Understanding On-Target Earnings, and a Simple Way to Calculate Them
As an executive recruiter and talent expert, I often get questions from hiring managers about “on-target” or “on-track” earnings, also known as OTE. The OTE metric is used to provide a realistic forecast of what the total compensation of a particular position should be when reasonable performance targets are achieved. For a sales role, it is usually the sum of base salary plus projected likely commissions from sales. For an executive position, it is typically base salary plus a likely bonus, assuming the company hits realistic enterprise goals.
So, what’s the issue?
A disparity in OTE often arises between two critical points in the hiring process:
- When the hiring firm is writing the compensation range for a job specification, the firm usually wants OTE to appear as high as possible to attract the most and best candidates.
- After a successful placement, when the recruiter’s fee is being paid, the firm suddenly gets less bullish about the OTE discussed with the candidate. Now, the number feels “optimistic” or “best case” to them.
Quite simply, OTE is only one number and should be the target compensation that the new employee expects when they accept the position.
Why OTE Should Be One Number – and How to Derive That Number
Say a salesperson has a base salary of $80,000 and has actual commissions for the year of $40,000. Their OTE in their current position is $120,000, and you can validate that number at hire via W2 earnings.
(In most states, it is perfectly legal to verify salary information via W2 to ensure your candidate is being truthful with you, but in all cases, you should check with your legal counsel to ensure you are following all state and local laws.)
Now, we need to produce an offer that is attractive enough to the candidate to get them to join our firm. Let’s say the base salary of our position is $85,000, with a $5,000 six-month performance bonus and a forecasted $40,000 in first-year commission. That is an offer of $130,000 OTE.
Said another way, the candidate is expecting to make $130,000 in first-year earnings when joining your firm.
OTE needs to be a sacred number that everybody is onboard with achieving. The hiring manager needs to do everything in their power to help the new hire succeed in hitting that number. Candidly, a firm that throws out an inflated number with no intention of compensating a candidate at that level of OTE is being unethical.
The solution is to keep OTE simple. Make it one number that everyone can understand and agree to. Base it on the reality of the candidate’s established W2 earnings, with some growth built in to make your offer worthwhile to them. Hold your hiring managers accountable to making new hires successful in achieving their OTEs. This makes the OTE figures you post credible.
By doing this, you will attract quality candidates, and all parties can sleep well at night.
Rick Crossland is author of the book The A Player.