What is on Target Earnings (OTE): What Does It Mean in Pay and How is it Calculated

If you’re a small business leader, a manager of a remote or hybrid team, or an HR pro committed to building performance-based pay structures then On-Target Earnings (OTE) is critical to your work. OTE is an effective way to recruit, incentivize and maintain high-performing talent, most notable in revenue roles. But creating a competitive but realistic OTE is very, very difficult. Get it wrong, and you risk high turnover and disillusioned employees; get it right, and you generate predictable revenue growth.

In this complete guide, you'll get OTE salary demystified—with a careful step-by-step walk-through of how to calculate OTE—analysis on the approach that’ll work best for your business (because there are many), and reams of strategic advice so you can use without building unholy optimism followed by unpleasantness.

What Is OTE?

OTE is short for On-Target Earnings and refers to an employee's maximum possible salary or earnings, assuming they were to meet all of their performance targets or sales goals.

OTE is not a guaranteed salary. It is a projected figure built upon two distinct and fundamental components:

• Base Salary: The certain, fixed yearly amount of monetary compensation an employee is paid regardless of performance. This provides financial stability.
• Variable Compensation (Commission/Bonus): Potential compensation that is directly linked to the employee's performance in achieving their objectives. This is the primary driving factor.

The formula that defines the OTE salary is therefore:

OTE=Annual Base Salary+Target Variable Compensation

For example, if a job advertisement lists a salary as "$150,000 OTE," it means the employee is guaranteed the base salary portion (e.g., $75,000), but the remaining variable portion (e.g., $75,000) is only earned if they achieve 100% of their targets. This clarifies what is on target earnings and what the OTE meaning truly represents.

How to Calculate OTE

Calculating OTE is a strategic exercise that requires balancing market rates, company goals, and employee motivation. Here is the structured process:

1. Determine the Base Salary

The base salary must be attractive enough to hire and retain talented individuals, even during slow sales periods or ramp-up phases. This amount should be compared to industry benchmarks for that role, experience level and geographic location (since remote operations are a thing).

Strategic Tip: The proportion of the base salary versus the variable compensation (known as the Pay Mix) is critical. A 50/$50 pay mix (e.g., $60,000 base / $60,000 target commission for $120,000 OTE) is common for high-risk, high-reward sales roles like an Account Executive. A 70/$30 mix might be used for roles with more fixed responsibilities, like a Sales Manager or a specialized Marketing Director.

2. Set Performance Quotas or Targets

These are the measurable metrics that define 100% achievement.This is usually a specific sales target for a salesperson (e.g., $1,000,000 in Annual Contract Value, or ACV). For other positions, anyone would make it could be a certain number of qualified leads, customer retention rates or project milestones.

Crucial Insight: Targets should be Achievable. If only 10% of your team hits the target, the OTE figure is based on a stretch goal, which is demotivating and a common pitfall. A healthy organization sees 60%−80% of its performing employees hitting 100% of their quota.

3. Calculate Projected Commission Based and Factor in Any Additional Bonuses

This step defines the Target Variable Compensation—the exact dollar amount the employee earns for hitting 100% of their quota.

Commission Structure: If an AE has a $100,000 base and a $200,000 quota, and the company sets the variable component at $100,000, the commission rate is $200,000- $100,000​=50% (a very high commission rate example).

Bonus Factor: This could include any quarterly, semi-annual or annual bonuses tied to team performance, company revenue goals or specific metrics not included in the overall commission (for example, a $5000 bonus for surpassing the customer satisfaction score).

4. Add the Base Salary and Commission/Bonus to Get OTE

Summing the fixed and target variable components provides the final, advertised OTE earnings figure.

Example: A Typical Account Executive (AE) OTE Calculation

This $200,000 is the OTE, the expected income if the AE performs on target.

Capped vs. Uncapped OTE

The decision to cap or uncap OTE is a major strategic choice that affects team motivation and company financial forecasting.

Capped OTE

A Capped OTE structure places a defined maximum on the total variable compensation an employee can earn. Once the employee reaches this cap, they stop earning commission, even if they continue to generate revenue.

• Benefit for Management: Provides budget predictability and control over payroll expenses.
• Drawback for Employees: Heavily demotivates high-performers who have reached the cap mid-year, effectively encouraging them to slow down.

Uncapped OTE

An Uncapped OTE means that your earning potential is limitless, with commission being paid on every sale. If a rep hits 150% of quota, they receive 150% (or often more) of their target variable compensation. This “syndicate shit” is normal in high growth sales companies.

• Benefit for Management: Maximally motivates top talent to pursue every deal and close as much business as possible. It is a powerful talent attraction tool.
• Drawback for Management: Creates less predictable compensation expenses, requiring a more robust financial model.

For growth-focused companies and leaders: The uncapped OTE model is generally preferred for core revenue roles, as the increased revenue generated far outweighs the increased commission expense.

Examples of Jobs with OTE Salaries

The OTE model is best suited for roles where output is directly and reliably measurable, making it clear what OTE stands for in terms of expected production.

• Sales Representatives / Sales Development Reps (SDRs): Their OTE is often heavily weighted to the base salary up front (e.g., 70/$30), which makes sense – after all, their targets are based on lower value metrics such as qualified meetings or lead generation rather than final closing revenue.
• Account Executives (AEs): The traditional OTE role, occasionally with an equal pay mix (e.g., 50/$50). They are directly compensated based on closed deals and revenue goals.
• Sales Managers: They usually have a higher base (75/$25 for example) in their OTE, since much of their variable compensation is based on a group's performance– and it needs to be different enough to allow him/her some level of management control.
• Field Sales Representatives: Similar to AEs but may have additional variable pay components tied to territorial growth or specific product launches.
• Marketing Directors: Sales hasn’t traditionally been a part of marketing org chart, however it’s possible that more senior Marketing roles have OTE and a variable component tied to Marketing-sourced Revenue, Customer Acquisition Cost (CAC) goals or simply lead volume targets.

Benefits of an OTE Salary

Using a clear OTE structure provides substantial benefits for companies and remote teams:

• Aligns Incentives: It makes sure that every activity an employee takes (sales rep, manager) is directly related to a company’s central pursuit: making more money.
• Attracts High-Performers: Ambitious, confident professionals are motivated by high OTE figures and the opportunity for uncapped earnings. It filters applicants who are willing to back their confidence with performance.
• Clarity and Transparency: OTE provides a single, easy-to-understand figure for total earning potential, making job offers transparent and comparable. It clearly establishes the expected return on investment for the salary package.
• Predictable Budgeting (when well-managed): Commissions do vary but this OTE figure is an easy cost-of-labour measure for forecasting and planning, particularly when it comes to remote hires in different markets.

Potential Pitfalls of Using an an OTE Model

For leaders and HR professionals, avoiding these common traps is crucial for maintaining trust and team morale.

Unrealistic OTE to Attract Talent

This is the most dangerous pitfall. Inflating the advertised OTE by setting an unattainable target variable compensation is a "bait-and-switch" tactic. It might temporarily boost applicant volume, but it quickly leads to:

• High frustration and low morale.
• Massive churn (high turnover) when employees realize the promised ote on target earnings are impossible to hit.
• Reputational damage to the company's employer brand. The OTE figure should be the realistic median earning for a competent rep.

Don’t Turn OTE into a Stretch Goal

The OTE figure represents 100% quota attainment. If you structure the compensation so that only the very top 5% of your team can achieve it, you have effectively made OTE a "stretch goal."

• Actionable Advice: The OTE should be defined around a realistic metric. Add accelerators (higher commission rates on >100% quota) to reward outstanding performance, and save real "stretch goals" for the over-achievers that deserve them vs making it a flat OTE.

Adjusting OTE After Hiring Is a Red Flag

A massive lowering of base commission, percentage or target just after someone has taken the offer significantly is an ethical compromise. Certainly, compensation plans need to change; however, change should be:

• Infrequent and justifiable (e.g., major shift in product line).
• Communicated transparently well in advance.
• Structured fairly to allow the employee a reasonable ramp-up or transition period.

FAQs About OTE

Is OTE Salary Guaranteed?

No. The Base Salary component of the OTE is guaranteed income. The Target Variable Compensation component is explicitly not guaranteed; it is contingent upon the employee hitting 100% of their targets.

What Happens if Performance Targets Aren’t Met?

If an employee attains 80% of their objectives, they will get 100% of their base salary + 80% of target incentives. This means that their total earnings will be lower than the OTE. Repeated underachievement could result in a performance improvement plan (PIP) or termination

How is OTE Calculated for Capped vs. Uncapped Structures?

The initial calculation of the OTE figure is identical for both structures: Base + Target Variable.

• Capped: OTE is the maximum amount the employee can earn.
• Uncapped: OTE is the expected amount at 100% performance, but the employee can earn more by exceeding targets.

Can OTE Change Over Time?

Yes. OTE values typically fluctuate on a yearly basis according to changes in the market but are also likely to vary based on promotions, company outlook changes, and restructured commission plans. Any alteration needs to be made with care and open communication.

Is OTE Net or Gross?

Gross OTE, similar to the gross base salary, will always be displayed in a Gross figure. This is the sum before any payroll deductions - including federal, state and local taxes, insurance premiums and retirement contributions.

Summary for Business Leaders

On-Target Earnings (OTE) is more than just a number; it's a strategic philosophy. By defining a clear, competitive, and most importantly, achievable OTE, you establish a direct line of sight between effort, performance, and reward. For organizations leveraging remote or hybrid workforces, a well-defined OTE ensures standardization and competitiveness in a global talent market, directly fueling your company's revenue objectives.