Eddy’s HR Mavericks Encyclopedia
The world's largest free encyclopedia of HR, with 700+ HR articles and podcasts.
Created by Eddy and our HR Mavericks community.
On-Target Earnings
When it comes to building a competitive commissions plan, one of the first things that should be determined is on-target earnings. This is important to determine as it is one of the first things sales reps want to know when they start a new job. In this article, on-target earnings will be explained, as well as the role they play in motivating employees.
What Are On-Target Earnings?
Typically used when paying sales employees, on-target earnings (or OTE, or simply target earnings) is the amount of money an employee gets paid if they hit all their metrics, or performance goals. On-target earnings include an employee’s base salary as well as any variable income (such as commissions, bonuses, piece rates). In simple terms, it is the expected “take-home pay” for a position.
Should Companies Offer On-Target Earnings?
While it is common for companies to use on-target earnings for salespeople, it is important to understand the pros and cons of using them.
Pros of Offering On-Target Earnings
- Clear expectations. On-target earnings provide clear expectations of the amount of money that sales reps can earn if they hit all their metrics each month. Since sales income can be a bit unstable, employees want to know what they will be able to make if they meet expectations.
- Motivation. Most sales reps with on-target earnings earn a base pay with commissions on top of it. On-target earnings gives them a realistic goal to work towards, which can drive them to go above and beyond the OTE.
- Earning opportunities. When a company provides OTE for a position, it also shows the potential of earning even more when exceeding all outlined metrics. Typically, when sales reps exceed their metrics in a given month, their earnings for the sale will increase. Sales reps are motivated by money, and knowing how much they will make when they hit their metrics will motivate them to make even more for every sale after their metrics.
Cons of Offering On-Target Earnings
- Variable income. For some employees, the uncertainty of not knowing what they will make each month is not very appealing and may increase stress.
- Manager discretion. Another potential downside of on-target earnings is that performance goals and earnings potential is set by the manager. If the manager doesn't provide support and want what is best for employees, they may set unfair OTEs.
- Higher taxes. The variable income that is included in part of on-target earnings is typically taxed at a higher rate than a normal salary, as it is counted as a bonus. This is something that can catch salespeople off guard at times if they aren’t aware of it, which can lead to frustration on their part.
How to Set and Calculate On-Target Earnings
Sometimes on-target earnings can be complicated, depending on how many different variables it includes. Here are the basic steps of calculating it.
Step 1: Begin With Base Salary
The most basic step is to start with the employee's base salary. This will never change, and all additional variable income will be added to this amount.
Step 2: Determine Variable Income
The next step is to determine all the different variables that will be a part of the OTE. As mentioned earlier, some of those can include commissions, bonuses, and piece rates.
Step 3: Set Metrics
Decide what metrics must be achieved in order to earn each type of OTE.
Step 4: Calculate Earnings for Each Variable
After all the variables and metrics have been determined, calculate what an employee will earn for each metric they fulfill. Once that has been done, the OTE is determined by adding the base pay to all the sources of variable income (assuming the metric for each is fulfilled). For example, let's take Jane Smith, a sales rep with XYZ Company. Jane has a base salary of $45,000, she is offered a commission of $100 for each sale she makes in a month and a bonus of $1,000 each month if she hits each metric that is outlined (such as amount of calls each day, talk time, or customer satisfaction score). If Jane meets all her metrics and makes 20 sales each month, we can calculate her OTE like this: Base salary: $45,000 Commissions: $24,000 Bonus: $12,000 OTE total: $81,000
Examples of On-Target Earnings
Here are a few examples of different kinds of variable income.
Commissions
Commissions are the most common kind of on-target earnings, as this is what salespeople are paid when they make each sale. For example, say they make $4,000 a month if they make 10 sales or appointments set each month. If they hit their quota exactly each month, then their OTE will be their base salary plus $48,000 ($4,000 X 12 months = $48,000).
Bonus
A bonus can be included in on-target earnings if an employee’s bonus is based on certain metrics that they hit. Say an employee needs to hit a 90% customer satisfaction rate each quarter in order to get a $10,000 bonus. If they do that, then their OTE will be $40,000 on top of their base pay ($10,000 x 4 quarters = $40,000).
Piece Rate
Piece rate is a little more complicated, but the same idea applies since it is variable income. When an employee is hired and there is a certain amount of piece rate hours/work they are expected to complete each week or month, they hit their OTE by meeting that expectation over the entirety of the year. For example, say they make $3,000 a month if they complete each of their jobs in a month at an average rate of two hours. That is the expectation, so they would get $36,000 ($3,000 X 12 months = $36,000) if they meet expectations for each of their jobs. Piece rate is generally the whole amount of an employee's wages, not something in addition to a base salary. The Fair Labor Standards Act (FLSA) regulations are that an employee still needs to make the equivalent of minimum wage (or more) for the hours they work under piece rate wages.
Topics
Tanner Pierce, PHR
Tanner has over 4 years of HR professional experience in various fields of HR. He has experience in hiring, recruiting, employment law, unemployment, onboarding, outboarding, and training to name a few. Most of his experience comes from working in the Professional Employer and Staffing Industries. He has a passion for putting people in the best position to succeed and really tries to understand the different backgrounds people come from.
Frequently asked questions
Other Related Terms
Eddy’s HR Mavericks Encyclopedia
On-Target Earnings
When it comes to building a competitive commissions plan, one of the first things that should be determined is on-target earnings. This is important to determine as it is one of the first things sales reps want to know when they start a new job. In this article, on-target earnings will be explained, as well as the role they play in motivating employees.
What Are On-Target Earnings?
Typically used when paying sales employees, on-target earnings (or OTE, or simply target earnings) is the amount of money an employee gets paid if they hit all their metrics, or performance goals. On-target earnings include an employee’s base salary as well as any variable income (such as commissions, bonuses, piece rates). In simple terms, it is the expected “take-home pay” for a position.
Should Companies Offer On-Target Earnings?
While it is common for companies to use on-target earnings for salespeople, it is important to understand the pros and cons of using them.
Pros of Offering On-Target Earnings
- Clear expectations. On-target earnings provide clear expectations of the amount of money that sales reps can earn if they hit all their metrics each month. Since sales income can be a bit unstable, employees want to know what they will be able to make if they meet expectations.
- Motivation. Most sales reps with on-target earnings earn a base pay with commissions on top of it. On-target earnings gives them a realistic goal to work towards, which can drive them to go above and beyond the OTE.
- Earning opportunities. When a company provides OTE for a position, it also shows the potential of earning even more when exceeding all outlined metrics. Typically, when sales reps exceed their metrics in a given month, their earnings for the sale will increase. Sales reps are motivated by money, and knowing how much they will make when they hit their metrics will motivate them to make even more for every sale after their metrics.
Cons of Offering On-Target Earnings
- Variable income. For some employees, the uncertainty of not knowing what they will make each month is not very appealing and may increase stress.
- Manager discretion. Another potential downside of on-target earnings is that performance goals and earnings potential is set by the manager. If the manager doesn't provide support and want what is best for employees, they may set unfair OTEs.
- Higher taxes. The variable income that is included in part of on-target earnings is typically taxed at a higher rate than a normal salary, as it is counted as a bonus. This is something that can catch salespeople off guard at times if they aren’t aware of it, which can lead to frustration on their part.
How to Set and Calculate On-Target Earnings
Sometimes on-target earnings can be complicated, depending on how many different variables it includes. Here are the basic steps of calculating it.
Step 1: Begin With Base Salary
The most basic step is to start with the employee's base salary. This will never change, and all additional variable income will be added to this amount.
Step 2: Determine Variable Income
The next step is to determine all the different variables that will be a part of the OTE. As mentioned earlier, some of those can include commissions, bonuses, and piece rates.
Step 3: Set Metrics
Decide what metrics must be achieved in order to earn each type of OTE.
Step 4: Calculate Earnings for Each Variable
After all the variables and metrics have been determined, calculate what an employee will earn for each metric they fulfill. Once that has been done, the OTE is determined by adding the base pay to all the sources of variable income (assuming the metric for each is fulfilled). For example, let's take Jane Smith, a sales rep with XYZ Company. Jane has a base salary of $45,000, she is offered a commission of $100 for each sale she makes in a month and a bonus of $1,000 each month if she hits each metric that is outlined (such as amount of calls each day, talk time, or customer satisfaction score). If Jane meets all her metrics and makes 20 sales each month, we can calculate her OTE like this: Base salary: $45,000 Commissions: $24,000 Bonus: $12,000 OTE total: $81,000
Examples of On-Target Earnings
Here are a few examples of different kinds of variable income.
Commissions
Commissions are the most common kind of on-target earnings, as this is what salespeople are paid when they make each sale. For example, say they make $4,000 a month if they make 10 sales or appointments set each month. If they hit their quota exactly each month, then their OTE will be their base salary plus $48,000 ($4,000 X 12 months = $48,000).
Bonus
A bonus can be included in on-target earnings if an employee’s bonus is based on certain metrics that they hit. Say an employee needs to hit a 90% customer satisfaction rate each quarter in order to get a $10,000 bonus. If they do that, then their OTE will be $40,000 on top of their base pay ($10,000 x 4 quarters = $40,000).
Piece Rate
Piece rate is a little more complicated, but the same idea applies since it is variable income. When an employee is hired and there is a certain amount of piece rate hours/work they are expected to complete each week or month, they hit their OTE by meeting that expectation over the entirety of the year. For example, say they make $3,000 a month if they complete each of their jobs in a month at an average rate of two hours. That is the expectation, so they would get $36,000 ($3,000 X 12 months = $36,000) if they meet expectations for each of their jobs. Piece rate is generally the whole amount of an employee's wages, not something in addition to a base salary. The Fair Labor Standards Act (FLSA) regulations are that an employee still needs to make the equivalent of minimum wage (or more) for the hours they work under piece rate wages.
Topics
Tanner Pierce, PHR
Tanner has over 4 years of HR professional experience in various fields of HR. He has experience in hiring, recruiting, employment law, unemployment, onboarding, outboarding, and training to name a few. Most of his experience comes from working in the Professional Employer and Staffing Industries. He has a passion for putting people in the best position to succeed and really tries to understand the different backgrounds people come from.
Frequently asked questions
Other Related Terms
Eddy's HR Newsletter
Sign up for our email newsletter for helpful HR advice and ideas.
