Your MLM Comp Plan's Competitive Edge
by
Michael L. Sheffield
MLM Compensation Plan Expert
Over
the years, the most common question asked by our new clients regarding their
compensation plan is “What is the total commission we can expect to
pay on our compensation plan?” My answer is always the same. “It
depends on the style and structure of the plan and the distributor performance
qualifications necessary to receive various income opportunities.
I have interviewed many of the top MLM software companies regarding what they
see as the average “breakage” in various styles of compensation
plans. Breakage is defined as unearned and unpaid commissions. These are commissions
that do not get paid and, thus, increase the company’s eventual profits.
The consensus suggests that the average unpaid commissions of a traditional
style plan are usually in a range of 10% to 15%. Any more than that and distributors
will lose confidence in the compensation plan. It is important that the independent
distributors believe the plan as fair and they can achieve various levels
of profit if they work hard enough.
As a plan matures, breakage acts as a control factor that can be altered to
increase or decrease payout. This may delay the need to drastically alter
the plan’s basic structure. Typically distributors must meet specific
achievement and maintenance qualifications each pay period in order to qualify
for various sources of income in the plan.
For example: A compensation plan offers its distributors a 20 percent retail
commission based on the suggested price and pays its bonuses on the balance
of 80 percent. This is defined as BV or Bonus Volume.
Of the 80% of retail, the company offers a unilevel compensation structure
based on five levels (the downline members personal sales) of 8 percent
BV per level, paying out up to 40 percent.
Then there is a generation component offering another 5 percent of BV through
four generations (the group volume of a qualified downline member at a
specific rank) for a total of up to 20 percent. It is also important
to point out that most plans require certain production qualifications in
order to gain the additional depth of income stream on the downline levels
or generations.
While totaling the BV percentages in our example indicates a combined exposure
of 60 percent, historical observation indicates that the majority of independent
distributors in the direct selling and MLM industry work part time or are
possibly passive distributor/consumers. As a result, they achieve income in
the lower levels of the compensation plan and will most likely never participate
in the generation bonuses.
Since part of the potential bonus volume percentage is never earned by that
individual distributor, and it reverts back to the company as “breakage”.
If you are new to MLM compensation plan development strategy, and all this
seems a bit confusing at first, stay with the program because “breakage”
will become an important factor in your ultimate corporate success.
Also, as is customary in compensation plan development, the rank attainment
and bonus maintenance qualification become increasingly more difficult to
attain as the distributor advances in the plan. While this may seem a bit
unfair on the surface, it is important that you understand that plans that
succeed in the long run are designed to reward workers who contribute to the
growth and success of the company with significantly increased income potential.
This usually happens by redistributing some of the unpaid commissions from
non-performers to people who people who are being rewarded for their personal
and group productivity.
Since the majority of distributors are working part time or are passive distributor/consumers,
they earn a lower percentage of the available income. This contributes to
distributors collecting about 10 to 15 percent less than the maximum potential
payout suggests.
This would lead one to ask, “ Why not design a plan that pays out exactly
the maximum amount that the company can afford?” The answer has to do
with properly packaging the opportunity to not only be competitive but to
look competitive as well as other financial considerations. The image package
is an important factor in compensation plan development because the compensation
plan model will be compared to other competitive opportunities. Your plan
must compete cosmetically as well as in actual financial potential with your
competitions offering if your company to attain stability and retain its distributors.
This can be compared to the retailing strategy of a product priced at $9.95
rather than $10.00. The price is basically the same put the customer will
generally buy the $9.95 product. In addition, if a company’s bonus payout
did not have the flexibility of “breakage”, it would be more difficult
to reward the best distributors based on their level of sales and sponsoring
contribution. Also, the plan would be forced to show much lower potential
and, thus, would appear to be less lucrative than plans incorporating breakage
into their compensation plan model.
In general, the distributors that are the best business builders suffer the
most because the company would not be able to shift some of the potential
income to them based on lower earnings by marginal performers. Anticipating
breakage at the lower levels of the plan where most of the part time distributors
and distributor/consumers participate, allow the company to offer an enhanced
income opportunity for those that truly perform.
Using Compression Wisely
Most companies incorporate a concept called “compression” in their
plan. Compression occurs when distributors fail to meet the required qualifications
for receiving bonuses. The non-qualifying distributor and customer volume
available in their downline will compress to the next qualified person in
their upline.
Typically, compression in a compensation plan is mandated by professional
mlm distributors that are evaluating a company. It is important that the concept
of compression is used wisely and that it rewards the desired distributor
behavior.
Allowing income to compress to non-producers creates a “something for
nothing” attitude. Using compression to extend the depth of income stream
for business builders based on specific performance can redistribute some
unpaid income wisely while still allowing for desired breakage percentages.
The concept of recruiting a master distributor should be addressed at this
time. We have seen many cases where a top distributor has negotiated a master
distributorship position. A master distributor is normally one person at the
top of the entire distributor organization, possibly trapping all the breakage
percentages.
This windfall potential for the master distributor can spell disaster for
the company if it was not planned for in advance.
I am not suggesting that you shouldn’t create special financial opportunities
to attract top performers. It is just a warning to plan for it in your compensation
plan strategy if you decide to limit the width of direct company legs.
Adjusting The Plan
Corporate executives or industry consultants cannot totally predict how much
a plan will pay, but a properly designed plan can be adjusted quite easily
and with very little pain for the current distributors.
Changing the compensation plan, while sometimes necessary, tends to cause
concern among distributors. There are several specific things that can create
the need for a plan change.
1. The plan is paying too much. There is too little profit for the company.
2. The plan is not paying enough. There is too little profit for the distributor.
3. Competition dictates changes to stay current with trends.
4. The plan is not encouraging the right distributor behavior.
5. There are changes in laws or legal interpretations of laws by federal or state agencies.
If the design and general structure of your compensation plan is based on
time tested and proven concepts still valid in today’s marketplace,
it should not require major adjustments for quite some time. However, only
field-testing a new plan will allow you to make the necessary minor adjustments.
These are easily handled by adjusting the distributor maintenance qualifications.
The most common reasons companies adjust their compensation plan are number
one and two on the above list. This can only be determined through test marketing.
For new companies, test marketing can only be accomplished during a Pre-Launch
period. This is usually considered to be the first six months of MLM business
operations. Established companies can run financial models based on current
distributor production information.
It is not uncommon to adjust the plan during this time based on the facts
determined. If the plans qualifiers are too difficult, no one makes money
so you will need to soften the requirements for earning various bonuses.
If the qualifiers are too easy, your plan may mature too soon, creating a
socialistic effect of spreading the wealth with no one making any serious
money, including the company.
Plan For Success
In the case where the plan is paying too much too early, you could increase
qualifiers while “grand fathering in” those present distributors
at their old qualifier amounts for a certain period of time, but increasing
it for all new applicants. Other than adjusting qualifiers to increase or
decrease payouts, it is important to avoid major changes in a compensation
plan too soon. This could tend to erode distributor confidence and create
lost momentum.
In conclusion, it is important
that you have people you have confidence in to “Inspect What You Expect”
as you business matures. They should be able to interpret the significance
of sales activity, sponsoring activity, and distributor attitudes to assist
in fine-tuning your business model.
Just as you chief financial officer (CFO) interprets your financial information,
you must be able to interpret your distributor activity and commission information
to understand where you company is headed.
Request information about starting or growing your MLM company.
Michael L. Sheffield is the CEO of Sheffield Resource Network, a full-service direct sales and multi level marketing (MLM) consulting firm. He is a Co-Founder and Chairman Emeritus of the Multi Level Marketing International Association and in 2001 he was inducted into the MLMIA Hall of Fame. As an MLM Consultant, he and the Sheffield team have assisted in hundreds of national and international MLM corporate start-ups as well as offered a full line of services for established direct sales companies. As the most noted expert on compensation plans, he has been a guest lecturer on the subject for the DSA, University of Illinois, University of Texas, Berkeley and Harvard Alumni Association. Long considered the industry's top MLM Consultant , Michael Sheffield has helped launch over 500 new companies and 200 new products marketed by direct selling companies around the globe. He can be contacted at 480-968-6199, Sheffield Resource Network, 2239 N. Hayden Road, Suite 103, Scottsdale, AZ. 85257, website address: www.sheffieldnet.com.
