Is your compensation plan working correctly? What does it even mean for a compensation plan to succeed? Let’s answer these questions.
When we want answers, we go to the data. Over the years, we’ve seen hundreds of compensation plan payouts. In our experience, company owners often lack the analytics necessary to discern if their compensation plans are doing what they’re supposed to.
Let’s demystify what a compensation plan does. In short, your compensation plan needs to pay the people who are creating growth and the percentage each distributor receives must be proportional to the growth they create. How do you know if the proportions are off?
Here are a few critical warning signs that you’re not hitting the mark.
1. Your salespeople aren’t earning enough money
We like to talk about the stickiness of your compensation. What do we mean by ‘sticky’? There is an amount of monthly pay for which salespeople will stick with your company. A salesperson is someone who generates sales primarily by their own work. In our experience, successful companies don’t have a lot of churn in their salespeople. If you want people to sell your product, and you want to avoid churn, do everything you can to get people to that sticky paycheck.
How much is it exactly? Between $200 and $500 a month. For simplicity, we’ll say $300. Our research on successful companies shows that 87% of salespeople who earn $300, will still be active salespeople six months later.
This applies to all types of compensation plans.
You need to make sure you make it easy—not too easy, but easy—to get to $300 a month. You need to have a plan laid out. If you don’t have that plan in place, you’re missing out on a key component.
You might wonder, why does it matter if salespeople stay?
Salespeople are the building blocks of your company. These are the people that are walking the streets. They’re talking to everybody. These people are selling your product. You must reward them for that work because it’s the work that’s growing your company. In our experience, most salespeople are content with $300 a month.
2. Your motivators are earning too much
Who are motivators? Motivators are the people who get up on stage at conferences and generate enthusiasm among the ranks. A good motivator creates a bond between the field and the company. They’re an important part of building the culture a company wants. You need them, but in many cases, companies end up overpaying motivators. Our research shows, 43% of commission dollars go to the top 1% of distributors who earn commissions. Is this too much? That’s for you to decide. In our experience it’s difficult to pay your salespeople and your sales leaders if your motivators are taking nearly half of the available commission dollars.
Growth comes from the bottom. As your company grows, it’s critical that you don’t starve that growth by paying an ever-increasing percentage to your top people. You need to ensure that when and if you reach a billion dollars, a person starting out earns the same as when you were a startup company. If new salespeople earn too little, then churn goes up. If you have less churn, everyone profits.
3. Your payout is too large a percentage of your sales volume
We’ve talked about the dangers of paying your top leaders too much. But what about paying too much to your distributor force as a whole? It’s possible, and it’s a problem that we do see in client data.
Take your company-wide compensation payout and divide it by your company-wide sales volume. Let’s call this your payout percentage. When we run company data for the first time, we see all kinds of numbers. The sustainable percentage for non-party-plan MLMs is 38–42% of wholesale sales. (This is not the same for party plans because oftentimes party plans pay a higher percentage because they pay on retail sales rather than wholesale.)
As a caveat, that 38-42% is dependent on the cost of your product relative to the wholesale price you charge.
4. You’re paying people who don’t build
One example of this is paying what we call ‘the lottery winner.’ For example, look at the graph below and ask the question, who really built this organization? Distributor A, B, C, or D?
Most people take one look at this graph and identify D as the distributor who did the work. Distributor A found a person who found a person who found a person who built a downline.
It’s easy for compensation plans to pay a lot of money to distributors A, B, and C. If those three distributors are earning fat commission checks on that organization, they’re lottery winners.
Look at the top earners in your distributor force and notice if their organizations look like this. Every company has lottery winners. Your plan needs to ensure that they’re paid an appropriate amount for their effort.
There are several ways that you can tweak your compensation plan to cut pay to lottery winners. This is something that companies that have been in business for a while need to be looking at. It’s a hard conversation. The people whose pay you cut will object. But you must remember, they aren’t the ones bringing in volume.
Lottery winners are just one type of distributor that sucks away compensation dollars from the people who are really building your company.
We believe in analytics. Without analytics you could never spot these warning signs. It’s a constant search to study out who are the people who are effectively building the business. You can’t just write your compensation plan and forget it. There is a real need to do ongoing, consistent analytics to identify people who you’re paying more or less than you should. You cannot effectively sort, group, and pay your distributors by intuition alone.
You must look at the data.
When you work with the analytics, you can address all these warning signs, but you can also do much more. You can identify up and coming distributors and focus time on them. You can find distributors who are working hard but doing the wrong things and thus not getting paid. In a sentence, you can tighten up your plan to get the most value for the money.
We say it all the time: your compensation plan is the single biggest expense your company pays. Make sure you make it count.
Our company, MLM-CC offers compensation plan design, analytics, and tracking. Reach out to us for more information.