What are on-target earnings (OTE)?
On-target earnings, or OTE, refers to the total compensation that an employee can reasonably expect to earn if they meet all performance targets. Unlike a flat wage, an OTE combines a guaranteed base pay with a variable element such as commission or bonuses.
In the UK, OTE is commonly seen in positions where performance is measurable, such as sales roles, recruitment and senior leadership. This allows employees to earn a steady, set wage while also benefitting from performance-based bonuses if they meet certain targets. For example, a recruiter might be paid OTE, meaning that they receive a bonus for successfully placing a certain number of candidates each month.
What is OTE salary and how is it different from a fixed salary?
Employees who earn a fixed salary receive the same amount of money each pay period, regardless of performance. By contrast, on-target earnings incorporate both base pay and potential earnings tied to performance. Each pay period, the employee receives their base pay, plus any additional bonuses earned by meeting certain targets, if eligible.
When presenting contracts and job adverts, employers must ensure that the salary is presented transparently in contracts and job adverts to comply with employment law and avoid misleading candidates. For example, a job advert might say “£35,000 OTE salary”, meaning that an employee has the potential to earn up to that amount, depending on their performance.
Examples of positions with OTE compensation
Roles where performance is easy to measure often include OTE. Bonuses linked to sales targets, new contracts or company-wide goals are all suitable for on-target earnings, and might be paid monthly, quarterly or annually.
Positions that might use OTE compensation include:
- Sales executives
- Account managers
- Recruitment consultants
- Insurance brokers
- Real estate agents
- Call centre representatives
- Business development managers
- Senior leadership roles
These roles depend heavily on measurable outputs, which is why OTE is a common pay structure. It ensures that employees are rewarded for the value they bring, while giving businesses a structured way to incentivise performance.
Capped vs. uncapped OTE salary meaning
When offering OTE, employers need to decide how much flexibility to allow in earnings potential, as this can significantly impact motivation, costs and workforce planning. The distinction here is whether the OTE salary is capped or uncapped.
Capped OTE
Capped OTE means that there’s a maximum limit on how much variable pay an employee can earn, even if they exceed their targets. This approach gives employers greater control over salary budgets and reduces risk. However, it can sometimes dampen motivation for high performers who feel restricted once they’ve reached the cap.
Uncapped OTE
Uncapped OTE allows employees to earn without limit, depending on how much they achieve. For sales-driven businesses, this can be a strong motivator and an effective way to reward top performers. The challenge for employers is managing financial predictability, as payroll costs may rise unpredictably if many employees exceed their goals.
Benefits of offering OTE
So, what does OTE mean for employers in practice? When done well, it can be a highly effective way to align pay with performance. Let’s look at the advantages that a well-considered structure can bring.
Motivates employees to hit targets
When pay is tied directly to results, employees have a tangible reason to push harder. By offering clear, achievable rewards linked to performance, an OTE is a great way to leverage motivation theory in the workplace. For example, a sales consultant with a realistic £10,000 potential bonus is more likely to stay focused on achieving their goals than one who relies solely on fixed pay. Employers can use OTE as part of their overall engagement strategy, helping staff to feel valued and motivated to deliver results.
Helps to attract top talent
High performers often look for roles where their efforts will be rewarded beyond a flat salary. Advertising certain positions with on-target earnings is an effective recruitment technique that can make your business more appealing to these candidates. While a competitive compensation structure can be attractive, transparency is key. Overstating OTE potential or not making it clear that the advertised salary reflects on-target earnings can backfire, damaging your employer brand and potentially breaching UK employment law.
Aligns performance with business goals
As well as motivating individuals, on-target earnings ensure that performance contributes directly to broader company objectives. Linking bonuses to measurable outputs and conducting regular performance appraisals can help managers to steer their teams to make progress towards shared goals. For example, a business development manager’s bonus might depend on securing a set number of new contracts, directly tying individual efforts to organisational growth. This alignment helps to create a culture of accountability and shared success.
Improves financial planning
Although OTE introduces some variability, it can also help with financial planning. Employers can use average performance data to predict how much they’re likely to spend on salaries each quarter, leading to more accurate budgeting. By using payroll software that is able to automatically generate reports that show potential salary liabilities, finance teams can gain a clearer picture of future cash flow, allowing businesses to offer OTE confidently.
Challenges of offering OTE
While offering OTE means clear benefits for both parties, it also introduces challenges. Let’s look at the risks that employers need to be aware of to avoid unintended consequences when implementing an OTE structure.
Potential for confusion
Employees sometimes mistakenly believe that the advertised OTE is guaranteed, particularly if it’s not clearly explained during recruitment. This misunderstanding can cause disputes or disappointment once pay is received. To avoid this, employers should provide full clarity during hiring and reinforce it during the onboarding process. Clear communication ensures that staff know exactly what they need to do to earn the advertised salary, and what, if any, pay caps are in place.
Risk of demotivating employees
If targets are set unrealistically high, on-target earnings can quickly lose their motivational power. Employees may feel that no matter how hard they work, the bonus is unattainable, leading to disengaged employees who may underperform or leave altogether. To prevent this, make sure to base targets on realistic, data-driven expectations and review them regularly to reflect market conditions.
Budgets can be unpredictable
Uncapped OTE, while motivating, makes it difficult for finance teams to forecast expenses accurately. If several employees exceed their targets, payroll costs can spiral unexpectedly. This unpredictability can disrupt wider expense management, particularly for businesses without strong cash reserves. Employers must weigh up the benefits of uncapped earning potential against the risks, and consider using payroll software to accurately track and monitor these fluctuations.
Complicated payroll compliance
Managing this structure requires strict adherence to UK law. The base salary must always meet or exceed the National Minimum Wage, regardless of how much commission or bonus is earned. Employers should also take working time regulations into account when setting performance targets, ensuring that employees are fairly compensated for all hours worked. Managing salaries using a system that supports payroll compliance simplifies this process, helping employers to avoid penalties and reputational damage.
How to calculate on-target earnings
While some of the compliance considerations can be complex, calculating OTE is reasonably straightforward. By defining your pay structure clearly, you’ll be able to set clear expectations and ensure that the pay you offer is both fair and motivating. Here are the steps you’ll need to follow.
Step 1: Determine base salary
Start by setting the guaranteed base salary, making sure that it complies with minimum wage laws and provides financial stability. This figure should be competitive enough to attract candidates while leaving room for performance-based incentives. Clearly defining the base salary is crucial to ensuring that employees understand what they will earn regardless of targets.
Step 2: Define performance targets
Once you’ve set the base salary, you need to establish the targets that trigger additional earnings. These must be realistic, and aligned with employee roles and responsibilities, as well as with company objectives. Using the SMART goals framework (specific, measurable, achievable, relevant, time-bound) helps to design targets that employees believe they can reach, making on-target earnings more motivating.
Step 3: Set bonus rates
Next, decide on the commission or bonus rate linked to performance. When designing any form of incentive pay, employers should aim to strike a balance between motivating employees and keeping payroll sustainable. For example, offering 10% commission on sales revenue may work well in high-margin industries but could be unrealistic in low-margin sectors.
As well as percentage-based rewards, OTE could take the form of fixed cash amounts for hitting quarterly targets, tiered rewards that increase as employees exceed different performance levels, or one-off project completion bonuses.
Step 4: Add base salary to realistic variable pay
After determining base pay, targets and bonus rates, you need to combine them to create the total salary. The variable component should reflect what an average performer is likely to achieve, not just the maximum possible amount. This approach ensures that employees view OTE as attainable rather than inflated. Employers who exaggerate potential earnings risk damaging trust and increasing turnover.
Example OTE salary calculation
For example, a sales executive might have a base salary of £28,000. If they achieve their quarterly sales goals, they could earn an additional £12,000 in commission. Their total salary would therefore be £40,000. Using payroll software that automates calculations and ensures compliance ensures that both the base pay and variable pay are accurate and displayed clearly on payslips.
On-target earning FAQs
What does OTE mean in salary?
In the UK, OTE refers to the total amount that an employee can expect to earn if they meet their performance targets. It includes a fixed base salary and achievable bonuses or commission, which may or may not be capped to an upper limit.
Is OTE guaranteed?
No, only the base salary is guaranteed. The performance-related element depends on meeting agreed targets. Employers must make this clear so that candidates don’t assume that an OTE figure is a guaranteed income.
What’s the difference between OTE and basic salary?
Basic salary is the fixed, guaranteed portion of pay. OTE includes both base pay and variable performance-based earnings. Employers should outline both figures in contracts to ensure transparency.
Do employers have to pay OTE if targets aren’t met?
No. If they don’t hit their targets, employees are only entitled to the guaranteed base pay. Employers must ensure that contracts clearly separate basic salary from the performance-related bonuses to remain compliant with UK employment law.
How does OTE appear on payslips?
Payslips typically show base pay and variable pay separately, so employees can see exactly what they earned in commission or bonuses. Payroll software makes this process easy, ensuring that all salary components are recorded correctly.
How can payroll software support managing OTE salaries?
Payroll software automates OTE calculations, ensures compliance with UK employment law, and produces accurate payslips with a complete breakdown of earnings. This reduces administrative workload for employers and makes pay more transparent for employees.
Manage OTE seamlessly with PeopleHR
Understanding OTE and how to implement it effectively is vital for employers. From motivating employees to improving financial planning, a well-structured salary is a great tool for driving business performance when used well. However, challenges like compliance, transparency and payroll accuracy mean that employers must take care when setting it up.
PeopleHR’s payroll software helps you to handle all aspects of OTE seamlessly. As well as automatically calculating performance-based earnings and generating clear, accurate payslips, its built-in compliance tools also help you to meet your employer obligations and comply with UK employment law.
To see how our software can help you to keep track of your payroll bill, no matter how complex your salary structure, Watch our payroll demo or get in touch with our team today.
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