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Chapter Ten: What are commission plans designed to accomplish?

Chapter Ten: What are commission plans designed to accomplish?

Published: Jun 07, 2014

By: Mark Rawlins

Chapter One: How is network marketing different from other methods of distribution

By now, if you're like most people, you just want to know what plan works the best, or you just want to tell me which plan works the best. Of course, the problem is that there are successful companies with each commission plan type.

In the last chapter, we discussed the different commission plans. In this chapter, I want to talk about what they can and should be designed to accomplish. I will talk first about creating an earnings emphasis in a plan. Then we'll finish up with which plans work and don't work for paying sales commissions and sales management commissions, as well as each of the distributor types that make up those two categories.

Creating a commission plan earnings emphasis

Simply stated, commission plan earnings emphasis occurs when a commission plan allows one or more types of distributor to make a higher percentage of commissions on some or all of their downline sales volume than other types of distributors

Lets consider a simple case of commission plan emphasis. A fairly typical commission plan these days pays five percent on downline volume; however, by adding additional commission types, it's possible for a company to allows some types of distributors to earn fifteen percent on their downline volume. What difference would commission emphasis make in this case? For simplicity, we'll assume that each person in their downline purchased $100.00 of product.

1.       A distributor making $500 a month will have about 33 consumers to take care of.

2.       A distributor making $1,500 a month will have 100 consumers to take care of.

3.       A distributor earning $50,000 a month will have a minimum of 3,000 consumers/distributors to take care of.

Which of these commission emphasis strategies is best? If depends on what a company is trying to accomplish. If a company is looking to creating incentives for working with consumers then in the case of #1 and #2, the distributor can probably give personal attention where needed; there are not too many consumers. But in the third example, it's hard to imagine that a distributor could give personal attention to 3,000 consumers. That's giving incentive for an impossible task. . If the fifteen percent emphasis was designed to reward something else-a task more appropriate to a sales leader or dream-builder-then would be an appropriate emphasis.

This is the fundamental question that the management of every company must come to terms with. What level of earnings do you want to pay your distributors each month? When I am working with a group of executives who are designing a commission plan, I often have them work through the following exercise.
Suppose you have $1,000,000 available per month for paying your distributors. When you distribute that money, do you want to pay two people $500,000 each? Do you want to pay twenty people $50,000 each? Do you want to pay two thousand people $500 each? Do you want to pay twenty thousand people $50 each?

When we're designing the commission plan, I have them fill out this chart individually so we have a point of reference as to what each of them believes. If you're thinking about starting a company, stop and take some time to fill out the chart. Remember, you have a total of $1 million to pay. (Don't worry, I'll wait)

If you're like most people, you created an emphasis of a certain earnings size when you filled out this chart. In other words, you created a few of most sizes of checks, but allocated a disproportionate amount of money on either small, mid-range, or large commission checks. This is the way most commission plans work; they have what I call earnings emphasis.

Commission plan earnings emphasis typically falls into one of three categories:

1.       Low-end or "pay for your product" emphasis: Some commission plans allow the product evangelist to quickly earn $50-$100 per month. The reason companies do this is based on the theory that people who love a product are the greatest advertisers. So if they can get product for free, they are even greater advertisers. Many of these product evangelists may also go on to be salespeople, sales leaders, and even dream-builders.

2.       Mid-range or "improve my life money" emphasis: This is the idea of getting distributors to a stable income in the range of $500 - $5,000 per month as quickly as possible. It isn't enough money to get rich, and usually isn't enough to cause someone to quit a full-time job, but it's enough to let them buy the car they want, or take a dream vacation. This amount of money changes a distributor's life enough to prompt him or her to make a genuine commitment to the company. These companies tend to enjoy an incredible degree of loyalty from their salespeople and sales leaders.

3.       High-end or "making it big" emphasis: What's the definition of "making it big"? It's making "a lot more money" than the average income of the type of distributor a company is trying to attract. If a company is trying to attract doctors and lawyers, this amount has to be much higher than if it wants to attract blue-collar workers or college students. However, most of these plans emphasize commission sizes of at least $20,000 per month and up. Companies with this type of emphasis believe leadership comes from the top down, and that, in the end, everyone is reaching for the big dream.

So which is better? Although there are more successful companies that have made the mid-range strategy work, companies have been successful using all three methods.

No matter which emphasis a company chooses, I can tell you two things that won't work:

1. Not knowing what the emphasis of the plan is.
2. Drifting between emphases in the marketing, incentive, and commission strategies.

I know it sounds odd, but I've worked with companies that simply copied their commission plan from another company and did not know what the emphasis was. Often, they then compounded the mistake by having a product strategy and a marketing strategy that didn't match the commission emphasis of the plan they ended up with, and chaos reigned. It's like using the saying "an apple a day keeps the doctor away" to sell oranges.
Okay, enough philosophy. Let's walk through a simple example of how to create earnings emphasis.
First let's start with a commission plan that has no earnings emphasis. In a plan like this, all distributors in the company earn the same percentage on their downline sales volume regardless of their downline's size. Let's use the example of five percent. If a distributor has $1,000 in downline volume, he earns $50. If he has $10,000 in volume, he earns $500, and so on. When you graph this earnings line, it's a straight incline.

Then a company may choose one of the three areas to emphasize; this choice inevitably takes money away from the other two areas. For example, to emphasize mid-range checks, a company could reduce commission in the low end or the high end. The first option is to reduce the low-end check in some manner. You can see in Figure 22 that when a distributor reached a certain rank or group volume requirement-for example, $1,000 in group volume-he or she would get an increased percentage. Thus the "bump" up in the graph. Now the distributor is making more in the mid-range.

The second way would be to "use" money from the high-end checks. In Figure 23, the emphasized curve follows the straight five percent line, then jumps up again in the middle. However, this time, the line flattens out as the distributor's sales volume moves higher; eventually, earnings cap out. This shows that a straight five percent commission would give them higher earnings at the top, but it emphasizes the mid-range commissions instead.

Now don't get me wrong; I want to be very clear on this. Most network marketing companies still create small, mid-sized, and large commission checks. In fact, for most companies, no matter which commission plan they use and somewhat regardless of their earnings emphasis, much of their commission money is still distributed between all commission check sizes. In other words, emphasis does not eliminate the other two areas; it simply changes the number of each size of commission checks.

Some people say that any commission plan type can be adjusted to create any of the three earnings emphases; however, it has been my experience that each plan type is suitable to certain types of earnings emphasis. Here is a chart of the plan types we reviewed in the previous chapter and their traditional earnings emphasis:

Why are some plans able to create certain earnings emphasis and other plans are not? In order to create an earnings emphasis, a plan must have a method of increasing the commission percentages paid to distributors who have built the size of downline organization and generated the amount of sales volume that the company wants to emphasize. The way a company does this is to have multiple commission types in a commission plan: that is, one or more level commissions that create stability and long-term growth, as well as one or more other targeted types of commissions. So let's review the chart.

Unilevels and matrix plans use only level commissions in their plans. A level commission is the least targeted of all of four types of commissions, which is why those plans don't generate an emphasis. Stairstep and unigen are both based on a combination of level commissions to spread the wealth and differential or single-level commissions, which are both targeted commissions. Because they include these targeted commissions, they're able to create whatever emphasis a company wants.

A traditional binary plan is the one emphasized plan that uses a single commission type, but it's typically a type of pool commission. If you remember, pool commissions are one of the most targeted commission types, which is why a binary plan ends up being an emphasized plans toward the mid-range commission checks.

Once a company decides what emphasis, if any, it wants to use, then it can narrow the choices on which commission plan types to use. Or the company may decide to build one of the new -la-carte plans. After the company has a general idea about the commission plan type it wants to use, the next step is to decide on specific commission strategies to provide adequate compensation for two activities: product sales and sales management. Let's review these commission plans and see how each of them deals with these two very different activities.

Commissions for Sales. Commissions for the salespeople require commission types that can be targeted to the few people who are involved in the sales process. The level commission has not been successful for sales commissions, unless used in conjunction with other commission types, because it's not a targeted commission. The plans that use only level commissions are unilevel and matrix. As a result, these plans typically have a very difficult time rewarding salespeople, unless, and this is very important, it's a barrier-to-signup company. In a barrier-to-signup company, the majority of the sales commission is received directly by the distributor in the form of retail profit at the time the product is sold.

In Chapter Four, we talked about the fact that differential, pool, and single-level commissions are targeted commissions. The commission plans that use these three targeted commission types to reward the salesperson are stairstep, unigen, binary, and some forms of hybrid unilevel.
Within the broad area of sales commissions, a company must still pay the individual distributor types. The three distributor types that would be affected by sales commissions are the consumer, the product evangelist, and the salesperson. Let's briefly review how commission plans affect these individual distributor types.

The consumer: For most companies, the plan for consumers falls into two parts. The first is to encourage them to become product evangelists without annoying them, and the second is to occasionally offer them opportunities to try new products. This second part is very traditional marketing. Some examples of this are free shipping for the month of April or "buy one, get one free." Another approach that's growing in popularity is a one-time referral commission or a free product for referring other consumers.
With an open-enrollment company, the consumer can become a big issue if someone signs up as a distributor, but then turns out to be a consumer. Most companies don't pay ongoing commissions, which, in most cases, are really rebates on the personal purchases of consumers. If a company decides to pay the consumer, two commission types that easily lend themselves to compensating the consumer are the differential and level commissions.

Why would a company design its commission plan to pay a consumer? Here are the pros and cons. Companies build a commission plan that pays consumers with the belief that it will encourage the consumer to move up to being a product evangelist, or even higher. The reason most don't implement this strategy is a very high financial price. As I mentioned earlier, up to seventy percent of all distributors in any open-enrollment organization never sponsor anyone. If a company has a total payout of forty percent, but gives ten percent commission to the consumer, then the company has significantly reduced the amount available to pay all other distributors. Think about it: the product evangelist found that consumer, and the salesperson, sales leader, and dream-builder serviced him or her, and now the company is limiting their earnings to thirty percent. Since almost no company emphasizes consumer rebates, this is a large amount of money to take away from the area they are emphasizing.

The product evangelist: A product evangelist does his work as much because of how he feels about the product and the company as he does for the money he makes. The best way to describe the compensation given to a product evangelist is a big "thank you." Traditional non-cash incentives and contests have been very successful. For example, a pool commission tied to a multi-month contest works very well. It's important to remember that by definition, product evangelists love to talk about the product, but don't want the commitment of taking care of consumer needs and problems. So the company needs to say "thank you" to them, but not saddle them with the responsibility of consumer support. As a result, the commission plan can't give them all the sales commission, because then no one would be paid to take care of the consumer.

The product evangelist is important to a company's success because there are potentially so many of them. If a company has a great product and a good commission and incentive program, ultimately a high percentage of its distributors will be product evangelists.

Let's take a look at the compensation strategies that have been used over the years for product evangelists. Level commissions in conjunction with another commission type, or a well-designed differential commission, can both work to give the product evangelists commissions on the consumers they bring into the business. Both commission types have their pros and cons. Differential commissions can be designed to pay the product evangelist better on his or her consumers, but level commissions are much easier to understand. Another benefit of the level commission is that, in that rare instance where the product evangelist sponsors a salesperson or higher, using the differential commission, the product evangelist makes no money on that distributor, whereas with a level commission the product evangelist usually earns some money.

The salesperson: The salespeople are where the rubber meets the road. A company must have people selling product, explaining how that product works, answering the consumers' questions, holding parties, and taking care of the problems. The other major responsibility of salespeople in most companies is to recruit and support product evangelists. Product evangelist find consumers, but don't service them; the salesperson does. So the salesperson needs to be compensated to do this. If the plan doesn't adequately reward distributors for these activities, they won't do it. This lack of activity begets what I call a "hollow plan"-lots of distributors, but no sales.

As we discussed earlier, there are two ways to compensate the salespeople:

1. Pay them inside the plan.
2. Create barriers to signup, so they can be assured of actually selling product at a retail profit.

Of utmost importance, for companies and distributors alike, is figuring out how long it will take to find consumers, train them, answer product questions, and solve their problems. The plan must compensate salespeople for this time; they will figure out whether they're earning enough sales commission to make selling your product worth their time. If the answer is no, they won't spend the time making sure that consumers needs are taken care of. If that happens, the company has to take over the role, or it simply won't get done.

Salespeople make around $500 to a few thousand dollars a month. Even though they may consider this a part-time income and often have full-time jobs, if you ask them what they do, they often identify themselves as distributors of the companies for whom they sell.

The amount of commission a salesperson can earn from a commission plan depends on three factors in addition to the commission plan type. These factors are:

1. Is the company an open-enrollment or barrier-to-signup company? I discuss this concept at length in Chapter 8, but in summary, if the company is a barriers-to-signup company, then the salesperson can also expect to make retail profit over and above the defined plan. In an open-enrollment company, the retail profit opportunities are limited.
2. What are the percentages paid on the "salesperson side" of the plan? This is pretty obvious. The higher the percentages, the more a salesperson is going to make.
3. What are the qualifications to advance in rank and receive monthly commissions? This issue is more complex than most people think. Companies often think that the easier they make it to achieve higher ranks, the better, but this is not necessarily true. The way most commission plans determine how to pay a salesperson is that the salesperson has a higher rank in the commission plan than his or her consumers. If the company makes it so easy to achieve higher ranks that actual consumers achieve the higher ranks, then the company has effectively taken away the salesperson's commission, and no one is being paid to service the consumer. This is a bad thing.

Sales management commissions.

You don't have to study commission plans very long to realize that the backbone of sales management commissions is a level commission based on some form of group volume. This is true of unigen, stairstep, and almost all barriers-to-signup companies. Unilevel, hybrid unilevel, and matrix plans use level commissions, but they're based on personal volume, not on group volume. The only standard plan in existence that does not use a level commission to pay sales management is binary. It pays both salespeople and sales leaders using a pool commission.

Why do so many plans use the level commission type to pay the sales management? The reason is pretty clear. The level commission is the one commission type that has the ability to spread out earnings among a group of distributors. So it has both the ability to reward improving performance and the ability to create stable earnings, both of which are critical to sales leaders.
Assuming that the company is using level commissions on group volume, the amount a sales leader earns is a function of three things:

1. What are the percentages paid and how many levels are they paid on? This is the most obvious concern, but it actually makes the least difference of the three. I know this doesn't seem right, but look at the following example. If one distributor earns five percent down five levels on personal volume with no compression and no group volume requirement, and another distributor earns five percent down five levels on group volume with standard compression with a group volume of $2,000 per month, the second distributor could easily make ten times as much commission as the first distributor.
2. What type of compression does the plan use? Compression allows sales leaders to be paid deeper on their organization-much deeper in some cases.
3. What is the group volume requirement? As I mentioned above, this issue probably has more effect on how much sales leaders earn than the other two issues. This is because it allows the sales leader to be paid down a number of generations on "hubs of activity."

The pool commission is also used quite often to create final enhancements to sales management commissions because of its ability to reward any specific targeted activity. For example, these commissions are often used at the very top ranks to create incentives for leaders to continue to build their organizations even after they reach the top rank. Also if, when the commission plan is modeled, there are "flat" spots in the plan, a pool commission can help alleviate them.

So, if the question of earnings for selling product and managing salespeople comes down to issues like compression, rank, and monthly qualifications, how do companies decide what is appropriate for them? That can be a painful process, and some issues, like monthly personal and group qualifications, should logically be decided after a careful consideration of the company's product line. I discussed this concept at length in Chapter Five.

The last thing we need to talk about when discussing sales management commissions is how a company can pay the individual distributor types of sales leaders and dream-builders.

The sales leader.

One complaint I hear today is that distributors are not loyal. I think sales leaders are extremely loyal, sometimes even loyal to a fault. These are the distributors who keep a company alive. If you want to check on the health of a company, look at the income stability of the salespeople and sales leaders. I've never seen a company with a solid, stable group of salespeople and sales leaders that was not itself stable.
The sales leaders hold the meetings, lead the conference calls, put together the training, and deal with the concerns of the salespeople. They are the primary motivators of the downline. These are the distributors who keep the momentum of a company alive. All four types of commissions are used in targeting earnings to sales leaders. In the case of a stairstep, it uses differential and level commissions to compensate them. Some companies also create "qualified sales leader" pool commissions to further emphasize mid-range earnings. When companies base their commission plans around a level commission, they can use a single-level group volume commission to emphasize mid-range earnings. Unigen plans are based on this concept.
In addition to the level commission to compensate sales leaders, companies have successfully used the miscellaneous types of commissions to create incentives as distributors make their transition from salesperson to sales leader. The other kinds of incentives that are common for sales leaders are car programs or other incentives to pay for trips to conventions.

The dream-builder:

Dream-builders play an enormously important role in the company. They provide the enthusiasm and create most of the training. They provide marketing expertise and material for the various niche markets in which the company sells.

Level commissions based on group sales have been the mainstay of compensating dream-builders for thirty years. Since the late 1980s, compression has been the norm. The challenge companies have to deal with in compensating dream-builders when using only the level commissions is that sooner or later sales volume starts moving out of the dream-builder's payline. Companies use four methods to deal with this issue:

1. Create an "infinity" commission added at the highest rank to provide a strong incentive to achieve it. This combination works so well because it spreads the money out among several dream-builders and allows them to be paid many levels deep on their downline.
2. Create a prorated pool commission which distributors at the top rank share
3. Continue to add more levels to the plan either by raising the payout or by cutting the payout of the mid-range distributors. (Don't laugh! I once watched a company cut all the mid-range distributors' earnings by thirty percent to give the dream-builders an extra level of payout. It wasn't pretty to watch the results).
4. Don't do anything. Many of the very successful companies today have plans that ultimately have an end to the dream-builder's payline.

As you can see, it's important that a company know what its strategy is going to be before distributors get to that point, and not drift between strategies. The bottom line is that a successful network marketing company necessitates a strong and flexible compensation plan, a plan that pays and generates activity at every level of the company. For this reason, it's important for corporate executives to build a plan that rewards their distributors-and it's important for distributors to find these types of companies.

2003, Mark Rawlins. Reprinted with permission from Mark Rawlins. No part may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without permission in writing from the author.

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