What it means
When hiring for customer-facing or sales positions, companies often quote OTE to give candidates a clear picture of their total potential pay. This figure assumes the employee achieves exactly 100% of their assigned quota or goals, which helps businesses budget for staff costs while tying a significant portion of compensation directly to business results.
In practice, OTE is split into two main components: a fixed base salary that provides financial security, and a variable incentive that fluctuates based on performance. For example, a role might offer a base salary of $40,000 with an additional $40,000 available if sales targets are fully met, resulting in an OTE of $80,000.
For non-finance managers, understanding OTE is vital when building department budgets and designing incentive structures. If targets are set unrealistically high, employees will consistently miss their variable pay, leading to frustration and high staff turnover.
Conversely, if targets are too easy, the company may overpay for mediocre performance. When managing teams with OTE structures, leaders must regularly review quota attainments to ensure the compensation model remains fair and motivating.
It also helps with cash flow planning, as higher sales volumes naturally trigger higher commission payouts, which need to be accounted for in monthly forecasts. OTE is like driving a taxi where you get a guaranteed daily basic wage, plus extra cash for every fare you complete.
Your total expected earnings depend on how many trips you make.
In practice
Real-world examples
Example 1
A startup hires a business development manager with a base salary of $30,000 and $50,000 in commission, creating an OTE of $80,000. Because 62.5% of the pay is variable, the role suits someone confident in closing deals. If the manager reaches 70% of target, they earn 30,000 + 35,000 = $65,000.
Example 2
An established manufacturing SME offers its regional account managers a base of $45,000 and $20,000 in bonuses, totalling a $65,000 OTE. The higher base reflects steadier, repeat business. An account manager who hits 50% of the bonus target would still earn 45,000 + 10,000 = $55,000.
Example 3
A digital agency recruits a senior client partner with a $60,000 base salary and $40,000 in performance bonuses, setting their OTE at $100,000. The agency budgets $100,000 per head when it plans its annual payroll. The finance team keeps a reserve in case several partners exceed their targets in the same quarter.
Think of it
OTE is like driving a taxi where you get a guaranteed daily basic wage, plus extra cash for every fare you complete. Your total expected earnings depend on how many trips you make.
Formula
Calculation
OTE = Base Salary + Target Variable Pay. Expected Earnings = Base Salary + (Target Variable Pay x Quota Attainment %).
Worked example: a role has a base salary of $35,000 and a target commission of $25,000, so OTE = 35,000 + 25,000 = $60,000. The pay mix is roughly 58% base and 42% variable.
If the employee reaches only 80% of quota, the expected earnings are 35,000 + (25,000 x 0.80) = 35,000 + 20,000 = $55,000. At 50% of quota they would earn 35,000 + 12,500 = $47,500. This shows why the base salary, not the OTE, is the only figure that is guaranteed.Case study
Seen in the real world
This is a fictional, illustrative scenario. At Apex Software, the management team wanted to expand their customer base by hiring two new sales executives. They advertised the roles with an OTE of $75,000, split evenly as a $37,500 base salary and $37,500 in performance commission. During the first year, one executive struggled to learn the product and only achieved 50% of their sales target.
As a result, they earned their base salary plus half of their commission, bringing their total earnings to 37,500 + 18,750 = $56,250. The second executive exceeded expectations, reaching 120% of their quota. The commission plan paid an accelerator, meaning commission at 1.5 times the normal rate on sales above quota. Their commission was 37,500 for the first 100% plus 37,500 x 0.20 x 1.5 = $11,250 for the extra 20%, so total earnings reached 37,500 + 37,500 + 11,250 = $86,250.
The finance team noted that the two executives together cost 56,250 + 86,250 = $142,500, which was below the $150,000 budgeted for two people at full OTE. This structure protected Apex Software during a slow ramp-up period by keeping fixed costs manageable, while also rewarding high performance appropriately. The team tracked these payouts closely against incoming revenue to ensure the commission structure remained profitable.
Watch out
Common mistakes
- Treating OTE as a guaranteed salary rather than a conditional target.
- Setting sales quotas so high that achieving the OTE is practically impossible.
- Failing to account for commission payouts in short-term cash flow forecasts.
Questions
People also ask
Is OTE guaranteed?
No. Only the base salary portion is guaranteed. The variable portion depends entirely on meeting or exceeding performance targets.
What happens if an employee exceeds their target?
Many companies offer commission accelerators, meaning employees can earn even more than their stated OTE if they surpass 100% of their goal.
Why do companies use OTE instead of just listing the base salary?
It helps attract ambitious candidates who want to boost their earnings through strong performance, and it aligns employee costs directly with revenue generation.