If you’re considering pursuing an opportunity in Network Marketing, you will sooner or later come across an organisation’s compensation plan. Compensation plans are essentially the framework according to which you’re going to get paid.
As we’ve explored before in a previous blog, income for Network Marketers is generated through sales and commission. What exactly the split is, is detailed in the company’s compensation plan, along with the level of commission and the progression path. These tend to be publicly available, or at least shared with potential new distributors early on in the sign-up process. A word of warning though – they can get very complicated.
Different types of compensation plans
Here’s a quick overview of the main types of compensation plans:
- Unilevel plans: This is in our opinion the most ethical and fair type of plan. As an example, there could be a 25% commission for the individual on each sale with stepping stones of 3-5% commission at each higher level. Typically, the percentages reduce the higher you go.
- Binary plans: a binary plan allows distributors to have only two front-line distributors. If a distributor sponsors more than two distributors, the excess fall at levels below the sponsoring distributor’s front line. One variation is where every person has a downline that’s in two legs, and you only get paid out on your weaker leg. The people at the top usually make a lot of money but the people at the bottom usually pay to join and don’t make much money at all.
- Matrix plans: A matrix plan is usually explained with two numbers afterward like so: 1 x 3. In this case, 1 x 3 means that for every one person at a level, they have a maximum of three downlines. The defining feature of the matrix compensation plan is that the number of additional distributors per original distributor is limited. This means that when a distributor recruits another distributor, eventually the capacity is reached, and the recruit overflows to the next distributor down the line.
- Breakaway plans: this is where the downlines stay at front line to the sponsor, until they qualify for the next level in their own right, when they “breakaway” to the next generation. These plans are less popular now, but in the 1990’s they were very popular – especially with party plan companies.
There are a number of additional types as well as variations of the above plans. Each organisation will have a slightly different version and there’s certainly been an evolution from the very simple set up of Avon, as an example, through to the more complex plans now used in a number of organisations to support ambitious growth plans.
Typically, qualifying levels are made up of different factors through a combination of income and the size of the team or downlines.
Which compensation plans are best?
Allan Bell of Pan European Solutions has been advising direct sales or network marketing organisations on compensations plans for the last 40 years. He says: “In my experience, the compensation plan should never be the driving force in your decision making. You really need to be passionate about the product or service that the organisation offers – that should be the key consideration as otherwise you’re unlikely to progress through the compensation plan anyway.”
He goes on to say: “A good compensation plan needs to be fair at every level. If it creates earning opportunities and rewards for the right kind of activities, then it should be a very ethical and powerful way of doing business. In a good compensation plan, everyone’s a winner: the customer because they’re getting a great product at a decent price, the participant because they’re getting rewarded fairly for the effort they’re putting in, and the leaders who bring in and train people are rewarded by getting an override commission. The company’s also a winner because their costs are variable in line with product sales. In my view, it’s a truly fair way of doing business, without the glass ceilings that you find in most corporate settings.”
“I always say, a good compensation plan needs to reward the 3 R’s: Retailing, Recruiting and Retention. The first two are fairly self-explanatory: retail generates income and recruiting involves offering the opportunity to someone else. Just as important is the retention of your team members, which is down to how well you nurture and support them.”
Although not as prevalent as people may think, there are unfortunately also a few pyramid schemes around where there is no actual product – these are what have given the industry a bad name, and our advice would be to stay well away from those.
In addition to the income via the compensation plans it’s also worth noting that in most organisations there are additional incentives as well as a progression in terms of title ranks and positions.
A big thank you to Allan Bell at Pan European Solutions for his contribution to this blog. Allan and his team are a full-service consultancy group who help start-ups and existing companies in the Direct Selling and Network Marketing industry with strategic and tactical advice to help them become successful.