OTE Meaning And More
OTE Meaning / Definition:
OTE stands for On-Target Earnings. This is the total amount you should expect to earn, when your basic pay and commission payments are added together, as a result of meeting all of your targets over a specified period within a paid job role.
Graduates will often come across the term when they first start looking at the sales and recruitment jobs advertised by firms like SuperGrad. These roles typically include a significant commission element within the remuneration package.
Is The OTE Meaning / Definition Enough?
So you now know what OTE means, but is this enough? No, not if you really want to understand what you are actually likely to earn. This is because OTE numbers alone do not provide a reliable metric for you to compare one role to another. For example, you may see one job saying £45k OTE and another that says £35k. You might feel that there is greater potential to earn in the first role, but this is not necessarily true. This is because there are many factors at play.
It is also incredibly easy on a job advert to put a high OTE meaning many people will think it is well paid. There is no requirement on a firm to justify this number. It can be an easy way for less scrupulous firms to increase the appeal of a role.
You therefore need to become an educated buyer! This article will put you in a more informed position when going through the job hunting process. Explore how you could be measured, and the factors that affect the likelihood of you hitting your targets. Also, whether these targets are realistic in the first place and what to watch out for.
What is commission / how will I be measured?
Commission is the way firms link your total pay to how you have performed. It can be a key draw for those seeking a meritocratic environment where they have a large element of control over their remuneration. But how is it calculated?
Typically if you undertake a role where there is the potential for a significant variation in your performance, and this directly relates to the bottom line of a firm, then Key Performance Indicators (KPIs) will be used to work out how much commission will be paid on top of your basic pay. What this means is that OTEs are often tied into sales revenues. This can just as easily be linked to activities that lead to revenue. For example, in recruitment, this could be the number of leads that you find that lead to terms of business being signed with new clients.
What factors affect my ability to earn commission / hit my OTE numbers?
Companies are typically keen to say that you are the primary determinant of your earning potential. This positions you as the person in control of your destiny. Whilst this is undoubtedly true, once in a role, there will be factors that are largely outside of your control. These could significantly affect your ability to earn. It’s good to do your best to understand these factors before accepting any job offer. Asking questions around these factors will also show to a potential employer that you are really thinking through the reality of working with them and also that you are money motivated.
Length Of Sales Cycle
The length of the sales cycle can have a very significant impact on your earning potential. A good example comes from a candidate we recently placed into a specialist headhunting firm. The candidate in question had previously joined a small website design firm that served a particular niche. Doing the initial calculations before joining the firm, it all looked rather exciting with potential for big ticket sales and also a big market to go after. The reality though was that the sales cycle would take a minimum of 6-12 months as he was selling the service to corporates and there were lots of layers of decision making that had to happen to sign off projects of this size.
The result: the candidate didn’t receive any commission for over 9 months which was very disheartening. Ultimately there is nothing wrong with a long sales cycle. As long as you know in advance and plan accordingly. Could you handle not seeing any financial reward on top of your basic for such an extended period of time? He couldn’t and as a result he exited the business and came to us looking for pastures new.
Strength Of Product/Service
Is the product or service actually offering something that is needed / in demand? Is it the answer to a problem that a lot of people have? The reputation of the firm is also always worth considering. How strong is the brand of the product or service in the marketplace? Do they have strong relationships with firms that buy their products? If you were to contact someone representing the business, would they know who you are?
Strength Of Competition
Has the market you are considering entering already reached saturation point? Will you have to encourage people to switch provider in order to make a sale? Are there plenty of potential customers who currently don’t use this service? Are the needs of your potential customers already being effectively serviced by firms established in this market?
There are often broader factors at play that could affect your ability to deliver results. For example, if you are considering working in recruitment in the healthcare sector for a firm that focuses exclusively on the NHS. How will this market be affected by Brexit?
How do I know if the OTE is realistic?
The best way to understand how realistic an OTE number is, is to have an intelligent conversation with the company. Or speak to the recruitment firm, like SuperGrad, that is representing you.
Probably one of the most reliable indicators is to find out how previous employees have performed in the same role. You could ask questions like What revenue did they generate in their first 3/6/12 months? What’s the average commission paid out to the last 3 consultants to join the firm in their first 12 months? You could also ask questions, or undertake your own research. Understand how long employees are typically staying with the firm; if it’s a role where the earning potential is a key attraction, then you would expect people to stay in the role if the expectations have been set realistically. High churn, although almost always a bad sign, may also be an indicator that the OTE may not be realistic.
Of course, looking at previous employees may not be possible if you are considering joining a small firm or startup. You can still ask questions around how they have reached their OTE numbers. What are their targets based on? Why do they believe that they are realistic? What do they believe is a worst case scenario and why? If you work in a commission role, nobody can ever tell you how much you will earn. You can ask questions to try and get a better understanding of what is likely.
What is a good level of commission?
Commission structures vary from company to company and often from role to role. Some roles may provide small incentives that do not significantly affect the total remuneration you receive. Others may be 100% commission.
Unfortunately there is a trade off. Typically if you are paid a higher basic for the same role, the potential for commission will be lower and vice versa. For example, trainee recruitment consultant roles where you are working as a researcher will typically pay a higher base than recruitment roles that have you actively selling. However, the ability to earn commission is likely to be much higher in the roles where you are actively selling and so the total amount that you could potentially earn will likely be significantly more too.
There are obviously pros and cons on both sides. Ultimately which works best for you will depend on your personality (primarily your attitude to risk), and your personal situation (primarily how much money you ‘need’ to earn each month).
Beware of OTE thresholds!
Some commission structures include thresholds. This is a certain level of performance that you will need to hit before you can start earning commission. This can be a very sane business practice. It allows the firm to make sure that you are covering your costs before they start paying you commission on top of your basic pay. Thresholds can even mean that your potential commission goes up. The company may offer more generous commission percentages once your costs have been covered.
So what’s the problem? As we said before, it’s all about becoming an informed buyer. It’s about understanding how you can earn commission and ultimately what you are actually likely to earn. With this in mind, you ideally want to see a company being just as explicit about their threshold as they are about their headline commission numbers. If this is not the case, you will then need to dig down further to work out how the threshold could impact your earning potential.
…especially rolling thresholds
A rolling threshold is when any shortfall in performance against your threshold in one month is carried forward into subsequent months. Again this could be seen as a reasonable business practice, but it could also be extremely demotivating for you. For example, you don’t hit your threshold in your first 2 months. Now your threshold in your third month has more than doubled. Even if you have a stellar month you will likely not earn any commission. It’s all about getting a balanced view as to what is likely / realistic, so ask questions.
What about Accelerator pay?
‘Accelerator’ structures in commission schemes allow you to earn progressively more as your performance improves. A simple example of this is the percentage you can earn from each sale increases in line with the number of sales you make. For example, you typically earn 10% of the revenue you generate, but this percentage increases to 20% for any revenue above £10k/month.
This obviously sounds great, and also fair, and it generally is. The key here, as with all the advice given in this article, is to understand how these figures have been set. From there you can work out as best you can how likely it is that you will be able to tap into these higher commission levels.
OTEs at SuperGrad
Although likely earning will vary from role to role, company to company and from person to person, we would expect most individuals we work with to earn £35k or more in their first year.
As a guide, the general rule of thumb in the recruitment sector is that a commission structure will typically pay one third of what you bill. It’s not uncommon to see candidates we work with billing between £110k and 150k in their first year. This equates to £35-50k per annum. In other sales roles, this number can vary wildly as what is required from you and / or the company to achieve a sale can be just as varied. Again ask questions to get a handle on how results are achieved within your sales cycle.
Be savvy, ask questions. Many people just want to ‘believe’ that they will earn a lot. Preferring to avoid the detail at the interview stage. This is a mistake. These are the same people who exit their role within their first 12 months when they realise what they had wanted to believe at the start, was not the reality on the ground.
Ultimately there are many factors beyond pay that make a job the right one for you. Pay is however important to most of us. It’s therefore better to have a good handle on what is realistic before you start in the role. Much better than finding out once the role is underway.
Have a look at our CV Template, Examples and Writing Guide for Graduates from UK Universities which will enable you to produce a CV that will help you secure your dream job.