Human Resource (HR)
Category: General HR
Although typically used in conjunction with sales compensation, On Target Earnings (OTE) basically refers to what employees earn when specific goals are met, i.e., if they’re ‘on target.’
For example, we might say that employee with a base pay of $100K and a 10% bonus has an OTE of $110K. Whether they actually earn $110K depends on how the bonus is structured.
For example, the 10% bonus may be discretionary – meaning someone decides whether to grant it and how much - or non-discretionary. There are advantages and disadvantages to both.
Discretionary compensation offers a motivational tool to managers that can be cut back in slower quarters. However, there's a downside:
- Rewards-based motivation is left up to managers, who may not be up to the job.
- The connection between met goals and rewards gets fuzzy once human intervention is introduced.
- Employees may feel unfairly treated if they don’t get the rewards they think they deserve.
- Employees and managers may not fully understand the criteria for allocating rewards.
Although most organizations rely on manager discretion when it comes to allocating bonuses, there’s a lot to be said for non-discretionary rewards:
- There’s a clear line of sight between behavior or outcomes and rewards.
- The manager is taken out of the mix, giving employees more control over their own variable compensation.
- Because non-discretionary rewards are based on pre-defined performance goals, they can be self-funding.
The downside of non-discretionary compensation is that employees tend to focus myopically on achieving only those goals that are linked to rewards.
Of course, companies typically want sales people to focus myopically on selling, which is why non-discretionary compensation works fairly well in sales organizations. But in other parts of the organization it’s less cut and dried, which is one reason companies continue to rely heavily on discretionary rewards.
Another form of variable compensation that offers the advantages of non-discretionary rewards without the disadvantages of discretionary rewards is the company bonus, which everyone at the company is eligible to receive if performance criteria are met. For example, a company might offer an extra week of vacation or a cash bonus to all employees if revenue increases by 10%.
Although seldom used, the company bonus offers several advantages:
- Everyone has a stake in meeting the goal(s).
- Employees are encouraged to pull together instead of working competitively.
- Company successes are shared by everyone rather than a hand selected few.
- Depending on the structure, this type of bonus can also pay for itself.
The main disadvantage, of course, is that poor performers are rewarded the same as top performers, which is why the company bonus works best in conjunction with other forms of variable compensation.
Think of it as an incentive compensation portfolio, where multiple performance levers balance each other to increase overall effectiveness.
Why do we want our OTE? Because no matter how you structure your variable compensation, OTE is a great way to communicate it. I mean, $110K OTE just sounds like more money than $100 salary + a possible 10% bonus.
It's like... money for nothing!
originally posted at Compensation Café
Laura Schroeder is a Compensation Strategist at Workday, a modern Software-as-a-Service solution for optimizing your investment in people. She has nearly fifteen years of experience designing, developing, implementing and evangelizing global Human Capital Management (HCM) solutions and is currently pursuing a certificate in Strategic Human Resources Practices at Cornell University. Her articles and interviews on HCM topics have been published in the US, Europe and Asia. She lives in Munich, Germany and enjoys cooking, reading, writing, kick boxing and spending time with friends and family. If you want to read more from Laura, check out her posts at the Compensation Café and Working Girl blogs or on Twitter @WorkGal.
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