Determining the health of your Quota:OTE Ratio vs Sales:Earnings Ratio
- To use the calculator, enter your organization’s numbers in the green fields. Let our engine do its thing, and plug in different numbers to see how they impact both sides.
- When Quota:OTE ratios and Sales:Earnings ratios both sit in green, this indicates that your reps are getting paid well and performing well. Signs of a healthy sales org — nice work!
- When one or both of the dials are in yellow, that could indicate that your reps are not being compensated highly enough for the sales they are bringing in, quotas are too high, too low, or that reps aren’t paying for themselves from a business lens. Y’all have work to do!
- However, when one or both of the dials are in red, you’re in the danger zone! This means your quotas are too low, your OTEs are too high, or — in the case of the sales:earning ratio — your team’s quota attainment needs to improve.
- What about a mismatch, when the quota:OTE ratio is green but the sales:earning ratio is yellow or red? That means you’re communicating OTEs that aren’t realistic.
Think of carnival prizes. You see a giant plush dragon hanging from the booth. That’s your goal, and guess what? You won! But, the game operator hands you a keychain and tells you it’ll take another 10 wins to get the dragon. A bonus — you find out very rarely do people win the dragon.
If you’re going to advertise the dragon, make sure it’s attainable. Same with OTEs.
New Ratio Calculator helps leaders set revenue-based quotas and OTEs
With our Quota:OTE vs. Sales:Earnings Ratio Calculator, we aim to help leaders from RevOps, sales, and finance set realistic quotas and OTEs based on past performance.
To receive your own Quota:OTE vs. Sales:Earnings Ratio Calculator, scroll up, fill out the form, and check your inbox.
Read on for context and tips to understand the tool.
On-target earnings 101
Let’s start with the basics.
What does OTE mean and why are sales leaders always bringing it up?
On-target earnings (OTEs) represent the total amount of money a sales rep or account executive (AE) can earn if they hit 100 percent of their quota. Sales leaders usually set OTEs for a 12-month period and lean on this number to set quotas.
To calculate OTEs, take the base salary and add the total commissions a rep would earn if they hit 100% of their quota.
For example, Amy’s base salary is $60,000, and her total commissions earned at 100 percent quota is $65,000. Therefore, Amy’s OTE equals $125,000.
Base + Commission = OTE
60K + $65K = $125K
Amid the ongoing “War on Talent,” rising OTEs have become especially prevalent. Trends suggest AEs continue to shop for the most lucrative opportunity. As you can expect, the bigger the OTE, the greater the chance a recruit accepts that offer over another.
But, one thing to keep in mind is that OTEs are not guaranteed. If a company lists OTEs of $200,000 and only 40 percent of the sales team hits that number, that’s a red flag. Some would even say that’s false advertising. More to come on this later.
Glad we have an understanding of OTEs. Now, let’s throw a wrench in it. A wrench that we in the biz call multipliers.
A multiplier is the number of times more a quota is than an AE’s OTE. To find it, divide the overall quota goal by the OTE.
Here’s an example. Ian is an AE with an OTE of $160,000. His quota is $1 million in annual recurring revenue (ARR). In this instance, Ian’s quota is 6.3x larger than his OTE. The multiplier, or quota to OTE ratio, for Ian’s compensation plan is 6.3.
Now, determining the multiplier for your compensation plans can be tricky. (That’s why we created the Quota:OTE Ratio vs. Sales:Earnings Ratio Calculator.)
We’ve found that most of the companies we speak with set multipliers 5x larger than their OTEs.
“The 5x range is what most people would consider good,” our Chief of Staff Graham Collins said.
But, because there’s always a but!
“There is a range of ‘good,’ and so much of this depends on your company’s revenue,” Graham said.
Next, we’ll look into the range and why it varies.
Factoring ARR with quota multipliers
A smaller multiplier, say 3x, often benefits the sales rep and the company when it’s a smaller organization.
Consider a company that generates $1 million in ARR. A quota that’s set with a 3x multiplier works great in this instance for both the company and the rep. Meaning, the company compensates the rep well for their efforts. Reversely, the rep’s output is worth the company’s investment in the rep.
For companies pulling $100 million in revenue, however, the 3x multiplier works against the company.
That’s because a company with $100M ARR likely dedicates substantially more resources to support their reps. Resources could include large investments such as a sales development team, sales enablement, marketing, and management teams. When factoring in these resources, the cost per sale at a larger company climbs significantly than the cost at a smaller one.
Since the cost per sale is larger at a bigger company, the company can’t afford to pay 16 percent, for example, of the sale to the AE who closed it. Instead, that 16 percent gets split to the different areas of the biz that helped support the deal, including the rep. Whereas, at a smaller company, the sales rep collects a greater percentage of the deal with often smaller dealsizes.
To recap, a quota with a multiplier of 5x the OTE is what we’ve observed as the SaaS standard. This ratio, or multiplier, usually changes based on a company’s total ARR. Companies who invest more in marketing and sales enablement, for instance, should have higher multipliers.
So, how can you tell if your ratio serves both the reps and your business revenue model? This is where our Quota:OTE vs. Sales:Earning Ratio Calculator comes in.
Introducing the Quota:OTE vs. Sales:Earnings Ratio Calculator
This is for you — and for free.
You can use it while building your next compensation plan and setting quotas. Plug in your organization’s numbers into the editable fields. Don’t forget to adjust the ARR at the top. Then, watch our engine determine the ratios, or multipliers, for Quota:OTE and Sales:Earnings.
Change the numbers and see if you can get both dials into the green.
The top dial, Quota:OTE Ratio, takes into account your base salary, on-target commissions, OTE, and annual quota. It’s, as Graham calls it, “more pie in the sky.”
The bottom dial, Sales:Earnings Ratio, is what’s actually happening with your business.
This ratio factors in the average percentage of your team that reaches their annual quota. Upon filling in the “Average Quota Attainment” field, our engine will break down the total average sales per rep, average commissions earned per rep, and the average total annual earnings per rep.
“The top is hypothetical,” Graham said. “The bottom is the real world.”
When both are in green, this means you’re compensating your team well and they in turn are performing well.
For additional resources, check out our Sales Compensation Calculator which includes tips and other support.