Introduction | Sales Compensation Models | On Target Earnings
One of the most important aspects of top talent acquisition and retention is getting the sales compensation right. According to Forbes, engaged employees are 59% less likely to seek out a new job. Businesses have to strike the right balance and ensure that the compensation offered is just right enough to spur new sales and keep your folks engaged.
There are many sales compensation models in practice depending on the market and the availability of sales talent. Compensation models like straight salary/no commission, salary along with commission, only commission based, sales profit margin-based commission and more are some of the most common ones.
The one most popular with sales teams in the salary along with commission is also called On Target Earnings. On Target Earnings is sometimes also called On Target Commission or On Target Incentive. In the sections that follow we shall delve deeper into this most preferred model of compensation in sales circles.
The OTE Model
Simply put the OTE model is a salary plus commission-based model, offering the sales executives a minimum assured income and a sales quota/target attainment-based commission, sometimes also called incentive. That was about the model, but some also use the term, On Target Earnings to represent a numeric value indicating the potential compensation of your sales executives. It gives an idea about how much a sales executive can earn over a financial year if he/she meets or exceeds the sales quota.
The OTE model can be implemented by businesses in an umpteen number of ways. Some even add a pay curve to the mix to make it look that bit more attractive for top sales executives. Pay curves offer an increase in earnings over and above the target attainment.
On Target Earnings are calculated as the sum of base salary and commission or incentive earned. To put in the form of an equation,
OTE = Salary + Commission.
What does the OTE model entail for sales commissions?
The OTE model is used to motivate the sales executives to not only achieve their sales quota but also to exceed those targets on a monthly or quarterly basis. Based on the set attainment and payment frequencies, the OTE earnings can be paid either monthly, quarterly or semi-annually as commission or incentives. This commission or incentive itself can be based on many other factors like the revenue a customer brings in or the profit margin involved. This commission is also called variable pay in common parlance.
In order to ensure sales quotas are met on a consistent basis, businesses tend to keep the base salary at a minimum, usually around 40% (conservative figure) and commissions around 60%. Too little a base salary can be a put off for sales executives and a little over might not help achieve the desired results in sales. Let’s explain this by taking an example.
Let’s say the business has set multiple commission rates for sales quotas achieved. They have also set the OTE to 60K monthly. An OTE of 60K monthly would mean the sales executive can potentially earn up to 60K a month including commissions. For the sake of simplicity let’s assume 3 rates for OTE payout.
Why use On Target Earnings as your sales compensation
On Target Earnings model benefits the business in a couple of ways.
A motivated staff:
On Target Earnings model is used in sectors where getting a job or a task done is relatively difficult. Sales in particular where the competition is tough, you need sales executives who are motivated enough to meet sales numbers. An On Target Earnings model helps businesses to keep their sales folks engaged in meeting sales numbers, bringing in revenue for the business
Reduced Employee Turnover:
Turnover or attrition is a costly affair, both in terms of financials and time. With a good OTE model in place, you have your sales folks engaged in what they do best, make sales. Everybody wins, sales folks are able to take home fat paychecks and businesses get their sales revenue targets sorted.
Issues around the OTE model
The OTE model is known to have its pitfalls. While it is more to do with the way the OTE model is presented or implemented than a problem with the model itself. The first one up is the one faced by recruiters. Recruiters always want to attract top talent, but there is heavy competition. Unless you are recruiting for a well known and reputed business, where employees would not mind a few cuts here and there, recruiters want to be able to present the maximum possible OTE to candidates.
With most of the recruitment outsourced in many businesses, any recruitment firm would not want to lose out on candidates to the competition. While this is good for the candidates, the promised OTE never sees the light of the day on employment. This impacts directly on the employee turnover and impacts the bottom line negatively in the end.
The other niggle with OTE is the level of complexity some businesses can take it to. With a complex OTE model, sales folks lose track of exactly how much effort they need to put in to meet their numbers. In many cases, sales numbers and quota deficits are communicated by sales managers. Real-time visibility of quota deficits, OTE deficits are missing in many cases.
Additionally, OTE models, simple as they sound, are difficult to get right. They can prove costly too until you get the mix right. The cost comes from the employee turnover due to an inefficient OTE model. Finally, OTE models need to be tweaked now and then. You may need to review your pay mix based on how hard or how easy it is for the sales reps to get clients.
In this age of tech, you need not fret over implementing an efficient and effective OTE model. We at Kennect.io offer you the perfect solution to not only build your sales quotas but help your sales folks stay on top of it, real-time.
We also offer an industry first Incentive Simulator, allowing teams to simulate their performance and plan to earn, all by themselves. With all the number-crunching done on the tool, your sales managers stand to get back 80% of their time spent on shadow accounting.
Let them focus on what they do best, Sales, let Kennect handle the rest.