This article will help you understand what quota, on-target earnings (OTE), and quota-to-ote ratio are. It also touches upon how you can calculate this ratio.
Moreover, read about factors influencing this ratio, like business and go-to-market models, sales team responsibilities, location, average contract value, and brand awareness.
While quota is the sales objective a salesperson intends to meet over a specified period, OTE is the entire pay a salesperson anticipates earning upon meeting 100% of their quota.
This comparison of a salesperson’s target to their anticipated earning is called the quota to OTE ratio.
Companies use this ratio to guarantee that they adequately pay their sales force for their efforts.
In this article, I’ll cover what the quota to OTE ratio is and how you can calculate it. I’ll also highlight six factors that affect this ratio.
What is a Sales Quota?
A sales quota is a specified sales objective that a salesperson or sales team must meet within a specific time frame, usually a fiscal year. It’s frequently used as a metric to assess a salesperson's or sales team's success.
Management typically sets the quota based on the company's revenue targets, market trends, and the salesperson's previous performance.
For more information, read our detailed guide on the sales quota.
How do you calculate sales quota?
The formula to calculate a salesperson's quota varies from company to company.
Still, it considers factors such as the average deal size, the number of deals closed, and the sales cycle length.
A common formula used to calculate quota is:
Let's say a company has five sales reps, and the total sales revenue goal for the year is $5 million, with a desired growth rate of 10%.
To calculate each salesperson's quota:
Quota = ($5,000,000 / 5) * 0.10
= $1,00,000
What is OTE?
On-Target Earnings (OTE) is the overall remuneration a salesperson may anticipate earning if they reach or surpass their quota.
OTE often includes basic pay, commissions, bonuses, and additional perks.
The OTE is an integral part of a salesperson's pay package and is frequently utilized as a motivation to increase sales success.
Check out our comprehensive article on OTE.
How do you calculate OTE?
The formula to calculate a salesperson's OTE is straightforward and typically involves adding together their base salary, commissions, bonuses, and any other incentives.
The formula used to calculate OTE will vary depending on the company and the salesperson's role.
Let's say a salesperson has a base salary of $75,000 annually, and their commission rate is 10% on all sales revenue generated.
If their quota for the year is $1 million, and they achieve 100% of their quota, their OTE would be:
OTE = $75,000 + (0.10 x $1,000,000)
= $175,000
This means that if the salesperson meets or exceeds their quota, they can expect to earn $175,000 in compensation for the year.
What is Quota to OTE Ratio?
The Quota to OTE Ratio compares a salesperson's quota to their On-Target Earnings (OTE). It’s computed by dividing the salesperson's quota by their average monthly earnings.
The resultant ratio gives insight into the fairness and efficacy of a salesperson's pay plan and areas where changes may be required to inspire and incentivize salespeople properly.
So what is the significance of the Quota to OTE ratio?
- Provides insight into the fairness and effectiveness of a salesperson's compensation plan.
- Helps identify areas where adjustments may be needed to motivate and incentivize salespeople.
- Ensures that salespeople are fairly compensated for their performance.
- Motivates and incentivizes salespeople to achieve their quotas and drive revenue for the company.
- Provides a benchmark for evaluating the performance of a salesperson or sales team.
- Helps identify which salespeople are performing at a high level and which ones may need additional coaching or support.
- It is used as a tool to attract and retain top sales talent.
- Improves the overall performance of a sales organization by ensuring that salespeople are aligned with the company's revenue goals.
How to Calculate the Quota to OTE Ratio?
Quota to OTE Ratio = Quota / OTE
Let's say a salesperson has a quota of $1 million and an OTE of $200,000.
Their quota to OTE ratio would be calculated as follows:
Quota to OTE Ratio = $1,000,000 / $200,000
= 5:1
This denotes that the salesperson's quota is five times their OTE.
What does this mean?
If the ratio is high, it may imply that the salesperson's quota is unreasonable or that their remuneration is not encouraging them to perform effectively.
In contrast, a low ratio may imply that the salesperson's quota is too easy and that they need to be adequately driven to drive sales success.
Top 6 Factors That Affect Quota to OTE Ratio
Let’s examine the top 6 factors and discuss how they impact the quota to OTE ratio.
1. Job responsibility
A candidate’s role in the sales team can affect the quota-to-OTE ratio based on the types of transactions sold and the skill required to close those deals.
For example, a corporation with a complicated product offering may need specialist sales jobs such as solution architects or technical sales associates. These jobs may require greater knowledge and effort, resulting in higher OTE and quota objectives.
2. Go-to-market model
The go-to-market model describes how a business brings its products or services to market.
It can influence the quota to OTE ratio by altering the sales team's focus, the types of clients sought, and the sales cycle duration.
For instance, a corporation with a direct sales go-to-market approach may have greater OTE and quota objectives than a company with an inside sales model. This is because direct sales teams often work on larger, more complex projects requiring more effort and skill.
3. Corporation’s business plan
The business model describes how a corporation produces revenue and profits.
It can influence the quota-to-OTE ratio by altering the duration of the sales cycle, the emphasis of the sales force, and the types of items or services provided.
For example, a firm with a subscription-based business model may have a lengthier sales cycle than a company offering one-time purchases, which might affect the sales team's ability to meet goals.
Furthermore, a corporation with a complicated product offering may require additional specialist sales jobs, which might affect the OTE and quota for each function
4. Brand awareness
Brand awareness is the degree to which a company's brand is known and appreciated.
It can influence the quota-to-OTE ratio by affecting the sorts of consumers sought and the degree of effort necessary to close agreements.
Notably, a sales team for a well-known brand may have lower OTE and quota objectives than a sales team for a lesser-known brand because the established brand may have greater credibility and require less effort to do business.
By understanding the above factors, sales organizations can set fair and effective OTE and quota targets and incentivize their sales teams to achieve their goals.
5. Location
The location of a sales team can impact the quota to OTE ratio by influencing the size and types of deals being closed, as well as the cost of living and labor in different regions.
For instance, a sales team in a high-cost-of-living region may have higher OTE and quota targets than a sales team in a lower-cost area. This is due to the differences in compensation and living expenses.
6. Average contract value
The average contract value (ACV) is the income earned with each client contract.
Quota to OTE ratio can vary based on the size of transactions closed and the concentration of the sales team.
For example, a firm with a high ACV may have greater OTE and quota objectives than a company with a low ACV because the sales force is working on larger, more complicated deals.
Wrap Up
The quota-to-OTE ratio gives insight into the fairness and efficacy of a salesperson's pay plan. It can also assist in identifying areas where changes may be required to inspire and incentive salespeople properly.
Use this article to learn the factors that drive the quota-to-OTE ratio and set a suitable ratio that is fair and effective in driving sales success.
