Unlocking Potential: On-Target Earnings (OTE) Explained for UK Businesses

For growing businesses in the UK, attracting and retaining top talent is a perpetual challenge. A well-structured compensation package is a critical tool in this endeavour. While a competitive base salary and employment benefits are fundamental, for many roles, incorporating on-target earnings (OTE) can be a powerful motivator and a winning strategy. This article provides an overview of OTE, its components, calculation methods, and applications across various industries, offering actionable insights for the HR managers of UK businesses.

What is OTE? Demystifying the components

So, what is OTE? In simple terms, on-target earnings represent the total potential pay an employee can earn if they meet their performance targets. It is not a guaranteed salary, but rather a realistic expectation of total remuneration. Understanding what OTE and its fixed and variable components are for a salary are crucial for businesses in the UK.

The two core components of OTE are:

• Base salary: This is the fixed, guaranteed portion of an employee’s pay. It provides financial stability and is paid regardless of performance.

• Variable pay (commission or bonus): This is the performance-related element that makes the fundamental difference between OTE and a traditional, flat salary. It can be structured as an OTE commission, that is, a percentage of sales revenue generated, or an OTE bonus, a lump sum paid for achieving specific goals. This portion of pay is what incentivises employees and directly links their efforts to the business’ success and growth.

Calculating and structuring on-target earnings

The calculation of OTE is straightforward in principle:

OTE = Base Salary + Variable Pay (at 100% target achievement)

However, the devil is in the details. Several factors affect OTE calculations. These might include industry norms, the specific role’s responsibilities, the company’s HR budget, and the desired pay mix. The pay mix is the ratio of base salary to variable pay. A common ratio is 70/30 (base/variable), or 60/40, but this can vary significantly. For instance, a role with a long sales cycle might have a higher base salary to provide more security for the employee.

OTE structures can be either capped or uncapped. A capped OTE places a limit on the amount of variable pay an employee can earn in a given period. This provides cost predictability for the business, but can sometimes demotivate high-achievers who regularly exceed their targets. Conversely, an uncapped OTE offers unlimited earning potential, which can be a powerful incentive for top performers, and is particularly attractive in a competitive sales domain.

OTE in action: real-world industry examples

The application of OTE is widespread in the UK, particularly in roles where performance is easily quantifiable. Unsurprisingly, ‘what is OTE?’ is a very common question for those considering a sales position. Sales roles, from Sales Development Representatives (SDRs) to Account Executives and Sales Directors, almost universally feature OTE. A sales rep might, for instance, have a base salary of £35,000 and an OTE of £55,000, with the additional £20,000 being earned through commission on closed deals.

Beyond sales, OTE is prevalent in other sectors:

• Recruitment: Consultants often have a base salary and earn commission based on fees generated from successful placements.

• Financial services: Financial advisors and brokers frequently have OTE structures tied to the value of investments they manage or the products they sell.

• Technology (SaaS): In the Software-as-a-Service industry, sales roles focused on acquiring new subscriptions are heavily OTE-driven.

• Estate agencies: Agents’ earnings are more often than not a combination of a basic salary and commissions on property sales.

The double-edged sword: OTE benefits and drawbacks

For employers, a well-designed OTE plan can bring significant strategic advantages. It aligns employee objectives with business objectives, motivating individuals and teams to drive revenue and growth. It can also be a powerful tool for attracting ambitious, results-oriented recruitment candidates.

For employees, the primary benefit is the ability to boost their earnings. A clear OTE structure provides a transparent link between performance and reward, empowering them to directly influence their pay.

However, there are potential negatives. If targets are unrealistic or poorly communicated, it can lead to demotivation and high staff turnover. An over-emphasis on individual targets can sometimes undermine team collaboration. It’s also essential that the base salary is sufficient to provide a reasonable standard of living, as the variable component is not guaranteed.

Why understanding OTE is crucial for jobseekers

For jobseekers, understanding OTE bonuses and commissions can be extremely important. A high OTE figure might be appealing, but it’s essential to dig deeper. Candidates should inquire about the pay mix, how targets are set, and, crucially, what percentage of the team typically achieves their quota. This provides a more realistic picture of potential earnings. A position with a lower OTE but a higher success rate among the team might be a more stable and ultimately more lucrative option than one with an astronomical but rarely achieved OTE.

Crafting and promoting an effective OTE strategy

Creating a successful rewards strategy that includes OTE demands collaboration. HR leaders should work closely with the heads of relevant departments, such as Sales and Finance. This will ensure that set targets are both challenging and achievable, that OTE is balanced with other types of employee benefits, and that the overall compensation plan is financially sustainable for the business.

When promoting OTE to current staff and jobseekers, transparency is key. For existing employees, regular communication about their progress towards their targets and clear explanations of how their variable pay is calculated are essential. For jobseekers, job adverts and interviews should clearly state the OTE, and recruiters should be prepared to discuss the structure in detail. Highlighting the success of current employees who consistently achieve their OTE can be a powerful promotional tool, demonstrating that higher earnings are a real possibility within your company.

In conclusion, on-target earnings are a valuable and versatile remuneration tool for growing businesses in the UK. By understanding the tool’s components, carefully designing its structure, and promoting it transparently, HR managers can create a powerful incentive for performance that benefits both the employee and the business.