While on-target earnings (OTE) are a powerful tool for motivating performance, they also come with significant legal considerations. From contract clarity to wage compliance, companies must navigate a web of laws and regulations, especially when operating across different regions.
In this article, we break down the key legal aspects of designing OTE plans, offering guidance for risk management and ensuring your compensation models align with local employment laws.
The definition of on-target earnings may vary by jurisdiction. In general, OTE refers to the total potential compensation an employee earns for meeting performance targets, combining base salary and variable incentives.
In some regions (such as Australia and parts of the UK), “OTE” is also a legal term that can impact:
Superannuation contributions
Employer tax obligations
Statutory entitlements (e.g. bonuses or leave accrual)
Legal Tip: Always verify how “OTE” is defined in local laws before using it in contracts or job descriptions.
To stay compliant with labor laws, businesses must ensure their OTE structures do not:
Violate minimum wage regulations
Include unattainable or misleading targets
Delay or deny earned commissions
Commission Payment Timing: Some U.S. states require commissions to be paid promptly once earned.
Termination Clauses: Clearly define what happens to unpaid commissions or bonuses when an employee leaves.
Equal Pay Compliance: Incentive plans must not unintentionally lead to pay disparities across protected groups.
Legal considerations here are not just about avoiding penalties - they’re also about building a reputation for fairness and transparency.
If your salesforce spans multiple countries or regions, you must tailor your on-target earnings (OTE) plans to meet local employment rules.
Currency and tax implications
Bonus caps or mandatory disclosures (e.g., in EU financial sectors)
Fixed vs. variable pay ratios (especially in regulated industries)
Language requirements for legally binding compensation agreements
In Norway, for instance, holiday pay is a statutory benefit designed to offset the reduction in regular income when employees take paid leave. This approach ensures that staff continue to receive compensation during their vacation periods, maintaining financial stability even when they are away from work. For incentive-based earnings such as bonuses and commissions, the employment contract should clearly specify whether these variable components are included in the calculation of holiday pay.
Best Practice: Collaborate with local counsel or use global compensation management platforms that stay updated with regional laws and regulations.
Contracts are your first line of risk management when it comes to OTE. Ambiguity around performance conditions or commission timelines can lead to disputes.
Clearly outline how performance is measured, detailing the specific metrics, targets, or KPIs that determine eligibility for variable pay. This ensures all parties have a transparent understanding of what is expected to achieve OTE and helps prevent disagreements regarding entitlement.
Specify payout conditions and timelines, including when payouts are processed, any prerequisites that must be met before payment is authorized, and whether there are clawback provisions or deferral arrangements. This level of transparency helps align expectations and streamlines payroll operations.
Detail what happens in case of disputes or underperformance, providing mechanisms for conflict resolution, as well as clear consequences or adjustments when targets are missed. By addressing these scenarios directly in the contract, both the employer and employee are protected from ambiguity or inconsistent application of policy.
Be reviewed annually to reflect updated laws or company policies. Regular review and updates ensure compliance with evolving legislation and internal business standards, reducing the risk of outdated or non-compliant contract clauses.
Legal aspects of contracts go beyond compliance - they are instrumental in safeguarding the interests of both employer and employee. By addressing these elements proactively, contracts help minimize the risk of litigation, foster trust, and promote a fair working environment.
Manual processes leave room for error. Use compensation management software like Bentega to:
Enforce policy rules
Apply regional compliance settings
Track commission calculations with an audit trail
Ensure documentation is secure and accessible
With the right systems in place, risk management becomes proactive rather than reactive.
Incentivizing performance through OTE can drive growth - but without the right legal safeguards, it can also expose your company to risk. By understanding the legal considerations, tailoring plans to different regions, and using technology for oversight, organizations can design compliant, effective, and fair compensation programs.
Worried about the legal aspects of your OTE plan? Bentega helps you manage on-target earnings across regions. Stay ahead of legal risks while rewarding performance. Discover our compensation tool