Go for the Goals
When choosing a company to join, the
most important factor is not the type of compensation plan,
but whether that plan is achieving important goals for distributors.
Alfred White, senior management consultant at San Diego-based
Hamilton LaRonde & Associates, Inc. recommends evaluating
each company you are considering against the following characteristics
of a good compensation plan:
- Is it easy to enter into the opportunity? You should
only have to buy a modestly priced sales kit.
- Are you rewarded primarily for direct sales, rather
than for override commissions?
- Are you rewarded for personally sponsoring others?
- Are you rewarded for recruiting multiple levels?
- Is the focus on selling products to the end consumer,
rather than to your downline?
- Are you rewarded for training and supporting your downline?
- Are you rewarded for high personal volume?
- Are you rewarded for high group volume?
- Are you rewarded for maintaining a monthly volume?
- Does the plan provide for recognition?
- Does the plan offer nonmonetary rewards and incentives,
such as trips or cars?
- Is the plan's monthly maintenance requirement reasonable
- not so high that you can never achieve it, and thus
never receive compensation?
Conversely, here are some compensation
plan characteristics that should send you running in the
opposite direction:
- A plan that does nothing to discourage deadweight distributors
and nonproducers.
- A plan that encourages inventory loading or large investments
in products.
- A plan that emphasizes gimmicks rather than product
sales.
Four Major Types of Plans
There are many different varieties of
compensation plans out there. They often have exotic names.
But they tend to be variations on four major types of plans…
The Unilevel Plan
In this plan, recruits do not advance to
positions above basic distributors, regardless of their
performance. According to White, the principal advantage
of the unilevel plan is that it’s easy for companies
to administer and for distributors to explain to potential
recruits.
Its chief disadvantage is its lack of flexibility
in achieving some of the goals mentioned earlier. In addition,
unilevel plans are limited in depth of levels of payment
which inhibits deep sales organizations. Instead, front
line width occurs which may cause sponsors to be "thin"
in support. Over time, most companies that start with unilevel
plans adapt them to look more like a stairstep breakaway
plan.
The Stairstep Breakaway
Plan
This is the oldest and most common type
of network marketing compensation plan. After meeting certain
performance criteria, a distributor advances in rank and
"breaks away" from his or her original sponsorship
line. The original sponsor receives a percentage override
on the sales of the entire breakaway organization. In a
way, a stairstep breakaway plan is a unilevel plan with
the flexibility to motivate distributors to perform and
advance.
Its chief advantage, says White, is that
it has a good track record, is easy to modify, is accepted
by regulatory agencies, and is driven by volume and performance.
The primary disadvantage of this plan is
that it is sometimes so complicated that it’s difficult
to explain to new recruits. Another disadvantage is that
if the company does not monitor its distributors, they tend
to get involved in inventory loading. And sometimes, there
is an unreasonably high ongoing monthly personal purchase
volume requirement.
Nevertheless, the stairstep breakaway plan
remains the most tried-and-true type of plan out there today
— and the most likely to survive in the decades to
come.
The Matrix Plan
This plan looks like a grid in which a
distributor is limited to a certain number of recruits at
each level. For example, in a 3-by-5 matrix, each level
down to five can have only three downline distributors.
This type of plan is sometimes considered
to be more gimmicky than others. Why? Because due to the
width limitations, new recruits may find themselves placed
underneath upline distributors who did not directly recruit
them. In a three-wide matrix, for instance, the fourth distributor
you personally sponsor would be placed under one of the
first three distributors you personally sponsored (your
first-level distributors).
This automatic filling of spots in the
matrix can be attractive to novice distributors if they
sign on with strong leaders who help fill their grids. Also,
it works well in companies where most of the products are
used by the distributors, rather than sold to outside consumers.
Matrix plans have been subjected to attacks
by regulatory agencies because they sometimes look like
"a game." By and large, they have not had a successful
record in the industry, and they foster nonproducers, which
makes the upline distributors resentful. Nevertheless, several
major companies operate matrix plans. Only time will tell
whether these plans are here to stay.
Binary Plan
The binary plan is the newest on the scene.
In a binary plan, a distributor is allowed to occupy one
or more "business centers," each limited to two
downline legs. Compensation is paid on group volume of the
downline legs rather than a percentage of sales of multiple
levels of distributors. In other words, payment is volume
driven rather than level driven. Sales volume must be balanced
in the two legs to be eligible for commissions, which are
paid at designated points when target levels of group sales
are achieved. The distributor may occupy multiple positions
and may re-enter or loop below other two leg matrices in
which he or she has been active. There is no depth limit
on payment but each matrix has a finite amount that can
be paid out, thus necessitating involvement in multiple
two leg matrices. Payment in binaries is often on a weekly
basis.
Proponents of binaries cite several advantages.
First, they like the weekly payout. Since it is a series
of two leg matrices, it is simple to explain. Group cooperation
is promoted because payout is on group volume and requires
balancing of volume in each leg to be eligible for payout.
Some call it more democratic because of the limitation on
payout in each matrix, the unlimited depth of payout, and
the allowance of looping or re-entry.
On the other hand, the binary is the most
controversial of plans. The binary had its unfortunate origins
in the early 1990s in fraudulent gold coin programs, and
its use later for other questionable products did not help.
Those subsequent products were generally high-ticket one-time
purchases such as consumer service or travel memberships,
travel certificates or overpriced prepaid phone cards. By
the end of the 1990s, and after many legal challenges, the
binary was not in great favor, and only companies like USANA,
that had applied the concept to consumables, seemed to be
around.
Critics charged that the implementation
of binary plans brought on legal and business problems.
Companies and distributors tended to promote the plan rather
than the product, creating accusations of a "money
game." Often plans had a one-time sale requirement
which created a something-for-nothing atmosphere and appearance
of payment for headhunting recruitment. The multiple business
center approach was often presented as a "purchase
of a business center," an "investment," or
a "front-load" of product. The ability to stack
personal business centers also created the possibility of
front-loading. The required balancing of sales volume between
legs meant that hard work might yield no payoff and income
would be forfeited, because personal production did not
count if balanced sales volume did not occur. Finally, the
multiple re-entry or looping created a "game-like"
atmosphere in which an individual could end up in the downline
of someone he or she had sponsored. For the distributor
looking long term at a distributorship that might be sold,
this "looping" also made it virtually impossible
to place a value on a distributorship because no continuous
downline genealogy could exist.
Last But Not Least
Here are some final yet important aspects
of a compensation plan to check out:
Overall Payout
How much of the sales dollar does the compensation
plan pay out to its distributors? Most plans pay between
35 and 45 percent of the company’s wholesale purchase
volume, and about 30 percent of suggested retail volume.
Look for a plan that divides the pie in your favor, without
going overboard. A plan that is overly "generous"
to its distributors can run itself into financial ruin.
And that’s bad for everyone.
Orphan Commissions
When distributors fail to qualify to earn
the commissions or bonuses on their purchase volume in a
given month (usually because they fall short of the minimum
purchase qualifying amount), the commissions they would
otherwise have earned are called "orphan" commissions.
Avoid plans in which orphan commissions return to the company.
A plan should be structured in a way that orphan commissions
"roll up" to the next qualifying distributor that
month, rather than return to the company. This approach
is also called "compression." Orphan commissions
from terminated distributors should be handled the same
way.
Lock-In
Look for a plan that has the lock-in feature;
that is, when you reach a certain level, you "lock
in" and cannot be demoted because of a temporary drop
in monthly performance.
Other Perks
The compensation plans of most companies
offer at least some perks for top performance above and
beyond commissions and bonuses. These come in many forms:
company cars, health insurance, free training, lead and
co-op advertising programs. A few publicly traded companies
even offer stock or stock options.
No matter what other advantages a plan
might have, always ask this pivotal question: "Does
it emphasize getting products or services into the hands
of consumers; or does it emphasize making money by finding
new recruits? If it falls into the latter category, run
away — fast. In the end, says White, it’s the
product — not the compensation plan — that drives
success.
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