-level commissions, not bonuses or other compensation that may be part of their pay mix.
• Pay mix refers to the % of the OTE that is base salary vs commission – this ought to be communicated clearly to any candidates for the role.
• To calculate OTE, add the base pay to potential commission at 100%. Here the OTE reflects the best possible outcome for the employee, but it may be less if targets aren’t met. For example, a £50,000 base salary plus 100% commission at £15,000 = £65,000 OTE. If only 50% of targets are met in a sales rep role, then they would receive £50,000 base salary plus £7,500 commission = £57,500.
• Commission payouts are tied to individual metrics like sales quotas or team goals around revenue or recruitment numbers. Exceeding goals may result in commissions higher than target payouts if your company allows for additional commissions to be paid when targets are exceeded. This incentivises employees so it’s well worth considering.
• OTE structures can be capped or uncapped. Capped OTE limits commission earnings while uncapped OTE enables higher commissions for top performers.

How Do You Calculate OTE?

OTE is the total annual compensation plan an employee can receive when they meet 100% of their work-related performance targets. It’s their base salary (their guaranteed pay agreed regardless of targets) plus their commission goals (the compensation they receive when 100% of their goals are met). When these are added together, you get their OTE salary.

For example:

• £40,000 base salary
  • £10,000 target commission (25% of base)
• = £50,000 OTE

So if the employee hits all targets, their total annual earnings would be £50,000, which is their On-Target Earnings. This does not include any additional bonuses or benefits beyond base and target commission which might also be offered as part of their pay structure at your business. Calculating OTE provides a clear projection of an employee’s expected total compensation.

Further Calculation Examples

What Does 25k OTE Mean?

You may see OTE expressed as a round number like “£25k OTE” in job postings. This refers to the On-Target Earnings potential for that role.

The £25k OTE indicates the total expected annual compensation if 100% of goals are achieved. This will be made up of:

• A base salary that covers core responsibilities. For example, £20,000.
• Target commission at full quota attainment. For example, £5,000.
• Adding the £20,000 base salary and £5,000 potential commission totals the £25,000 OTE.

Expressing OTE as an even round number like £25k is a convenient way to convey the full earnings potential in a simple and accessible way for candidates to assess what their best case scenario pay might be. But companies calculate OTE more precisely in setting the specific base salary and target commission numbers that make up the total On-Target Earnings.

It can, of course, be expressed with other numbers. Similarly, a “£28k OTE” indicates £28,000 in total expected annual compensation when 100% of goals are met. For example:

• A £22,000 base salary.
• Plus potential commissions of £6,000 at full quota attainment.
• Totals the £28,000 On-Target Earnings amount.

Round OTE figures simplify the compensation potential for job seekers, while employers use exact base and commission numbers to calculate OTE precisely.

A Note On OTE Salary vs Base Salaries

Even when a job advertisement lists their on target earnings (OTE) as a specific number, such as £28k, it’s worth looking at the breakdown of that number.

Remember your OTE salary should be looked at as your ‘best case’ salary. When the going is good, this is what you’ll earn, but what about when the going gets tough? You have to consider the base salary independently of the OTE so you aren’t seduced by the higher number, which may not actually be achieved every year.

Ensure the base salary meets your needs as an employee, and as an employer you ought to offer competitive base salaries to attract top talent. High OTE salaries are nice to have, but a higher base salary will instil candidates and employees alike with more confidence.

Capped vs Uncapped OTE

Capped OTE

• Some companies use a capped OTE structure which limits the amount of commission an employee can earn.
• A cap provides predictability in budgeting and cost control for the business. However, it limits the upside potential for top performers.
• There’s also a danger that employees may see their OTE as a fixed salary when they achieve their targets year on year, and then stop pushing after those targets are met until the next tax year.

Uncapped OTE

• With an uncapped OTE structure, there is no limit set on commission earnings.
• This enables high achievers to exceed targets and maximise their commissions. It provides stronger motivation but less cost predictability for the business which can be worrying, especially if paying commission is new to you as a business owner.

When designing an OTE plan, companies need to weigh the benefits of predictability with a capped structure vs the performance incentive of uncapped earnings potential.

The right approach depends on the company’s objectives, sales model and appetite for risk. Most choose either capped or uncapped rather than a hybrid approach as this is clearer for all involved.

A general rule of thumb to follow is that uncapped OTE earnings are better used at established businesses that have a proven track record of consistent profits. Capped OTE earnings are much better suited to newer businesses that are starting out to help control costs.

What Roles Generally Have OTE Salaries?

Sales Roles

• Sales representatives and account executives frequently have OTE structures as part of their compensation package to encourage performance.
• The base salary of a sales representative provides steady income, while commissions on sales give them additional earnings potential for meeting quotas.

Business Development

• Business development professionals who source new accounts and partnerships often have an OTE model.
• The base covers their core responsibilities, while commission encourages them to drive business growth and make new connections or the business.

Recruiters

• Recruiters and talent acquisition roles often include an OTE component as recruitment fees can be high for businesses so a stronger success rate is required.
• Meeting hiring targets triggers commission payouts on top of their base salary to encourage them to find and onboard the right staff the first time.

Other Performance-Based Roles

• Many performance-driven positions such as mortgage brokers, media sales, and investment brokers use OTE compensation as a way to incentivise employees.
• The base salary covers core activities, while variable pay connected to specific targets encourages them to go above and beyond in their role.

Paying Taxes On On-Target Earnings

For tax purposes, OTE is treated as income from employment and is subject to the same taxes as any other wage or salary. This includes both National Insurance Contributions and income tax. However, there are some important administrative distinctions to be aware of when it comes to OTE for you as an employer and for employees.

While OTE is considered income from employment for tax purposes, it is often not subject to the automatic deduction of tax at source. This means that employees who receive OTE will need to declare it on their annual tax return and pay any due taxes in a lump sum with failure to do so resulting in interest and penalties.

For these reasons, it is always important to seek professional advice if you receive On-Target Earnings as part of your compensation package to ensure you do not encounter tax issues.

Conclusion: Pros & Cons Of OTE

Nonetheless, OTE remains a popular compensation model among businesses of all sizes and can work for both employers and employees so long as the figures are factored into the company’s budget and running costs to ensure they’re never in a position where they promise an OTE salary to an employee if they meet their targets, those targets are then met, but the business is then unable to pay the on target commissions previously promised.