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 referred to as 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, including its role in incentive compensation management.
What is On Target Earning
Simply put, the On Target Earning model is a salary plus commission-based model, where sales executives receive a minimum assured income along with incentives that are based on target attainment.
On Target Earnings are calculated as the sum of base salary and commission or incentive earned. To put it in the form of an equation,
There are numerous ways that businesses might put the OTE model into practice. Some even add a pay curve to the mix to make it look a bit more attractive for top sales executives. Pay curves offer an increase in earnings over and above the target attainment.
As a sought-after model for keeping the sales team driven, there are much more benefits that the OTE model offers to managers.
Scroll down to know more.
Benefits of On Target Earning
OTE is a model that caters to the requirements and expectations of the employee and employer. Here are a few benefits that On Target Earning offers:
Keep the Employee Motivated
Having a target to achieve in a fixed period of time will keep the sales executive focused on the goal at hand, the strategies required to accomplish these targets, and smart work to timely fulfill them. An OTE model thus keeps the employee motivated and keeps their productivity high thereby achieving their rightful reward, the commission.
Improve Employee Engagement
Every initiative in the workspace is to bring the best out of the employees and to make them better engage in the everyday routine of the organization. Providing target oriented incentives has always been a positive reinforcement in employees where they have shown better performance in their work and improved engagement in the workspace.
Recruiting The Right Talent
The HR usually discusses the OTE during the sales force recruiting process. It is only after getting a thumbs up on the On Target Earning does the HR closes the deal. In certain instances, the OTE is kept at a high value to find the best and most competitive talent. A high OTE sales position will only receive applications from candidates who know the business well and have confidence in achieving their sales targets on time.
Reduce Employee Turnover
A workspace that provides a healthy competitive ambiance, opens opportunities to grow as well as rewards their achievement will always be returned with trust, dedication, and commitment. Hence a job environment that implements the OTE model in their sales performance also ensures employee retention.
Draw Company Expectation
An OTE that an organization assigns its salesforce is the reflection of the growth they strive to achieve in the coming quarter or year. Hence, the OTE is the organizational expectation that the workforce is also expected to fulfill to achieve the target and growth set for the individual and the company.
With these varied benefits offered, there is a serious need to approach while determining target earnings for your company.
How to Determine Target Earning
Determining your On Target Earnings is a company-specific decision that depends on the growth and competency that the organization is striving to achieve.
But there are a few general tips that must be kept in mind while determining your target earning. And the first is to make achievable and realistic targets for the salesforce to be eligible for the incentive.
OTE is also determined on an individual basis. Hence sales managers must be understanding of the potential and capabilities of their sales force. The target for an experienced salesperson might not be a realistic goal for a fresher who is just new to the game.
Assigning the right target earning will ensure positive actions and results from the sales team than intimidating and overburdening them with over expectations.
Sales managers must also keep a close watch on the industry trends and the competitor’s OTE while determining their company's target earnings. Understanding the industry standards will help them understand a frame and limit that they can apply while determining their sales team OTE.
Above all these determinants there is an ethical aspect that comes into play while determining the OTE. There have been instances where the HR promised OTE was not provided to salesforce even after achieving their targets on time. The organization must have the integrity and morale to fulfill the promised OTE during hiring the rightful salesperson.
How to Manage On-Target Earnings Plans
An organization’s On-target earnings plan is dependent on the pay mix that they offer to their sales reps. The pay mix refers to the base salary-commission ratio that eventually adds up to the on-target earning of the salesperson.
An ideal and good pay mix is of a 50-50 ratio where the sales rep’s OTE is made up of 50 percent fixed salary and 50 percent based on sales commission. This kind of pay mix division ensures a safe backup for the sales rep in the form of a fixed salary and motivates people to work towards achieving the remaining 50 percent.
There are pay mixes where managers create a ratio of 10-90 or 90-10. In whatever proportion it is the baseline is dependent on the company’s motive in sales performance and improvement.
In a 10-90, the stakes are high as a huge portion of the final earning of the sales rep is based on commission with just a meager fixed income. This puts the salesperson on a high burner where they are expected to showcase high performance.
While a 90-10 can minimize the competitive environment where the salesperson can be content with the base salary and the required sales target achievement for the commission kept low.
Hence a balance between salary and commission, a balance between motivation and competition, and a balance between employee and employer growth must be hit to plan the ideal on-target earning.
These factors are highly dependent on the industry. Manufacturing, retail, and pharmaceutical companies determine their target earnings distinctively according to their products or services and their sales rates.
Irrespective of the industry, calculating the OTE efficiently with transparency is a must to ensure consistent motivation and performance of sales reps. Automating incentive management is the judicious option to ensure all the above-mentioned.