Definition
On-Target Earnings (OTE) is the total annual compensation a salesperson is expected to earn when they achieve exactly 100% of their assigned quota. OTE is the sum of two components: base salary (the fixed portion paid regardless of performance) and target incentive compensation (the variable portion earned at plan). A rep with a $100K base and a $100K target incentive has a $200K OTE. The concept seems simple, but in practice, OTE is where most comp plan problems begin — because the number itself tells you almost nothing without understanding the ratio between fixed and variable, the probability that a rep can actually achieve 100% attainment, and whether the OTE is competitive enough to attract and retain the talent the revenue plan requires.
In PE-backed portfolio companies, OTE is one of the first things an operating partner should examine when evaluating the sales organization. An OTE that is too low relative to market makes it impossible to hire the reps the growth case demands. An OTE that is too high relative to revenue productivity creates a cost-of-sales problem that compounds across the hold period. And an OTE where the variable component is set at 20% when the role requires 50% creates a sales team that behaves like a support team — reliable but not aggressive.
Why It Matters
OTE is the primary economic signal that tells a sales rep how the company values their role and what level of performance is expected. When OTE is misaligned with market benchmarks, you get one of two outcomes: either you cannot hire the talent the plan requires (OTE too low), or you are overpaying for the performance you are getting (OTE too high, or the fixed/variable ratio is wrong).
The more common problem in PE-backed companies is not that OTE is set incorrectly in absolute terms, but that the components are wrong. A company that sets a $200K OTE with a 70/30 base-to-variable split is telling reps that performance variability carries limited financial consequence. That works for account management roles in mature accounts. It does not work for new business hunters, where the behavioral signal needs to be: your upside is significant, but you earn it.
What to Look For
- Market competitiveness — OTE should be benchmarked against comparable roles in the same industry, geography, and deal size range. Use sources like Betts Recruiting, Compgauge, or Repvue for SaaS-specific benchmarks.
- Fixed/variable ratio — The split should match the role's risk profile. New business roles typically run 50/50 to 60/40. Account management runs 70/30 to 80/20. If all roles have the same ratio, the plan was designed for convenience, not performance.
- Achievability — What percentage of the team actually earned their OTE last year? If fewer than 50% of reps hit plan, the OTE is aspirational rather than target — which erodes trust and drives turnover.
- Consistency with revenue plan — The total comp expense at target (all reps at OTE) should produce a cost-of-sales ratio that the business model can sustain. If it does not, either OTE or headcount needs to change.
Red Flags
- OTE has not been updated in 2+ years while the labor market has moved significantly
- All sales roles — from SDR to enterprise AE — use the same base/variable split
- Fewer than 40% of reps achieved OTE last year, but no plan changes were made
- OTE is competitive but entirely base-heavy, eliminating meaningful performance differentiation
Related Terms
- Variable Compensation Ratio — the split between base and variable that gives OTE its behavioral signal
- Quota Setting Methodology — how the target that OTE pays against is established
- Compensation Benchmarking — the market analysis that validates whether OTE is competitive
- Provider Landscape — vendors who design comp plans and set OTE structures