On-Target Earnings: What They Are & How to Determine Them

English poet Alexander Pope once said, “Blessed is he who expects nothing, for he shall never be disappointed.”

It’s a bleak, melancholy sentiment that’s true in its own right, but doesn’t hold up too well in terms of real-world application. Any person who “expects nothing”  doesn’t actually exist.

Expectations are a fact of life — especially for sales professionals.

A lot is expected of a sales rep. They’re expected to meet a quota, conduct themselves professionally, and consistently make good on several other promises, benchmarks, and standards. But expectations in sales go both ways.

Sales reps expect a lot from their employers as well — particularly when it comes to compensation. Every salesperson should approach their position with some expectation of what they can earn from it. And the number behind that specific expectation is most commonly known as on-target earnings.

Let’s explore the concept a bit further and see how sales leadership can determine that kind of figure for its new reps.

On-target earnings are often calculated on a candidate by candidate basis — pulling from each prospective hire’s established W2 earnings. Still, if you have multiple candidates vying for the same position, their respective OTEs probably won’t be radically different.

The OTE figure you present to a candidate needs to be definitive and realistic. It’s unethical and potentially detrimental to your company’s reputation for it to be anything else.

It can be tempting to artificially inflate the number you show prospective hires — to entice them with a figure that will inevitably be beyond their reach during the interview and contract negotiation processes — but you have to remain grounded.

Almost anyone involved in a sales rep’s professional development has to be on board with their OTE figure. Hiring managers, sales managers, and new hires themselves need to have a mutual — if unspoken — understanding that the on-target earnings number they agree on are ambitious enough to keep the rep in question motivated but realistic enough to actually be met.

On-target earnings provide a benchmark for reps and managers alike. Sales management needs to commit to thoroughly guiding reps to hit their OTE marks, and reps need to have appropriate reference points to let them know if and when they need to pick up some slack.

Company leadership and accounting departments also need to be mindful of these figures. They need to be able to budget for each new hire’s on-target earnings. If your sales reps’ collective OTE exceeds what your company is prepared to accommodate financially, everyone involved in the process is in trouble.

How to Determine OTE

In many cases, a candidate’s OTE will hover around one-fifth of a rep’s annual sales quota — meaning a rep with an annual quota of $500,000 should have on-target earnings of roughly $100,000.

Still, that calculation isn’t definitive or universal. It will vary from business to business based on factors like your industry, your company’s scale, a sales rep’s experience, the revenue your sales org generates, and the nature of your sales process.

As I mentioned, you can’t artificially inflate on-target earnings, but that doesn’t mean you have to be too conservative. You still want to attract capable, high-achieving candidates. Remember, there’s a good chance you’ll have access to a candidate’s previous W2 through the hiring process.

You can use that reference that document when determining an appropriate OTE figure — take it into account and try to offer some degree of improvement in compensation from their previous position.

You also have to commit to the figure you’ve presented to a candidate. You don’t get to adjust or renege on the on-target earnings you promised during the hiring process once a sales rep commits to your organization.

Both sales reps and sales leaders need to have a strong grasp on the concept of on-target earnings. OTE figures are central to any sales hiring process. They let reps know what to expect from the positions they’re applying for and, in turn, whether those roles are worth their commitment.

And sales leaders always need to remain mindful of the OTE numbers they present — striking a balance between reasonable and attractive with these figures can be the difference between landing an exceptional, happy candidate or losing out a marquee new hire.