As businesses grow, their sales strategies—and the compensation plans that support them—must evolve. Many organisations begin with commission-based models because of their simplicity and clear linkage to performance. However, as sales teams expand and the business landscape becomes more complex, a commission-only approach can create unpredictability, misalignment, and even demotivation.
Enter the On-Target Earnings (OTE) model: a structured compensation framework that balances stability with performance-driven incentives. But when is the right time to make the shift? And how can companies transition effectively? Let’s explore.
What is an On-Target Earnings (OTE) Model?
An On-Target Earnings (OTE) model defines the total compensation a salesperson earns when they meet 100% of their sales targets. It combines two components:
- Base Salary: The fixed, guaranteed portion of their pay, offering financial stability.
- Variable Pay: The performance-based portion, directly tied to meeting sales quotas.
Example: If a salesperson has an OTE of €120,000 with a 70/30 pay mix:
- €84,000 (70%) is their base salary.
- €36,000 (30%) is their variable pay.
If they achieve 80% of their target, they earn €112,800 (€84,000 base + €28,800 variable). This structure provides predictability for the business while motivating salespeople to exceed their quotas.
Key Differences Between OTE and Commission Models
- Commission-Based Model: Sales reps earn a percentage of each deal, with higher rates applied after exceeding quotas. This can drive competitiveness but may lead to unpredictability in payouts.
- OTE Model: Provides a clear earning structure based on achievable quotas, combining stability with motivation.
By defining clear expectations and aligning variable pay with targets, OTE models simplify forecasting and budgeting.
Why Transition to an OTE Model?
The decision to shift to an OTE compensation model often stems from one or more of the following challenges:
- Unstable CashflowsCommission-heavy models can result in unexpected financial stress during high-performing months, especially if payouts are made at deal close. OTE models provide a structured approach, allowing companies to forecast compensation expenses more accurately.
- Low Motivation or High TurnoverIf sales reps are consistently falling short of their targets under a commission-based model, they may feel demotivated and seek opportunities elsewhere. OTE plans, with their transparent targets and achievable earning potential, create a more supportive environment.
- Misaligned Sales StrategiesCommission-only plans often reward short-term deal closures, sometimes at the expense of strategic objectives like customer satisfaction or cross-selling. OTE models allow companies to incentivise behaviours that align with broader goals.
- ScalabilityAs businesses grow, managing multiple commission rates across diverse teams, territories, and products can become unwieldy. OTE models standardise compensation structures, making them easier to scale.
How to Transition to an OTE Model
Making the shift requires thoughtful planning and communication. Here’s how to do it effectively:
- Define the Pay MixDetermine the balance between base salary and variable pay based on the role:
- New Business Reps (AEs): Higher variable pay to drive deal closures.
- Account Managers (AMs): Higher base pay to incentivise customer retention and upselling.
- Set Realistic TargetsUnrealistic quotas can undermine the benefits of an OTE model. Analyse historical performance and market conditions to set achievable targets that motivate your team without overburdening them.
- Educate Your TeamTransitioning to OTE requires clear communication. Explain the structure, including the breakdown of fixed and variable components, and use payout calculators to illustrate earning potential under the new model.
- Leverage TechnologyCompensation tools can simplify the transition by automating calculations, tracking performance in real time, and providing transparency for both sales reps and managers.
When Should You Make the Switch?
The right time to transition varies by organisation, but common triggers include:
- Rapid Growth: Scaling teams require scalable compensation structures.
- Declining Results: If turnover is high or quotas aren’t being met, it’s time for a change.
- Cashflow Struggles: Predictable payouts can alleviate financial stress and improve planning.
- Strategic Shifts: Expanding into new markets or launching new products may call for a more structured compensation model.
Final Thoughts
Transitioning to an On-Target Earnings (OTE) model is more than just a change in numbers—it’s a strategic move that aligns your sales team’s goals with your company’s vision. By offering stability, transparency, and motivation, OTE plans empower sales teams to perform at their best while simplifying financial management for the organisation.
With careful planning and the right tools, the shift to OTE can drive sustainable growth and foster a culture of success.
