A multi-level marketing (MLM) company’s compensation plan defines how it rewards its field sales representatives through commission, bonus, and override payouts based on the company’s genealogy structure. With the definition in mind, which direct sales compensation programs drive MLM business growth? While the answer depends on the company’s culture, growth objectives, product offering, pricing structure, and representative training, there are growth advantages associated with each of the primary types of MLM compensation plans.
Genealogy structure defines MLM compensation
Choosing the right compensation plan to drive business growth starts by understanding and evaluating the main types of MLM compensation plans. All plans are based on a defined MLM genealogy structure that determines the relationships within the company’s sales team and how each representative connects to the company’s income opportunity.
As new representatives join an MLM company, they connect within the organization to the representative who recruited or sponsored them. A sponsoring rep is called the upline because they appear above the new representative in the hierarchy created by the company’s genealogy. When the new representative recruits others to join the organization, she builds a team that falls beneath her within the genealogy structure – similar to a family tree – that’s known as a downline.
Over time, the MLM company’s genealogy tree, which is made up of the interconnected upline and downline teams, provides an evolving record of the organization’s growth. In addition, it forms the structure for how the company calculates commissions on retail sales, qualifications for ranks within the organization, and incentive bonuses. In short, the MLM genealogy determines who qualifies for compensation and how much they are paid.
How MLM compensation plans fuel growth
Each genealogy structure has attributes that help drive direct sales growth. But growth can be significantly accelerated when an MLM company aligns its genealogy with its strategic objectives, product offering, and sales culture. There are four primary types of MLM compensation plans.
Unilevel compensation plans
Unilevel plans are a straightforward compensation structure widely used by MLM companies. The structure is relatively simple and uses a single genealogy to determine payments. In a unilevel plan, all new representatives are placed in the first level of the structure, directly below the sponsoring representative. There’s no limit to the level’s width (the number of representatives sponsored), but there is a limit to the depth as representatives fill out their own downlines. For example, a unilevel plan might pay a 10 percent commission on sales volume produced by the first level. Then, if the plan limits the depth to five levels, the organization could pay a 5 percent commission for level two, 4 percent for level three, 3 percent for level four, and 2 percent for level five. For levels six and beyond, no commissions would be paid.
- Providing representatives with the flexibility to sponsor as many representatives as they would like within their frontline team.
- Encouraging reps to increase their earning opportunity with ranking criteria and bonuses based on building out downline depth.
- Keeping the structure simple, so representatives understand exactly what they need to do in terms of sales and recruiting.
Binary compensation plans
A binary compensation plan follows a two-by-two genealogy structure, known as a “two-leg” downline. A sales representative’s frontline level is limited to two downlines. As they recruit more representatives, they “spillover” to be slotted in additional tiers below the frontline. The depth of a binary downline is unlimited.
MLM representatives earn commissions based on the sales volume generated in each of the binary plan’s legs. The lesser earning leg is known as the “pay leg” and determines the commissions paid. The leg with higher sales is called the “reference leg.” By basing commissions on the lesser-earning leg, a binary compensation plan’s structure is intended to encourage MLM representatives to work as a team to build out both legs in order to maximize their compensation.
Binary compensation plans drive MLM growth by:
- Facilitating a fast start with reps able to start earning right away.
- Providing the ability for both the organization and representatives to maximize sales productivity through recruiting and strategic spillover placements.
- Inspiring teamwork as representatives work together to recruit and strengthen the pay leg.
Matrix compensation plans
A matrix compensation plan’s structure has both fixed width and depth and is one of the most common MLM compensation plans. In a 3×5 matrix compensation plan, MLM representatives would recruit to fill in their three-person frontline level first, with the spillover then filling out three-person levels for each (9 representatives) in the second level. The spillover would continue to build out additional levels within the matrix tree structure, with compensation earned up to five levels deep.
Matrix compensation plans drive MLM growth by:
- Encouraging strategic recruiting to maximize payouts and ongoing growth of the downline team.
- Providing long-term earning potential that keeps representatives engaged and active.
- Providing MLM companies with greater control over payout volumes for planning and strategic growth.
Hybrid compensation plans
As the name suggests, a hybrid compensation plan combines elements of multiple genealogy structures to create compensation that aligns with an MLM company’s specific objectives and goals. With a hybrid plan, payouts are determined by a representative’s placement genealogy and sponsorship genealogy.
The most common hybrid plan is a combination of the unilevel and binary structures that pays based on the binary plan for initial sales volume and then the unilevel plan for ongoing sales. By opting for a hybrid compensation plan, an MLM organization has the chance to address the perceived weaknesses of a traditional compensation structure by leveraging components of another plan that better fits the organization’s model and growth goals.
Hybrid compensation plans drive MLM growth by:
- Providing the flexibility for MLM companies to tailor the compensation plan to fit the organization’s needs and competition.
- Motivating newer representatives by allowing higher initial compensation rates.
- Creating additional opportunities for representatives to earn compensation over time.
MLM compensation plans are not one-size-fits-all. Compensation plans that fuel business growth are an organization-specific balance of incentivizing and rewarding specific sales representative behaviors while taking the company’s product offering, pricing model, and organizational culture into account. When an MLM organization has a clear strategy for growth, it can design and adapt its compensation plan to drive the actions needed to increase sales within established business parameters that protect the bottom line.