On-target earnings: A practical guide for Canadian HR

Imagine your top sales candidate asks, “What will my total compensation look like if I hit my targets?” As an HR manager, being able to confidently answer this question with a clear explanation of on-target earnings (OTE) can make or break your recruitment efforts. 

On target earnings are more than just numbers – they're a strategic tool for attracting, motivating, and retaining top talent for sales roles. This article breaks down what OTE means, how it is calculated, and why it’s essential for building a competitive compensation strategy. 

What are on-target earnings (OTE)? 

On-target earnings have become an important aspect of compensation strategy in sales and marketing recruitment. OTE represents the total expected annual compensation for a role if the employee meets all performance targets.  

It outlines a candidate’s earning potential, and that word – potential – is key. Employees will receive the predicted on-target earnings if they meet their sales quotas or targets. 

Here’s how to calculate OTE: 

This figure combines base salary with commissions, bonuses, and incentives. 

On-target earnings vs. base salary 

Base salary is part of on-target earnings; they are not the same.  

The base salary is the guaranteed portion of compensation, while OTE includes commissions linked to performance. Commissions (or variable pay) can change from one period to another, depending on how well your sales rep meets their quotas.  

Find out more about commissions (along with other pay incentives) in this article.  

What’s a pay mix ratio? 

The pay mix ratio – how much of total sales compensation is fixed vs. variable – is an important consideration for employees. It determines what portion of their paycheque is stable each month and what portion can change based on their performance.  

The most common pay mix ratios are: 

• 60:40 – 60 percent base pay, 40 percent variable pay 
• 70:30 – 70 percent base pay, 30 percent variable pay 
• 75:25 – 75 percent base pay, 25 percent variable pay 

A 2023 report states that 50:50 is also a common pay mix ratio, especially among SaaS teams.   

Pros and cons of different pay mix ratios 

Pay mix ratios that favour base salary over commissions offer stable incomes for sales teams. This tends to attract employees who prefer to have steady, predictable pay. The downside? Your sales people might not be as motivated to meet sales quotas. 

On the other hand, a higher commission vs. base salary is a good incentive for the sales team to meet or exceed targets. But if sales are down because of market conditions or external factors, employees earn less. This could lead to a burned out, demotivated sales force.  

When reviewing your organization’s pay mix ratios, you should consider: 

• industry standards – you'll want your pay mix to be benchmarked against other employers within the same industry 

• business goals – your pay mix ratio should reflect the company’s priorities. For example, is it to grow your client base, or hit higher sales figures from existing clients?  

• talent attraction and retention – consider what type of sales professionals you want to attract and keep. High performers may be drawn to aggressive commission plans, while those seeking security may prefer a higher base salary 

Finding the right balance is key. A thoughtful, data-driven approach to pay mix can help you attract, motivate, and retain the right sales talent for your organization. 

Here's an OTE calculator from CHRR 

To help you visualize what your sales team’s on-target earnings might look like, use this OTE calculator we’ve designed for you! Just enter the base salary, target quota, and commission rate. After keying in those figures, you’ll get on-target earnings and a pay mix ratio. 

       

OTE & Sales Compensation Calculator

   

      Base Salary ($):         

   

      Quota ($):         

   

      Commission Rate (%):         

   Calculate OTE   

 

       

 

   

      OTE = Base Salary + (Quota × Commission Rate)   

   
What is a good OTE?  

Establishing an on-target earnings structure that benefits both employer and employee is more art than science. So says Matt Sachkiw, regional vice-president (Eastern Canada) and treasury operations for Canadian-owned payroll and HR company Payworks.  

“Leaders need to find the delicate balance between driving the desired behaviour without discouraging the employee by setting completely unrealistic targets,” he says. 

Based on CHRR's research, a common approach is to set an employee’s on-target earnings as a percentage of their annual sales quota. This is within 15 to 25 percent, depending on industry standards and role complexity.  

For example, a sales rep with a $750,000 annual quota might have an OTE of $150,000 if using a 20 percent benchmark (750,000 x 0.20). From there, you can determine the right pay mix ratio based on industry standards and your company’s business goals. 

That’s a baseline figure. Your organization can adjust above or below 20 percent depending on your compensation strategy.  

“Ultimately, the best targets are both aggressive and achievable,” Sachkiw says. “And of course, the OTE structure needs to align with the overall financial goals and framework of the business.” 

How realistic are on-target earnings? 

On-target earnings are realistic if they’re based on: 

• market conditions 
• business goals 
• past performance figures 

If OTEs are set too high and few employees ever reach them, this can lead to frustration, disengagement, and higher turnover. On the other hand, when OTEs are consistently attainable for the majority of the sales team, they serve as a motivating and credible benchmark.  

On-target earnings might not work for all roles, according to Sachkiw. It may not be a good fit for those in governance or risk management, but it works well for other roles.  

“This style of compensation structure has proven highly successful in industries with heavy focus on sales and roles where effort can be directly correlated to measurable results,” Sachkiw says. “OTE provides excellent incentive for those who are already highly self-motivated.”   

Realistic and data-driven OTEs are part of a competitive compensation strategy.   

Pros and cons of on-target earnings for employers and talent 

A compensation plan that includes on-target earnings has its advantages and disadvantages. Here are some of them: 

Benefits of OTEs 

• Attracts top talent: An attractive, credible OTE can help employers stand out in a competitive market 

• Aligns incentives with business goals: OTEs motivate employees to achieve business goals, especially when targets are attainable and rewards are meaningful 

• Supports retention: Transparency around OTEs and pay mix builds trust, reducing employee turnover 

• Promotes employer brand: Companies known for honest compensation practices earn better reviews and more referrals 

• Improves performance: When employees believe that targets are realistic, they are more likely to be engaged and productive 

“For employers, OTE can help attract self-starter superstars – the kinds of folks who don’t want to be limited by earnings ceilings,” Sachkiw says. He adds that a good OTE program will include strong financial incentives for exceeding targets.  

How else does OTE benefit employers? “An effective OTE program helps move a portion of people costs from a fixed cost to a variable one, which any accountant would tell you helps build a financially resilient business,” Sachkiw says. 

Downsides of OTEs 

• Unrealistic expectations: If OTEs are set too high, employees may feel misled, resulting in disengagement and higher turnover 

• Inconsistent income: Having a pay mix ratio skewed toward variable pay can result in unpredictable earnings. This can turn off candidates who prefer a more stable income  

• Complexity: Complicated OTE structures and unclear calculations can cause confusion and mistrust among employees 

• Unhealthy competition: Aggressive targets and pay mix ratios may foster internal rivalry, undermining teamwork and collaboration 

It’s important to look at the pros and cons of on-target earnings as part of your sales and compensation strategies. It helps to get a full picture to come up with the best pay and benefits plan for your salespeople.  

“The great thing about OTE is that you’re empowered to design a compensation structure that’s a win-win for both employers and employees!” Sachkiw says. 

Sachkiw is part of Payworks, the top awardee in the payroll solutions category at the Canadian Readers’ Choice Awards for HR. Find out more about Payworks and other awardees in our special report. 

Challenges and misconceptions around OTEs 

There are a few points to consider when drafting and communicating on-target earnings to your employees. These are the most common concerns and issues they’ve raised, which we saw from online forums like Glassdoor and Reddit: 

• Unattainable targets that few employees reach are part of job postings. This can lead to negative reviews 

• Confusing calculations are a challenge for job seekers to understand  

• Unrealistic quotas can make OTEs meaningless, especially if they are based on best-case scenarios rather than historical performance 

• Economic uncertainty can impact quota attainment and the ability to reach OTEs 

HR teams and sales managers can take a proactive approach in addressing these challenges. Taking the effort to go over details of OTE can help manage the expectations of job seekers and new hires. 

Communicating on-target earnings in job offers and interviews 

Set your organization apart by having an open and honest conversation with potential hires about OTEs. Here are some discussion points to consider: 

• Go over the average quota attainment rate: Share what percentage of the team achieved OTE last year 

• Explain the pay mix: Clarify how much of the compensation is base versus variable, and how commissions or bonuses are structured 

• Provide historical data: Offer insight into the average and median earnings for the role over the past two to three years 

• Clarify ramp periods: For new hires, explain any ramp-up period and how targets are adjusted during onboarding 

• Encourage questions: Invite candidates to ask about quota setting, territory assignment, and support resources 

A Glassdoor conversation reveals that clarity on OTEs is an important issue for employees. HR leaders who address these issues will build trust and attract top-quality talent. 

Start a dialogue with potential sales reps at the preboarding stage. Set expectations on OTE and overall compensation as early as possible.  

Building trust through transparent OTE messaging 

Using on-target earnings is a powerful tool for aligning employee motivation with business objectives. By understanding and effectively communicating OTE, HR managers can build trust, drive performance, and strengthen their employer brand. 

Staying informed about trends and best practices in on-target earnings will keep your organization competitive. Thoughtful strategies can help you attract, engage, and retain the high-performing sales professionals your business needs to succeed. 

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