What Is OTE? A Simple Guide to On-Target Earnings

What is an OTE?

On-Target Earnings (OTE) is the total compensation a salesperson earns when they achieve 100% of quota. It’s basically the sum of the base salary + variable salary, where the variable part is tied to a target or quota. OTE structures and amounts vary heavily by role OTE (AE, SDR, Enterprise, SaaS, etc.). An OTE is the most commonly used commission model in the software-as-a-service industry and is a popular alternative to a direct commission.

Why does the OTE matter?

For Sales Leaders

On-Target Earnings (OTE) plays a critical role in how sales teams are structured and managed. A clearly defined OTE sets transparent expectations during the hiring process and helps communicate realistic earning potential to candidates. It ensures that compensation is directly aligned with company revenue goals, creating a clear connection between performance and reward.

A well-designed OTE structure also drives quota accountability. When targets and incentives are clearly defined, sales leaders can better manage performance and create a culture of ownership. In addition, OTE significantly impacts commission budget planning, as it forms the foundation for forecasting variable compensation costs and managing overall sales expenses.

For Sales Reps

For sales professionals, OTE defines earning potential. It clearly outlines what can be earned when performance targets are met, making it a central factor in evaluating job opportunities.

A transparent and achievable OTE structure directly influences motivation. When compensation mechanics are clear and fair, sales reps are more likely to trust the system and stay focused on achieving their targets.

For Finance & RevOps

From a Finance and RevOps perspective, OTE directly affects Customer Acquisition Cost (CAC) and margin planning. Variable compensation is a major component of sales expenses and must be modeled accurately to protect profitability.

OTE also determines commission accruals, which are essential for accurate financial reporting and cash flow management. Without clear OTE structures, companies risk budget deviations and unexpected payout spikes. Finally, OTE impacts forecasting accuracy, as quota attainment, commission payouts, and revenue projections are tightly interconnected.

Common OTE Mistakes

Designing an effective On-Target Earnings (OTE) structure is not just about setting a number. Many companies unintentionally create compensation models that damage trust, distort forecasting, and reduce sales motivation. Below are four of the most common mistakes in OTE design.

Unrealistic quotas

An OTE only works if quota attainment is realistically achievable. If only 20–30% of sales reps consistently hit quota, the OTE becomes misleading rather than motivational.

In this scenario, the advertised earning potential no longer reflects reality. Candidates may feel misled after joining, existing reps may disengage, and leadership may struggle with retention issues. Healthy sales organizations typically see 50 – 70% of reps achieving quota. If attainment rates are significantly lower, the problem often lies in quota setting, territory design, or pipeline assumptions and not in rep performance alone.

Unrealistic quotas hurt morale. They also distort revenue forecasting and create unnecessary pressure on hiring and compensation planning.

Excel-Based Tracking

Many companies still manage OTE and commissions in Excel. While spreadsheets may work in early stages, they quickly become a risk as teams scale.

Manual tracking introduces not only formula errors that lead to incorrect payouts, but also disputes between reps and management. The lack of real-time transparency leads to sales reps mistrusting their numbers, so they invest 2-3 hours themselves per month to keep track. This is valuable time that gets lost for customer acquisition. Think of your sales team. What would 2-3 hours more per person per month mean for you business?

Manual tracking does not only affect sales, but also finance. Time-consuming reconciliation processes at month-end are usually the enemy of every finance team. For finance teams, Excel-based processes also increase audit risk and make accrual calculations inefficient. Ask yourself this: If there was an audit today at your company and the auditors are challenging the commission payouts – how fast could you explain everything in accordance with compliance?

Additionally to the mentioned points think about complexity:

As compensation plans grow more complex – especially in SaaS environments with ARR, churn, and multi-tier accelerators – manual spreadsheets become unsustainable.

I can tell you, I saw the spreadsheet labyrinth of hell at a UK-based company that had about 20 sales reps. That’s usually the point where spreadsheets, CRM or BI dashboards are not sufficient anymore and a dedicated solution is required. 

Overcomplicated Accelerators

Accelerators are meant to reward overperformance. However, overly complex, multi-layer incentive structures often have the opposite effect.

When compensation plans include too many thresholds, multipliers, and exceptions, reps struggle to understand how their earnings are calculated. Instead of motivating performance, complexity creates confusion.

If a rep cannot quickly answer the question, “How much do I earn if I close this deal?”, the compensation plan is too complicated.

Clarity drives performance. Simplicity builds trust. Overengineered accelerator models often reduce both.

No Ramp Structure

New hires require time to build pipeline, learn the product, and understand the sales process. Yet, many companies apply full quotas and full OTE expectations immediately.

Without a structured ramp plan – such as reduced quotas or guaranteed variable compensation during onboarding – cost structures become misaligned. Reps may miss quota for reasons outside their control, leading to frustration and early attrition.

A well-designed ramp structure aligns onboarding timelines with realistic revenue contribution. It protects both the company’s cost planning and the new hire’s earning expectations.

How to Design an Effective OTE Plan (Step-by-Step)

Step 1: Define the target metric

Every OTE plan must start with the company’s objectives. Typically it’s Annual Recurring Revenue (ARR) in SaaS businesses or Monthly Recurring Revenue (MRR). Some are also going for the Total Contract Value (TCV). 

Leadership should first determine the total metric growth target (e.g. ARR), while distinguishing between net new ARR (new business) vs. expansion revenue (existing business).

Then you break it down further as you need a sales capacity plan that exactly tells you the number of reps required.

Without a clearly defined revenue goal, quotas and compensation structures become arbitrary. OTE should always be derived from revenue strategy, not the other way around.

Step 2: Define quota per rep

Once the overall revenue target is set, the next step is translating it into realistic individual quotas.

Quotas should be based on multiple things. For starters, the required pipeline coverage (e.g 3-5x quota). Pipeline coverage is basically your quota divided by the conversion rate (CVR) you have from first meeting to contract signed. A simple example can be that you have a quota of 100K and a CVR of 20%, meaning you close every fifth deal. Now your pipeline should cover at least 500K worth of pipeline to be in range to achieve your quota. Of course you shouldn’t have a big deal that accounts for half of that pipeline. The theory of pipeline coverage assumes your average deal size as the standard. If you know all those numbers you know how much pipeline you need and how many deals you need to open and close. 

Quota design is critical. If quotas are inflated beyond realistic pipeline capacity, OTE loses credibility and attainment rates drop.

Step 3: Determine the variable percentage

The variable portion of compensation determines how much of a rep’s earnings depend on performance.

Typical splits vary by role.

In direct sales we usually see a 50/50 split (base vs. variable), especially common in the UK and America. In Europe – especially Germany – there’s a tendency to have a higher percentage for the base salary, so it’s often 60/40. 

In CSM we usually see something like 70/30 as the standard. Most companies don’t even incentivise their CSM team yet. Ask yourself: Does CSM stand for Customer Success Management or rather Customer Sales Management? 

Rule of thumb for the splits: The higher the direct revenue ownership and deal influence, the larger the variable component typically becomes.

The variable percentage of an OTE plan must be carefully aligned with the realities of the sales role and the market environment. First, it should reflect the length of the sales cycle. Roles with longer, more complex cycles often require a higher base salary to provide income stability, whereas shorter sales cycles can sustain a stronger variable component.

Second, the split needs to match the level of revenue responsibility. Sales professionals who directly own large quotas and have significant influence over deal outcomes typically carry a higher variable percentage, as their performance has a direct impact on company revenue.

Third, companies must consider the risk tolerance within the talent market. In highly competitive hiring environments, overly aggressive variable-heavy compensation structures can deter strong candidates who prefer more predictable income.

Finally, the compensation split should be benchmarked against industry standards to remain competitive and attractive.

If the variable component is set too low, it may fail to create meaningful performance incentives and reduce motivation. If it is set too high, it increases perceived income risk and can create hiring friction or retention challenges. The right balance ensures both strong performance alignment and market competitiveness.

Step 4: Model the Budget Impact

Before finalizing an OTE plan, companies must carefully model its financial impact under different performance scenarios. It is not enough to calculate compensation at 100% quota attainment; leadership needs a clear understanding of how payouts behave across varying levels of performance.

At a minimum, three scenarios should be simulated. First, a 70% attainment scenario helps assess the financial implications if a majority of the team underperforms. This provides insight into fixed cost coverage, margin pressure, and potential morale risks. Second, the 100% attainment scenario represents the expected payout at plan and serves as the baseline for budgeting and forecasting. Third, a 120% or higher attainment scenario – including accelerators – reveals the true cost of overperformance.

Accelerators are critical for motivating top performers and driving revenue beyond target, but they must be financially sustainable. If several reps significantly exceed quota at the same time, the commission budget must be able to absorb those payouts without compromising margins.

Thorough scenario modeling protects profitability, supports predictable Customer Acquisition Cost (CAC), and prevents unexpected financial surprises at the end of the quarter or fiscal year.

Step 5: Automate Tracking

Even the most carefully designed OTE plan will fail if it cannot be executed reliably. While many companies initially manage quotas and commission calculations in Excel, manual spreadsheets quickly reach their limits as the sales organization grows. Increasing complexity, more compensation rules, and higher data volumes make spreadsheet-based processes error-prone and difficult to maintain.

Automating commission tracking fundamentally changes this dynamic. It provides real-time visibility into performance and earnings, allowing sales reps to understand exactly where they stand against quota at any given moment. Automated systems also ensure accurate commission calculations, significantly reducing the risk of formula errors that often lead to disputes between sales and finance teams.

Beyond accuracy, automation enables reliable forecasting and precise commission accrual calculations. Both are critical for financial planning and margin control. For EU-based companies, automation also supports GDPR compliance by ensuring structured, secure handling of sensitive compensation data. In addition, modern systems create an audit-proof record of commission rules and payout logic, which strengthens governance and internal transparency.

In recurring revenue environments – where ARR, expansions, churn, clawbacks, and multi-tier accelerators must all be reflected in compensation – automation is no longer optional. It becomes an operational necessity to maintain trust, scalability, and financial control.

Frequently Asked Questions (FAQ)

Is OTE guaranteed?

No. Only base salary is guaranteed.

What happens if I exceed 100% of quota?

You typically earn accelerators above OTE.

What’s a good OTE for SaaS AEs in Europe?

That totally depends on the specific niche in Saas and deal values. 

What we at Centify typically see are the following:

Mid-market AEs: €90k – €140k

Enterprise AEs: €150k+

Should OTE be realistic?

Yes. Healthy organizations see 50-70% of reps hitting quota.

How do you calculate OTE commission rate?

Target commission divided by quota.

Example:

€40,000 commission target / €800,000 quota = 5% commission rate.

Why does OTE cause disputes?

Manual tracking, unclear definitions or retroactive rule changes.

Should startups offer higher variable?

Typically yes, but excessive risk reduces hiring attractiveness.

Can OTE change mid-year?

It can, but requires formal plan updates.