On-Target Earnings (OTE)

What it states and what it does not

OTE is what the plan pays at exactly 100% attainment. It says what the design intends. It says nothing about what the team earns, which depends entirely on the attainment distribution underneath it.

Setting the split

1. Base the ratio on control. The more of the outcome a person genuinely controls, the more variable is defensible; roles with long lead times and shared credit need more base.

2. Derive quota-to-OTE from gross margin and cycle length rather than adopting a published multiple.

3. Model the plan against last year's actual deals before shipping it. Surprises are design errors, not edge cases.

4. Publish the derivation. Goal-setting research conditions the performance effect on commitment, and an unexplained number is harder to commit to.

What to report instead

• The attainment distribution, not the average — a wide spread usually indicates territory or quota design before talent.

• Actual earnings against OTE, by tenure cohort, so ramping reps are not averaged with fully ramped ones.

• The share of the team between 80% and 120% of target, which is the clearest single read on whether the plan is set correctly.

How to sanity-check a plan

1. Split the number into base and variable and state the ratio. An OTE quoted without the split is not comparable to any other OTE.

2. Ask what proportion of the team actually hit target last year. OTE assumes on-target performance, and if a minority reach it the expected earnings are materially below the stated figure.

3. Check whether variable is capped, and whether there is an accelerator above target. Both change the real value of the plan more than the headline does.

4. Establish the payout cadence and whether commission is paid on bookings or on collections. Paid on collections with a long payment cycle means the money arrives much later than the deal closes.

5. Read the clawback terms alongside it. Uncapped clawback against variable already spent makes the stated OTE optimistic.

Where it misleads

• It is a plan, not a prediction. In a team with low quota attainment, the average earned is well under OTE and the plan still states OTE.

• Comparing two OTEs with different base/variable splits compares different amounts of risk, not different amounts of money.

• Ramped or guaranteed periods inflate first-year earnings relative to the steady state the number implies.

• A high OTE with an unattainable quota is a recruiting number rather than a compensation plan, and the distinction only becomes visible after two quarters.