Although areas such as wellbeing and work-life balance are now key considerations when it comes to taking the leap and accepting a new role, 62% of UK employees report that pay is their biggest motivator for coming to work. With a cost of living crisis at large, employees everywhere are trying to secure more lucrative opportunities. OTE could offer just that.
OTE or ‘on target earnings’ allows employees to take control over their income. By meeting or exceeding targets, employees can tap into an enhanced income and dig a bit deeper into the pockets of their employer.
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What Does OTE Mean?
OTE stands for ‘on target earnings’ or ‘on track earnings’. This refers to the projected or expected total pay that an employee can earn within a set period of time. It is commonly used in sales or performance-based roles where an employee’s pay is determined by their achievements and meeting certain targets.
OTE is often made up of various components, including base salary, commission, and bonuses. The base pay is the fixed amount of salary that an employee receives regularly and can always expect to earn. The commission is a variable figure that is usually calculated as a percentage of the sales or revenue generated by the employee. Bonuses are additional rewards given for achieving specific targets or exceptional performance.
Capped Versus Uncapped OTE
The difference between capped and uncapped OTE lies in the limitations placed on the potential earnings of an employee.
In a capped OTE structure, there is a predefined maximum limit or ‘cap’ on the amount of commission or total earnings that an employee can achieve, regardless of their performance. This means that even if an employee goes above and beyond their sales targets or achieves exceptional results, their earnings will not exceed the predetermined cap. In essence, they have the ability to bring home more money.
On the other hand, in an uncapped OTE structure, there are no limitations or caps on the potential earnings. Employees have the opportunity to earn unlimited commission or total compensation based on their performance and achievements. This means that the more successful an employee is in meeting or exceeding their targets, the higher their earnings can be.
What Industries Typically Offer OTE Salary?
OTE is a compensation structure commonly found in industries that heavily rely on sales and performance-driven roles. Some of the industries that typically offer OTE include:
In retail, OTE is prevalent in positions such as sales associates, store managers, and regional sales managers. These roles often involve meeting sales targets and driving revenue for the company.
The technology industry frequently offers OTE to sales representatives, account executives, and business development managers. These roles involve selling software solutions, IT services, or hardware products.
- Advertising and Marketing
Account executives, sales managers, and business development professionals in the advertising and marketing industry often have an OTE component to their income. They may earn commissions based on the revenue generated from securing advertising campaigns or client accounts.
OTE Salary and Employee Benefits
Receiving OTE offers several benefits to employees, empowering them to excel and reach their full potential. Let’s take a look at some of these benefits in more detail:
- Drives High Performance
OTE pay serves as a powerful motivator for employees to perform at their best. With the potential for increased earnings tied to meeting or exceeding targets, employees are driven to go above and beyond in their work. The prospect of earning additional commissions or bonuses acts as an incentive for employees to drive sales by consistently striving for excellence and achieving exceptional results.
- Motivates Employees
OTE pay creates a results-driven environment. This environment drives motivation and creates a high-performing culture in organisations. The opportunity to increase their earnings based on their performance fuels a sense of purpose and determination in employees. Knowing that their efforts directly impact their take-home pay, encourages employees to set ambitious goals, take initiative, and continuously improve their skills and abilities.
- Enables Autonomy
OTE pay provides employees with a certain level of control and autonomy over their earning potential. By aligning pay with performance, employees have the opportunity to directly influence their income. This can be particularly appealing to individuals who are self-motivated and enjoy the challenge of surpassing targets. It offers a sense of empowerment, allowing employees to take ownership of their financial rewards based on their efforts and achievements.
OTE Salary and Organisation Benefits
Implementing an OTE pay structure offers several benefits to the organisation, not just employees. Here a just a few of the organisational benefits that come hand-in-hand with OTE:
- Attracts Top Talent
One of the biggest benefits of OTE is that it acts as an enticing factor when recruiting top talent. The potential for increased earnings based on performance appeals to ambitious individuals who are motivated by financial rewards. It helps the organisation attract and retain high-performing employees who are driven to achieve results and contribute to the company’s success.
- Generates Higher Revenue
OTE directly aligns employee performance with revenue generation. Incentivising employees to meet or exceed their targets drives sales and boosts overall profits and ultimately leads to more sales for the organisation. The motivation to earn additional commission or bonuses encourages employees to actively pursue opportunities, close deals, and maximise sales potential, compared to roles where employees are paid the same each month, regardless of how hard they work.
- Increases Employee Engagement
When employees have a direct stake in their performance-driven compensation, they become more engaged and focused on achieving the organisation’s goals. The clear link between effort and reward strengthens employee commitment, productivity, and dedication to meeting objectives.
Downsides Of OTE Salaries
While OTE has its advantages, there are some potential pitfalls employers should be mindful of:
- Detrimental Competition
OTE pay can sometimes foster an unhealthy sense of competition among employees. When pay is directly tied to performance, individuals may prioritise their personal success over the success of others and the organisation. This can lead to a cutthroat environment that hampers cooperation and inadvertently creates a culture of unhealthy competition between coworkers.
- Burnout and Work-Life Balance
The pursuit of meeting or exceeding targets can create high levels of stress and pressure for employees. The pressure to consistently perform at high levels can lead to long working hours, limited personal time, and reduced opportunities for relaxation and self-care. This imbalance can adversely affect employee wellbeing and overall quality of life.
- Creation of Silos and Reduced Collaboration
OTE pay structures can sometimes lead to the creation of silos within the workplace. When individuals are solely focused on achieving their individual targets and incentives, collaboration and teamwork may suffer. This can hinder information sharing, impact cross-functional interaction, and limit the collective success of the organisation
How To Calculate OTE Pay
It’s important that organisations clearly understand what their OTE pay is comprised of and how to calculate OTE for each individual. Determining on target earnings isn’t always as easy as it first seems and it’s critical to get right. Let’s look closer at calculating OTE:
- Determine Base Salary
Start by identifying the employee’s base salary, which is the fixed amount they receive regardless of their performance. This base pay can be an annual or hourly rate depending on the pay structure.
- Determine Commission Structure
Another part of the pay mix is commission. If the OTE includes commission, determine the commission structure. This can be a percentage of sales, revenue generated, or other predetermined criteria. Understand any tiered on target commissions or thresholds that may apply.
- Consider Bonus Pay
The third part of the compensation package is bonus pay. If the OTE includes bonuses, determine the criteria for eligibility and the potential payout and make sure these are clear. Bonuses can be based on individual performance, team performance, or company-wide goals. Evaluate the formula or targets required to earn the bonus.
- Add Together The Components
Add the base salary, commissions, and bonuses together to calculate the OTE. OTE pay is taxable, so employers should make sure this is actioned correctly with their payroll team or provider.
What Does OTE Look Like In Practice?
OTE structure can vary based on each organisation, but here is an example to see OTE in action:
Let’s take the pay of a Sales Advisor. The OTE pay is advertised as £50,000 per annum. This could be made up of:
- An employee’s base pay of £25,000 per annum.
- Capped commission of up to £20,000 per annum.
- An annual bonus of £5,000 should the Sales Advisor meet their targets.
When Should Commission and Bonuses Be Paid?
The timing of commission and bonus payments can vary across different organisations based on their specific policies and practices, but here are a few examples:
Some organisations choose to pay commissions and bonuses on a monthly basis, often alongside regular salary payments. This can provide employees with more frequent recognition and rewards for their performance.
Quarterly commissions and bonus payments are another common approach. Paying these every three months will align with the organisation’s financial reporting periods.
Yearly commission and bonus payments are often tied to the financial year-end or performance review cycles. Companies may set specific performance targets or goals for employees to achieve throughout the year, and bonuses are awarded once these targets are met.
In some cases, bonuses in particular may be discretionary and not tied to a specific payment schedule. This means that bonuses are awarded based on the organisation’s discretion and evaluation of individual or team performance in respect of company goals, without a predefined timing.