The Dirty Secret of OTE for Inside Sales Reps

I have an axe to grind. It’s about OTE for inside sales positions in SaaS.

We started hiring in Austin, TX in April 2018 with a goal to scale our Austin sales team to roughly 20 salespeople across Account Executive and Sales Development Rep positions. The reasons for choosing Austin were many: 

• It’s geographically close to our New Orleans headquarters, which makes it easy for leadership to get back and forth regularly
• The market is full of talented managers across the revenue spectrum (sales, marketing, customer success)
• S3 Ventures, who led our Series B round of funding, is based there and can deep roots in the market
• Any given August or September, our inside sales team might have to evacuate during Hurricane season, so having a separate sales office de-risks the potential for business interruption and gives our team a place to evacuate.
• Most importantly, we like the city for many reason, but mainly tacos ??

After almost a year of hiring for sales reps in the city, I’ve learned a few things about the Austin market that surprised me. First, the competition for inside sales reps in Austin is red hot. The unemployment rate in Austin is sitting at 2.6%, which means there are more jobs than people to fill them. In any market, good talent is hard to come by. In a super-low unemployment market, it’s not only hard to come by it’s also hard to keep. With some many options, reps can be choosy with which opportunities they take, requiring companies to be competitive in ways beyond just a cool office or culture. 

Next, the talent isn’t necessarily better than the talent in other cities, but it is certainly more expensive. In almost every single instance where we have extended an offer, only to be turned down for another offer for marginally higher OTE. Most reps cite the cost of living as the need for higher OTE, but my suspicion is that there are many companies in the Austin market with strong financial backing that are irresponsible with how they are designing comp for sales reps. When you look closer, there are many phantom OTEs in Austin that are luring reps into career traps.

What is OTE?

OTE stands for “on target earnings” and the formula to calculate OTE is very simple: base salary + variable compensation. When OTE is advertised or discussed, the number refers to the amount that a salesperson makes when they are fully ramped and product at or above their target or their quota.

Many reps are disillusions by OTE because they misunderstand it. Here’s the thing: OTE relies on the rep being ramped AND hitting their number, which likely doesn’t include the 6-9 month ramp period where the rep is getting their feet underneath them with the product, the market, the sales cycle, and the company’s sales culture. 

This means that for a while, reps are relying mostly on their base salary to survive until they bring in revenue and get commissions. It’s this fact that I believe is leading many young sales reps down the wrong path, as many are chasing base salaries around rather than looking at the potential of the position or the potential of the company.

How do companies figure out how much to pay sales reps?

In David Skok’s analysis of sales comp, he discusses the Unit Economics of a Salesperson and concludes that:

...when your sales process starts to work well, quotas should be at least 5x the OTE (On Target Earnings), which includes base salary + bonus. Ideally quotas are 6-8X OTE to be considered high performing. These are guidelines we’ve observed based on empirical data from a number of successful companies we’ve worked with. But, this is just a guideline. The complexity and difficulty of your sale will determine the ratio your business can support.

Let’s break that down. If a company is offering $100k OTE ($50k base + $50k variable), then a salesperson will need to carry a $500k+ annual quota in order to be a unit profitable rep. Let’s assume a 6-month ramp time (conservative estimate) and that the rep carries a $10k ARR quota in month 3, $20k in month 4, $30k in month 5, and full quota of $42k in new ARR in month 6. And let’s further assume that the rep knocks it out of the park and hits their exact number in every month for the first 12 months. And finally, let’s assume the company is paying 10% commission on all new ARR. Here’s what the first year earnings would be for that rep:

As you can see, in year one the rep makes $87,500 for bringing in $375,000 new ARR, a ratio of 4.2x. In year two, the rep can expect to make $104,000 by hitting quota every month and bringing in $540,000 in new ARR, a ratio of 5.2x.

This is the dirty secret about OTE, the advertised OTE is not the money that you will make in your first year and that’s OK. It’s designed that way, because reps should be thinking beyond their first 6-12 months in the position.

Be greedy long term

So many young sales reps want to be successful yesterday and they underestimate the time and effort it takes to hit success milestones. It’s my position that it takes anyone at least 6 months to get good at anything. I see it too often that a sales rep joins a company and doesn’t achieve “success” in her first 6 months, get’s frustrated, and leaves for another position that offers $5k more in base salary. 

This is a bad career move.

This works in the current economy with the job market where it is, but it is a poor short term strategy. Instead, reps should be looking at the company they are working for, and planting seeds to build a career in sales with a company that will support their growth. The earnings in the first six months are irrelevant.

Sure, you need to put food on the table for you and your family, but beyond that you should be playing the long game. Learn the market, learn the product, learn the company, and push through the adversity to get in a groove because once you find it you will be surpassing quotas regularly, at which point the OTE really is irrelevant. 

Most importantly, find a company with a great leadership team that cares about where you will be in 3-5 years, rather than just caring about you hitting a number. Working with and learning from strong leadership will accelerate your career and enrich your skills in ways that compensation simply cannot.

So the next time you are looking around or your next position, and you see a company is offering $120k OTE, ask yourself whether the company is one you will want to be at for at least two years, because it will take you that long to really hit your OTE.