A multi-level marketing (MLM) company’s compensation plan is integral to the strategy, growth, and success of the business. So, what’s the best MLM compensation plan? Answering this question requires a deeper look at the different types of compensation plans and how they align with the goals of your MLM business.
In the simplest terms, MLM compensation pays independent sales representatives for their own sales as well as sales made by the representatives they recruit. For direct selling companies, compensation plans must take into account both the pricing structure for the products and services being sold, as well as the behaviors the company wants to motivate and reward. Effective multi-level compensation plans accomplish three primary objectives: to recognize, reward, and incent sales representatives. As a result, the choice of your MLM company’s compensation plan is a powerful tool within your overall business strategy.
Types of MLM compensation plans
There are several different ways MLM compensation payouts can be structured based on the company’s genealogy structure. Today, most plans are hybrids, paying compensation on both a placement genealogy and a sponsorship genealogy. Take a look at the most prevalent payout types.
The first direct selling companies implemented what became known as the Stairstep Breakaway Compensation Plan or the Breakaway plan. In this model, when a representative in a downline — aka the representatives recruited by a particular sales representative – achieves a defined personal and group volume, she will “break away” and start her own line. At that point, the representative breaking away will earn a higher percentage, and the original recruiting representative will earn less of an override. This model can be difficult for new recruits to understand, and it can sometimes cause representatives to over-purchase inventory in order to meet the plan’s volume requirements.
Breakaway plans are less common today because they tend to force reps to self-focus until they reach the break-away rank, which can make it difficult to change gears and focus on the downline’s success needed to promote to higher ranks and earn leadership rewards.
A simpler variation is the Unilevel Compensation Plan, which typically uses one genealogy to pay. Like the Stairstep Breakaway plan, a Unilevel plan enables a representative to sponsor as many people on their frontline as they want, but there is a limit on the depth of the downline. In other words, a plan might pay a 5 percent commission per level, up to seven levels.
In contrast, a Binary Compensation Plan limits a representative’s frontline while offering infinite depth. In a Binary plan, there are only two downlines. A representative will only have two other representatives in their frontline, with all additional sales representatives recruited placed in tiers below the frontline. This creates a “two-leg” downline of two-representative-per-level tiers, which can theoretically extend for infinity. A rep is paid based on the volume in each of the legs vs. a percentage of the sales for multiple levels of representatives. A representative earns commissions from only the lesser earning leg of their downline, sometimes called the “pay leg.” Because of this, binary compensation plans incent teamwork between the two downline legs.
A Hybrid Compensation Plan works just like the name sounds. A Hybrid plan combines two plans together, such as a Binary and a Unilevel plan. For example, field representatives are paid like a Binary plan for initial sales volume and then like a Unilevel plan for ongoing sales volume.
Finally, a Matrix Compensation Plan has both a fixed width and a fixed depth for representative payouts. For example, in a 3-by-9 matrix, each level up to nine will have three representatives. With a Matrix plan, distributors are limited on the number of people they can earn on, which gives MLM companies more control over the payout volumes. Both Binary and Matrix plans require representatives to maintain a broader view of the organization and know how to strategize the placement of hard-working, personally sponsored reps to get the max payout for themselves and assist their downline with their growth. These plans can require a much deeper level of involvement, but can also offer much greater rewards.
Across these different compensation plan payouts, companies also opt to add a variety of bonuses to further recognize, reward, and incent their sales teams. Bonus examples include matching, promotion, generational, and rebate bonuses.
What is the best MLM compensation plan?
Each of the main types of MLM compensation plans has strengths and weaknesses. Today, many companies choose one of the primary plan types as a foundation to generate stable revenue and then leverage other commission types within the structure to align with their business objectives and drive growth. Today, the best MLM compensation plans include the following attributes.
1. Customer-sales focus
MLM companies have two types of customers – those who are also representatives and participate in the income opportunity and those who don’t. Retail sales to customers not participating in the business are critical for long-term growth and compliance. MLMs, with a majority of sales coming from their field representatives, risk scrutiny and action by the FTC.
The key to achieving an appropriate retail sales volume starts with your products and services. Make sure that along with filling a need in the market, you’re able to charge prices that appeal to retail buyers. When you do, you’re able to expand your marketing reach as well as the opportunity for your representatives. In addition, incentivizing representatives to recruit customers by adding retail sales commissions and customer requirements for higher level bonuses and rank can also help promote a healthy retail customer base.
2. Ranks and recognition
Along with commission earnings, recognition should play a central role in a good MLM compensation plan. As representatives achieve defined levels or ranks within the organization, recognition should include additional compensation as well as a title that corresponds with the rank. Titles by rank convey status within the organization, which can be highly motivating.
Be strategic when defining the parameters for the different ranks. Ranks should align with the company’s long-term goals, such as recruiting more reps, selling certain products, or increasing retail sales. Progression can also reward representatives who assist their recruits and stay active in their own business as well as their personally sponsored business. The aim is for each level to be motivating and a realistic stretch goal for a significant portion of your field representatives. If you make a title too difficult to achieve, it can be de-motivating. On the other hand, if you make ranks too easy to reach, you will reward mediocrity, which can make retaining high-performing representatives more difficult.
3. Strategic compression
Compression rewards active representatives due to bypassing ineligible or inactive representatives when determining rank qualifications and/or compensation. When standard compression is applied, an upline representative is paid as if the inactive representatives were not present in the genealogy. Dynamic compression excludes both inactive and ineligible representatives.
While compression allows representatives to get paid deeper into their organizations, MLMs must use it strategically. Over-use of compression can reward the wrong behaviors, discourage reps from working together, and disincentivize recruitment of additional representatives. Compression is best used when the purpose is to avoid punishing a rep with a reduced payout if a few individuals in the downline fail to meet payout requirements or have gone inactive in the period.
4. Activity requirements
Consistent activity drives sales results. The best MLM compensation plans build in activity requirements to reward the desired behaviors that lead to increased sales, representative retention, and company profits.
Define the minimum amount of personal sales volume over a rolling period of time for reps to remain active. Personal sales volume is the total sales volume from the representative’s personal orders and the orders placed by customers sponsored by a representative. Don’t mistake personal sales volume for personal purchase volume. The best MLM compensation plans do not include a personal purchase requirement. Instead, they encourage representatives to sell the products and buy for themselves only because they want to use the product, not to qualify for earnings.
Set personal sales volume parameters for a representative to be deemed “bonus qualified.” Representatives who achieve minimum requirements are able to earn compensation based on the sales of other representatives and qualify for rank promotions.
5. Fast start
MLM compensation plans that reward and incent newly recruited representatives can have a dramatic impact on rep retention. Compared to the industry’s overall representative turnover rate of 90 percent within their first five years, representatives who make a sale within 14 days of joining a direct selling company are likely to stay with that company for an average of six years.
Including fast start parameters for personal sales volume within your compensation program helps drive – and reward – early success.
6. Recruiting rewards
Sales volume is just one part of how MLM companies grow. Recruiting is equally crucial to success. The best MLM compensation plans also include incentives to motivate and reward recruiting. Keep in mind, MLM compliance regulations require compensation to be based on retail sales, rather than on wholesale purchases or recruiting. Compensation cannot be solely based on recruiting others. However, recruiting bonuses can be treated as icing on the cake. By rewarding recruiting, you keep it top of mind among representatives and keep the organization growing.
At ByDesign, we specialize in MLM software solutions that help MLM companies grow and sales representatives succeed. Click here to learn more or contact us to schedule a consultation today.