Sales compensation is tricky, and higher salaries aren’t always better
OTE stands for On-Target-Earnings, meaning the total amount that a salesperson would make if they hit 100% of their annual quota. Every B2B (business-to-business) seller fixates on OTE compensation when they’re deciding between jobs – often to the detriment of their long-term career trajectory.
Before we discuss why chasing temporary highs might be a bad idea, let’s start from the basics. Most tech sales rep’s compensation plans consist of base salary and commission, which add up to the actual total amount earned:
- Your base is the amount that you are guaranteed to make.
- Your commission is the amount that you earn based on how much you sell. Commission percentages in SaaS sales typically hover around 15-25% of the quota amount.
How do I calculate OTE vs. actual compensation?
For example, let’s say Hermione is an Account Executive with 4 years of sales experience, making $110K base, $220K OTE. Her quarterly quota is $200,000, which comes out to $800,000 over the course of the year. Hermione actually closes $600,000 in deals, or 75% of her quota. At the end of the year, she ends up making:
$82,500 commission + $110,000 base = $192,500 – short of her $220K OTE
What is the average OTE for each sales role?
For Account Executives, base salaries tend to be around 50% of the OTE and commission the other 50%.
As Account Executives progress in their sales career, they earn the opportunity to sell to progressively larger companies, rapidly accelerating their earnings. Bravado has compiled extensive average base and OTE salary data for SaaS Account Executives in the United States:
- SMB Account Executive: $62K base, $118K OTE
- Mid-Market Account Executive: $78K base, $151K OTE
- Enterprise Account Executive: $108K base, $211K OTE
For other sales roles, e.g. sales development reps or business development reps (SDRs / BDRs) and customer success managers (CSMs), total salary tends to be more heavily skewed towards base. Rough estimates put SDR and CSM salaries at a 70% base / 30% OTE split:
- Sales Development Representative: $49K base, $70K OTE
But wait, there’s more… Spiffs, Accelerators, P-Clubs, Equity
OTE isn’t the end of the story when it comes to sales compensation. Seasoned enterprise tech sales reps can earn $300K in OTE if they hit their quota, but what happens if they exceed it?
Obviously, companies would be in a bad place if all of their top reps hit quota, and just coasted for the rest of the year. So, they came up with a bevy of bonuses to keep reps in the rat race:
Cash or physical good bonus paid to rep immediately after crossing a major sales milestone, e.g. closing a $2 M deal, crossing $5 M in revenue for the year.
Increase in commission rate after a rep exceeds their quota number by a specific amount:
Let’s say our rep Hermione now hits 120% of her quota, closing $960K in deals on a target of $800K.
Once she passes 110% of her quota, a 5% accelerator kicks in, boosting her commission rate from 13.75% to 18.75% on everything she brings in above $800,000:
$30,000 additional commission payout from the accelerator
Annual reward trip for top performers, often to a beautiful beach destination; many companies replaced these trips with more cash bonuses during the pandemic, although these may now be making a comeback
Spiffs, accelerators, and President’s Club are all short-term rewards for exceptional sales performance in a given year.
Companies can also give equity, or ownership shares of the company, as part of the total compensation package; equity is usually not tied to hitting or exceeding quota. Employees earn their equity by continuing to work at the company over a certain period of time, usually 4 years.
While equity is most common in earlier-stage tech startups, some publicly-traded companies will give free or discounted stock shares, which are easily convertible into cash in most cases.
Why is focusing on OTE a bad idea?
In the tech boom years (pour one out for 2011 - April 2022), monstrously large startup funding rounds and pressure to grow revenue pushed SaaS sales salaries to dizzying heights. To attract top talent, employers waved around salaries with eye-poppingly large OTEs. Top sales reps left cushy jobs at big companies to chase $300K+ OTEs at Series A, B, and C startups, thinking that hitting quota was a sure thing.
As it turned out, many of these OTE numbers weren’t real – employers based them off quota targets that most sales reps couldn’t hope to hit. Even at 15 out of the top 20 companies to sell for, the majority of reps weren’t hitting quota. Ultimately, many reps actually made 60-70% of the advertised OTE, less than the job they left.
The lesson here is that OTE is just only one part of the story. There’s no point in having a $300K OTE if 0% of the sales team is hitting quota – you’ll be lucky to even make $150K in base. More realistically, the company will enter a death spiral from failing to generate revenue, and you’ll have made $75K in 6 months before being laid off.
How do I know if companies are lying about OTE?
Here are a few helpful questions to ask a hiring manager when considering On-Target-Earnings:
What is your company’s philosophy on OTE?
Understanding a company’s perspective on hitting OTE salary goals is pivotal to how they define success. Learning more about how a company sets their OTE will give insight into whether sales quotas are conservative or unrealistic goals.
What percentage of your present sales team achieved complete OTE last period?
This is a great way to understand what percentage of sales representatives are hitting their OTE every quarter and/or annually. If the answer is relatively low or below 80%, it may indicate that companies are inflating OTEs to attract talent, and setting them up to fail with unrealistic quotas.
What is the ramp time and ramp compensation adjustment for new hires?
Very few reps will start making 100% of OTE right off the bat. It takes time to learn about the product you’re selling, and build up a pipeline of prospects. Knowing the average rep’s ramp time allows you to predict how soon you can expect to start earning your full OTE potential, as well as what an average sales cycle would look like. Some companies will also compensate you at a higher base salary during the ramp period – this is typically an indicator that the hiring managers care about setting you up for success.
Ultimately, when evaluating a company, big OTEs can be a shiny distraction. For a list of the best companies to work for, where reps are consistently hitting quota and compensated fairly, check out Bravado’s Top Companies for Tech Sales.