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On-target earnings is a term used in the business world to describe the compensation expectations for sales professionals who have a variable component to their income. This occurs because salespeople generally receive both a base salary and commission payments for all sales made. As a result, on-target earnings, or OTE, represent the sum total of both of these amounts. The commission portion of the OTE is based on sales quotas, which may or may not be reached, set forth by the employers of salesmen.
Many professions are paid based on an hourly rate, receiving a certain amount of money for each hour of work that has been delivered. In some cases, professional workers receive a yearly salary that is based on the requirements of the jobs that they have to do. By contrast, salespeople are hired for their ability to make sales. As a result, they are often paid commission, a portion of the overall amount they sell. Adding the base salary to the commission and other extraneous income yields the on-target earnings.
As an example, imagine that a job listing for a salesman shows that the on-target earnings for the job are $200,000 US Dollars (USD). The base salary for this job is just $50,000 USD. That means that the remainder of the OTE, which is $150,000 USD, comes from commission payments to the salesmen. In some cases, extra income like stock options available can also be factored into the amount.
Of course, when someone is calculating the commissions portion of on-target earnings, there is no way of knowing whether a salesman will actually sell enough to earn that money. Employers have to base the amount on the sales quotas, which are certain levels of sales that salesmen are expected to reach in a specific periods of time. Salesmen may sell more than their quotas and go above the projected OTE. They may also fall below, which will adversely affect the OTE and, perhaps, put their jobs in jeopardy.
For example, imagine that a sales job with a particular company promises a 10 percent commission on all sales. The salesman who is hired is expected to reach a quota of $100,000 USD sold each year. Taking 10 percent of $100,000 USD yields a total of $10,000 USD. That amount is the projected commission, which can then be added to the base salary and all other expected income to yield the on-target earnings for that particular job.
Many commission-based sales jobs have a sort of safety net built in for the salesman. This is especially true in a retail environment, where management knows that slow sales periods are a fact of life beyond the employee's control.
Specifically, a company may make up a portion of the pay an employee would have received if sales quotas were met.
However, when sales are better and quotas are able to be met, the employee is expected to repay the company for the advanced commission from the slow times.
As a result, this practice really has no effect on the employee's overall earnings.
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