What is OTE (On Target Earnings) and why your company needs to understand this to scale
If you lead a sales team, you may have heard of OTE — On Target Earnings. But between 'hearing about it' and structuring your team's compensation based on this concept, there is a chasm that separates teams that deliver results from teams that merely fulfill tasks.
OTE is not just a number at the end of the month. It is the backbone of a compensation model that aligns the interests of the salesperson with the company's objectives. When well-designed, it transforms the team's behavior, directs efforts to what really matters, and — most importantly — makes your best talents want to stay.
What is OTE?
OTE (On Target Earnings) is the total expected compensation of a sales professional when they achieve 100% of their target. In straightforward terms: it is how much they earn if they hit the agreed quota.
Unlike what many think, OTE is NOT the same as a fixed salary. It consists of two parts:
- Fixed salary (base): the guaranteed amount every month, regardless of results.
- Commission / variable (incentive): the portion that depends on performance against targets.
For example: an SDR has an OTE of $6,000/month, with $3,000 fixed and $3,000 variable if they hit 100% of the target. If they achieve 80%, they receive part of the variable. If they achieve 120%, they receive more.
Simple on paper. Where most go wrong is in designing the structure — and that’s where the difference appears.
The difference between OTE and fixed salary
Many companies hire salespeople paying only a fixed salary with a 'promise of commission.' This is not OTE. It is a gamble.
In a well-structured OTE model, the professional knows exactly how much they can earn, under what conditions, and how each of their actions impacts their own pocket. This completely changes the game:
- Predictability: the salesperson knows the ceiling and floor of their compensation.
- Alignment: the variable is tied to metrics that really matter (revenue, margin, LTV).
- Directed motivation: the effort goes where the money is.
- Retention: good salespeople stay when the structure is clear and fair.
Companies that treat commission as a 'discretionary bonus' (I give it if I want) reap the opposite: demotivated salespeople, confusing targets, and high turnover.
How to structure an OTE that works
Creating an OTE plan is not just about defining 'salary + commission' in the contract. It is about designing a system that balances three variables:
1. Fixed vs variable proportion
There is no universal rule, but there is a market standard that works:
- SDR / BDR (prospecting): 70% fixed / 30% variable — high security, moderate incentive.
- Account Executive (closing): 50% fixed / 50% variable — balance.
- Enterprise / Large Accounts: 40% fixed / 60% variable — higher risk, higher reward.
- Sales Executives (Head / VP): 30% fixed / 70% variable — pure results.
The greater the professional's ability to influence results, the larger the variable portion should be.
2. Correct metrics for the variable
The classic mistake is tying the variable to metrics that the salesperson does not control. Examples:
- ❌ 'Commission on net margin after operational costs' — the salesperson does not control operational costs.
- ✅ 'Commission on contracted revenue (ACV)' — the salesperson controls the business they close.
- ✅ 'Commission for qualified meetings held' — the SDR controls how many meetings they schedule.
- ✅ 'Bonus for renewal above 90%' — the CS controls the health of the account.
3. Accelerators and brakes
A good OTE plan has:
- Accelerators: if the salesperson hits 110% of the target, the commission on the excess is higher (e.g., 1.5x).
- Brakes (clawback): if the client cancels in the first 3 months, the commission is refunded.
- Gates (minimums): below 50% of the target, no variable is paid — prevents 'hit 10% and earned full commission.'
Why OTE is strategic (and not just an 'HR' issue)
Many managers treat sales compensation as a human resources problem. This is a costly mistake.
OTE is a strategic lever because:
- Directs behavior: want the team to sell more annual contracts? Tie the variable to ACV. Want them to focus on margin? Tie the variable to margin.
- Controls sales cost: with a well-designed OTE, the sales cost is a percentage of revenue. Growing does not mean proportionally increasing fixed costs.
- Helps scale predictably: when the sales machine is calibrated with a well-structured OTE, hiring more salespeople translates into more revenue — not more expense.
- Attracts better talent: experienced salespeople know how to read an OTE plan. They choose companies where they can earn well by hitting targets — not where the commission is a 'mystery every month.'
The most common mistakes when implementing OTE
- Unrealistic targets: OTE calculated with unattainable targets turns into 'disguised salary.' No one makes an effort.
- Variable without floor or ceiling: risky for both sides. Without a floor, the salesperson may go months without receiving. Without a ceiling, the company could go bankrupt if a salesperson closes a huge deal.
- Changing the rules mid-game: nothing destroys trust faster than altering the commission plan after the salesperson has already made the effort.
- Not communicating clearly: if the salesperson cannot calculate on their own how much they will earn, the plan is bad.
- Single metric for different roles: paying SDRs for closing and AEs for prospecting simultaneously confuses and generates conflict.
How Agência Kaizen can help
At Kaizen, we structure marketing and sales operations with a focus on predictability. This includes designing compensation plans that make sense for your business, aligning marketing and sales metrics, and creating processes that turn targets into revenue.
It’s not about 'raising the team's salary.' It’s about paying for the right results, in the right measure, and building a sales machine that scales without exploding costs.
Conclusion
OTE is not a benefit. It is not a kindness from HR. It is a management tool that, when well applied, becomes the most powerful lever a sales manager has to increase the team's results.
If your sales team is not delivering what it should, perhaps the problem is not the people — but the plan you designed for them.
Want to structure an OTE plan that really works? Talk to Agência Kaizen.