On-Target Earnings: Understanding the 50/50 Sales Compensation Model

Startup companies often use a 50/50 split between salary and commission for sales compensation. OTE, or on-target earnings, sets revenue targets for reps, offering unlimited earning potential. It's simple: meet the goal and get the full OTE.

If you exceed, you can earn more. But if you fall short, you will earn less. While not suitable for everyone, this structure aligns pay with performance for early-stage companies, bringing transparency to sales compensation.

What Is On-Target Earnings (OTE) in Sales?

On-target earnings (OTE) is a salesperson's total compensation if they achieve 100% of their sales goals. For startups, a common OTE model is the 50/50 plan. Under this structure, 50% of a salesperson’s OTE comes from their base salary, while the other 50% comes from commissions and bonuses.

• Base Salary

The base salary provides salespeople with stable income and security. For startups, base salaries are often lower since much of the OTE comes from commissions. The base salary must still be competitive to attract top talent.

• Commissions and Bonuses

The other 50% of OTE comes from commissions. This is typically a percentage of sales revenue and bonuses for overachieving quotas. This rewards salespeople for pushing for more sales. Salespeople get rewarded for achieving more than their target, with bigger rewards for bigger sales.

The 50/50 model balances security and motivation. Salespeople get a livable base pay but must work to achieve maximum compensation. For startups, this model helps control costs while driving sales growth. With the right OTE and motivated sales talent, startups can achieve rapid success.

How the 50/50 Sales Compensation Structure Works

The 50/50 sales compensation structure splits an employee's pay into two main parts: base salary and commission. Typically, the base salary makes up 50% of the employee's OTE, while commission accounts for the remaining 50%.

• Base Salary

The base salary provides a steady income and security. It is usually a fixed amount paid out regularly, such as biweekly or monthly. The base salary is for essential living expenses and provides basic financial stability for the employee.

• Commission

The commission depends on performance and may vary. Employees earn commission by achieving predetermined sales targets and key performance indicators (KPIs). Commissions encourage salespeople to surpass goals as their pay rises with sales success.

For startups, the 50/50 model is appealing. It balances the need to keep costs low in the early stages with the desire to attract and keep top sales talent. This compensation model also motivates salespeople to overachieve in pursuit of generous commission payouts. Meanwhile, the company avoids high fixed costs in the uncertain early days. A well-executed 50/50 sales comp structure benefits both employers and employees.

The Pros and Cons of a 50/50 Sales Comp Split

The 50/50 compensation model offers some advantages for startups.  However, there are some potential downsides to consider with this compensation structure.

Pros

• It's simple and fair. This pay structure is easier to understand. Both sides get the same share, which reduces confusion. This can also boost morale and motivation among sales team members.
• This model reduces upfront costs for the company since it requires less base pay.
• Salespeople may feel more secure. This OTE guarantees a portion of income to employees, regardless of their individual performance. This can reduce turnover.

Cons

• Salespeople may rush to close deals to earn more commissions. They may prioritize quick sales over nurturing lasting customer relationships to maximize their commissions. This can be short-sighted and damage the company's brand over the long run.
• The model may attract the wrong type of salesperson. Someone who cares more about making money than doing what's best for the company may not fit in well at a startup. Some salespeople may find it stressful that their pay can vary a lot, which can cause them to leave their job frequently.

For startups, the 50/50 model motivates sales and cuts costs, but it must align with the company's vision. Using it for part of the salesperson's pay or as a temporary approach can mitigate drawbacks. With good hires and management, the benefits may outweigh the drawbacks for startups.

Is a 50/50 OTE Model Right for Your Startup?

Choosing the right compensation plan for a sales representative makes a difference. The 50/50 approach can be a good move for startups but also risky. Here's why:

• Flexibility

The 50/50 model provides startups with flexibility as it ties compensation to sales. As the company grows, the sales team can adjust compensation up or down based on company performance. This model is ideal for startups still finding their footing.

• Motivation

With half their pay at risk, account executives are highly motivated to meet and exceed sales targets. They have a personal stake in the success of the company, which often translates into an energetic, driven sales culture.

• Cost Control

Startups can control costs in the early stages of business by using a 50/50 model. This model has lower base salaries and only pays higher compensation when achieving sales targets and revenue goals. If targets aren’t met, the company has minimized their financial risk.

• Retention Difficulties

The only downside is that the 50/50 model can increase turnover. Account executives may seek more stable pay elsewhere, especially top performers. Startups need to weigh motivation and cost against the risk of losing and keeping talent.

The 50/50 OTE model offers startups several benefits. But it also has some significant drawbacks to consider. For the right startup in the right stage of growth, it can be an effective way to motivate and compensate sales teams while controlling costs.  However, it may not be sustainable or optimal as a company matures. Startups need to assess their priorities, values, and future needs to choose the best sales compensation plan.

Conclusion

This compensation structure is simple yet effective for startups. Splitting pay 50/50 helps control costs while offering reps unlimited earning potential. Setting clear expectations with OTE is key. Though not flawless, it's a good starting point for sales. With adjustments, it can grow with the business.

If you lead a startup sales team, think about using this structure—it could be ideal. Visit Salary.com and check out products and services for your compensation planning needs.