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Binary Compensation Plans: The Good, the Bad, and the Ugly

by Dan Jensen, Compensation Plan Specialist

Binary compensation plans were invented in the 1980’s and, over time, gained some notoriety for fast growth leading to periods of popularity in the global Direct Selling / MLM Industry. They have several unique characteristics that set them apart from most other types of compensation plans.

How Binary Plans Work

Lineage

A distributor has only a “left leg” and “right leg” in their binary lineage structure.
The leg with the least amount of volume is considered the “Weak Leg” or “Pay Leg”
When a person already has both the left and right legs started, any additional recruits they enroll are placed by the computer in one of the two legs chosen by the sponsor. This is called “placement” and “spillover”.
- Each company maintains a policy for how the computer decides the next available position for a new recruit which is most commonly the outermost available position like the outside edges of a Christmas tree. Sponsors are often not allowed to choose the exact location their new recruit is placed but they are allowed to choose which leg, right or left. Some binary plans do allow specific “inside leg placement” where the sponsor chooses the precise location where a new recruit is placed. This practice is not recommended as it leads to considerably higher payout cost for the plan and very high levels of plan manipulation by the field.
- The sales pitch often used is that an individual may have one leg built for them through this spillover from their upline while they must build the other leg themselves. However, this is seldom the reality.
- Leaders learn quickly the strategies of building their binary downline structures, always focusing their efforts on adding more recruits into their weakest leg while trying to balance the two legs (which is nearly impossible to achieve for leaders).
Many Binary plans do not use the Binary Lineage for team structure requirements in their Career Path (title) requirements. Instead, the Enrollment Lineage is used for some of the title requirements instead. We recommend not using the Binary Lineage for any Career Path requirements including volume and team structure to avoid rampant manipulation and disproportionate results for different builders.

Payout

Most binary plans pay weekly
Binary Commissions are most often a percentage (often 10%) paid on the volume from the Pay Leg (weakest volume leg), infinitely deep.
Some binary plans pay a fixed bonus amount for one or more volume levels in the Pay Leg (Usana). For example, a binary payout may pay $50 per block of $500 in volume in the Pay Leg. Any volume that does not complete a block of $500 is carried forward to the following week(s) until the next block has been accumulated.
When a commission is paid, the amount of paid volume is deducted from both the Pay Leg and the Strong Leg. The Pay Leg volume starts the next commission cycle (week) at zero while the Strong Leg starts the next cycle at a reduced amount using the rules of Carry Over Volume (see above).
- Example: if a Pay Leg has $500 in volume and a Strong Leg has $2,000 in volume, the Binary payment is paid on the $500 Pay Leg volume. The Pay Leg volume is reset to zero and a matching $500 in volume is removed from the Strong Leg, even though no additional payment is made on that volume.
A minimum “cycle point” is defined where volume in the Pay Leg must reach a minimum threshold before any binary commission is paid to the recipient. If volume in the Pay Leg is below this cycle point, no binary commission is paid until a future commission period (week) when the minimum cycle point is finally achieved. In most plans, that unpaid volume may carry forward (see “Carry Over Volume” below) until the minimum cycle has been achieved in the future.
- Breakage (unpaid commissions) is high from reps that never (or rarely) achieve the minimum cycle volume amount. This breakage is vital to keeping the comp plan payout affordable to the company (see Traps to Avoid below).
All binary plans have “Carry Over Volume” where unpaid volume is carried forward in both legs to the following week as long as the rep remains “active.”
- Unused volume in the Strong Leg is carried over to the following commission period. This unused Carry Over Volume is often seen as a compelling reason for a distributor to stay active in the business with the hope they will eventually be paid on the unused volume of their Strong Leg in a future commission period. This can only happen if they successfully develop their Pay Leg into their Strong Leg some day – a very rare event. In such a situation, the former Strong Leg becomes their Pay Leg and they earn a “windfall” amount on the stored Carry Over Volume from that leg. The hope that their unpaid Strong Leg volume will someday become their weak leg is seen as a reason many continue to work and stay in the business for a while longer.
If the distributor is Inactive during a commission period (usually because they fail to meet a minimum Personal Volume threshold), the volume in both the Pay Leg and the Strong Leg is “flushed” – reset to zero. For many, the fear of loss becomes a strong motivator to stay Active. Some binary companies use this flushing rule as an added incentive to stay on a monthly AutoShip.
Because it is impossible to project the cost of a Binary payout, a payout cap is required to protect the company (see point 4 under Disadvantages to Company).

What does the Binary Plan Reward Me for Doing?

When a builder recruits another person, the “pitch” is often focused on encouraging them to build one leg assuming that the new recruit will receive many recruits through Spillover from the upline into their Strong Leg. “If you join under me, you build one leg and I (and my upline) will build your other leg”. As a result, recruiting is the primary behavior the Binary Plan rewards. Some might suggest it is a “recruiting machine”. Your results may vary…

Advantages to Company

Some Binary Plans find strong recruiting results as builders work to balance their left and right legs, focusing almost entirely on their weak leg.
Some suggest the Binary Plan is a simpler plan to explain and work because it only has two legs to focus on. My experience does not support this due to the many other complications the rep must understand such as placement, Enrollment Lineage, Binary Placement Lineage, Spillover, Carry Over Volume, and Flushing.
A Binary Plan seems to work best when the primary strategic focus is on recruiting reps into the business rather than enrolling customers. It supports a “buying club” culture where anyone who wishes to use the product enrolls as a distributor.
Binary Plans tend to highly favor and promote the use of AutoShip to ensure the regular purchase of products.

Disadvantages to Company

A heavy recruiting emphasis for some can feel too much like an “MLM” and is easily perceived with skepticism. A recruiting culture is often driven mostly by the opportunity and less by the unique benefits of the product and company mission. This rarely creates strong loyalty in the field.
Customer enrollment is often very weak as the sales force focuses on recruiting people into the business (opportunity emphasis over product) like a buying club. Customers cannot take a position in the binary lineage because they are not independent contractors. If they are given a spot in a lineage, regulators usually consider them as reps. As a result, in a binary plan, customers are usually recruited as reps, creating a buying club culture.
Legal challenges in some countries have proven to be more common due to the lack of customer enrollment and heavy emphasis on recruiting. In the United States, attorneys are advising their clients that a minimum of 51% of company revenue must come from known customers who are not distributors. Otherwise, the company may be vulnerable to legal challenge as they grow. A binary plan might make this goal much more difficult to achieve.
Most countries in Asia allow Binary Plans with the exception of Malaysia and some states in India. There may be others we are not aware of.
Due to the infinite depth of pay on the Pay Leg of each distributor, it is impossible to project the cost of a Binary Payout, resulting in a history of Binary Plans paying out too “hot” – paying out more than originally designed as the sales force matures and downline depth increases overall – unless the company utilizes a payout cap, limiting what will actually be paid. When a cap is used, if the Binary payout exceeds the cap, then payouts are reduced to remain within the specified cap.
- This problem often manifests itself only after several years of strong growth. Many binary plans eventually require reducing the Commissionable Volume (CV) (or Bonus Volume / BV) ratio to the rep price in order to reduce the payout to affordable levels or reduce the amount of reduction occurring due to the cap being exceeded. Some plans reduce only the binary payout or only a check match payout when the cap is applied.
The premise behind the Binary Plan is often based on the assumption that “my Strong Leg will be built by my upline through the Spillover from their recruiting”. However, this assumption often proves to be wrong or even deceptive – most people (more than two-thirds in our research) receive little or no spillover from their upline and have to build volume in both legs while only being paid on the volume in one leg. As a result, two people producing the same volume and number of recruits can have very different outcomes in the Binary Plan depending on where they are placed in the lineage. One may receive lots of spillover (recruits who create volume) from their upline building their Strong Leg without any effort of their own. Their entire focus is solely on building their Pay Leg. For another person who receives no Spillover from their upline, they must build BOTH legs – at least two or three times the work to get the same earnings as the first person. Thus, the actual outcomes for people prove to be less predictable and often disappointing based on the excitement felt when they joined. This causes many to leave the business disappointed.
Growth for all Direct Selling companies can be no greater than the growth of leaders the company develops over time. The more leaders a company develops, the faster they grow. In a Binary Plan, everybody has two legs. They receive no commission from their Strong Leg. But where are most of the potential leaders in their downline? Always in their Strong Leg – that’s what makes it a STRONG LEG! As a result, builders are not rewarded through binary payout for developing leaders who are in their Strong Leg. This results in fewer leaders developing and higher failure rates for existing leaders.
- For this reason, most binary plans have a “check match” payout technique that compensates somewhat for this big weakness. The check match payout often rewards them for leaders in both their Strong Leg and their Pay Leg by paying a percentage of the binary earnings of downline people (usually leaders) in both legs.
Retention rates of binary plans have generally proven to be the lowest in the industry. Industry averages for all flavors of direct selling comp plans are considered to hover around 20% over a 12 month time period for recruits. Binary plans rarely exceed 10%. While growth can be significant for a short period of time, once the company peaks and sales begin to decline, the momentum often collapses, and leaders leave quickly. As a result of collapse, companies with binary plans appear to have the highest fatality rate for startup MLM companies.
A series of upline sponsors doing little can benefit greatly from the efforts of one or two superstars in their Pay Leg because they receive infinite depth on the same leg. They, of course, love this. For them, the binary system may become an entitlement system. The company, unfortunately, pays out very large amounts to undeserving people at the expense of others who are more deserving. The saying “what one man receives without working, another works for without receiving” is very applicable here.
When a recruit is placed in a binary lineage structure, it is inevitable that some will have distributors under them in a binary plan due to Spillover. Most binary plans act like buying clubs where both business minded builders join to earn money and customers join as reps to buy at a discount. Most recruits are actually customers (“custo-reps”). Legally, this may invite regulatory challenges in some countries because a customer does not recruit and receives no commission but placing them in the lineage makes it appear that they do. Herbalife, for example, claimed to the FTC that their thousands of “members” were only customers because they did not recruit anyone. The FTC rejected this argument because the customer-members were in the lineage structure and had the opportunity to earn money.
A binary plan creates a system of “shared benefits” where some will benefit from the efforts of others with little or no engagement – an upline recruiter may build your strong leg through spillover. Crucial to this discussion, however, is the disconnect between reward and performance and luck. Sustainable comp plans are based on key principles such as “do this, get that… don’t do this and don’t get that”. “Shared Benefits” appears to weaken this vital principle rewarding some lucky few for doing little or nothing while requiring others to work hard and do it all by themselves to get the same reward. Those who do less get the same reward as those who do much more, creating an unpredictable (and unsustainable) business model and a lower level of competency in the field. Do NOT reward people who do little or nothing. You cannot grow your business on the backs of incompetent people. This concept of “Shared Benefits” appears attractive on the surface but it can be very problematic for the company over time creating an entitlement culture (I deserve it). It can be a “ticking time bomb”.
Another concern is the lack of impact on the earnings of a leader who disengages from the business. The binary payout is based purely on volume – usually not current rank or performance. Thus, a 5-Star-Leader who is paid as a 3-Star-Leader because they fail their downline leader structure requirements will likely see little, if any, drop in their binary income. This will create a serious problem in the future with poor leader engagement levels. Leaders whose incomes continue despite their lower level of performance will eventually perform at lower levels. We see this problem everywhere in our industry. This will create a decline in corporate revenue which will be very difficult to turn around. How can you ignite growth without leaders who are willing to re-engage and work harder when they don’t have to?
Binary plans have been outlawed in several countries.

Advantages to the Distributor

The infinite depth payout promotes tap rooting in the Pay Leg – the reaching down to develop rising stars in that leg. This is excellent but is limited to the Pay Leg.
- Most Binary Plans use other strategies to reward the development of other leaders, even those in your Strong Leg, such as through a Check Match.
Its greatest strength is the motivational reward for recruiting people into your weak leg. The Binary payout mechanism is a powerful recruiting tool.

Disadvantanges to the Distributor

Every binary plan has a minimum “cycle point” where a minimum amount of volume in the Pay Leg (weak leg) is required to get ANY commission. The percentage of new recruits in their first 90 days who get to the minimum cycle point is historically very small. Until they achieve the minimum cycle point, they do not receive any binary commission. As a result, we see a consistent pattern of very low retention rates of new recruits for binary plans worldwide – lower than industry averages by far. In a world of instant gratification, most new reps do not have the patience to wait for their binary volume to get to the minimum cycle point. They bail quickly.
- We could argue that an easy solution would be to not have a minimum cycle point but that would result in the Binary plan paying much too high. The breakage caused by the minimum cycle point is essential to keeping the binary plan payout within budgetary limits.
Rarely will a rep have perfect volume balance between their left and right legs (unless manipulation is occurring). Some reps get lots of Spillover and build only their Pay Leg thereby receiving binary compensation sooner. Others must build BOTH legs but get paid only on their Pay Leg. Thus, the rep who builds both legs often has developed 3 times the volume of another rep who built only their Pay Leg (due to this natural imbalance between legs). How can anyone consider a plan “fair” when it pays the same reward to a person who worked three times harder than another?

Common Traps to Avoid

Most binary plans will eventually pay out more than the company can afford usually due to increasing depth and the amount of placement manipulation occurring. As an example, if a company could pay out 35% of volume from their binary plan, for every order placed the company could pay an average of 3.5 upline sponsors their 10%. In the early growth years, the company may find a low payout of the binary plan while the lineage was shallow to the company and most leaders. But over time, as leader organizations grow deeper, the average number of people paid on any individual order may grow from 3.0 upline sponsors to more than 5.0 upline people (paying out 50%).

In some cases, the company collapses because they avoid the inevitable fixes required to keep the plan within budget. Various sources of breakage must be designed into the plan to keep the plan from paying out too hot. These sources of breakage include:

Minimum cycle point: A rep must achieve a minimum amount of volume in their Pay Leg before any binary commission is received. Common cycle points range from $300 to $700 (USD). The lower the cycle point the less breakage the plan creates causing it to pay out more. Too high of a cycle point causes reps to realize that they have to wait too long before they earn any commission so they leave the business.
Spillover placement must be limited to the “Outside Leg”. Think of the edges of a Christmas Tree – the edges are the Outside Leg. If the exact location a new recruit is placed in is allowed to be chosen by the Sponsor (I’ll place Linda under Sarah), rampant gaming occurs with builders placing new recruits in just the right places needed to keep their legs balanced and reward specific downline friends and family members, significantly reducing the breakage necessary to keep a binary plan affordable. The affordability of a Binary relies heavily on the field’s inability to balance their legs.
Company capped payout: Almost all binary plans have a declared “cap” that limits how much the company will pay out. Common caps are 50% of CV (or BV). Binary plans vary in how these caps are implemented. Some limit the cap only to the binary payout while others first reduce other payout mechanisms such as check match payouts before a binary payout is reduced. Caps must be disclosed to the field and are often looked down upon for obvious reasons – but they are necessary to keep the plan affordable when the business grows large.

Conclusion

Binary Plans are very popular in Asia. Leaders often gravitate to comp plans they can manipulate or “maximize” their income. This manipulation is rampant in Asian markets and eastern European markets. Yet, Binary Plans can create significant growth for many months and in rare cases, even years. A well-designed Binary Plan must consider both its strengths and its weaknesses. Failure to anticipate the weaknesses can result in a collapse of the business. When designed well and with proper policies to avoid manipulation, a Binary Plan can provide sustainable growth as other compensation plans.

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Roll Up and Compression – To Do or Not To Do…

Compression. Of all the techniques used to fine tune a MLM compensation plan, compression is one which is most often used, but seldom understood. For many MLM and Direct Sales companies, compression is a source of massive waste in their compensation plan – dollars being spent with little return. For others, it is a source of focused and well planned incentives on distributor performance which is otherwise difficult to obtain.

Roll Up and Compression – what are they really?

Compression and Roll Up are terms often used interchangeably in network marketing. Compression can be defined as:

The impact on a genealogy when a distributor is terminated. The downline of the terminated distributor is linked to the sponsor of the terminated distributor causing a “compression” effect on the downline.

Compression, therefore, relates to the effect of removing a distributor from a genealogy leg as in the following example:

In this example, distributor B is removed from the genealogyresulting in distributor “C” being relinked to “A”. When “B” is removed, his entire first level is linked to their new sponsor, “A”, and all other downline distributors move up one level closer to “A”, compressing the downline by the one level vacated by “B”. This is called compression.

Roll Up Defined

If a commission payment cannot be paid to a distributor due to that distributor’s being inactive, unqualified or not eligible, the payment will “roll up” to the next qualified, active and eligible distributor upline. For example, a simple uni-level plan pays 10% to level 1 and 10% to level 2, but only if the distributor purchases $100 in the month.

The next example shows the effect Roll Up has on the commission of “A”.

Without roll up, A receives a level 1 commission from B’s $100 purchase, no level 2 commission from “C” because C purchased nothing, and no commission from D because D is at level 3, beyond the reach of A (the plan only pays 2 levels).

With Roll Up, A receives $10 from B, nothing from C (no purchase volume), and for this month only (next month C may be active, again), D is counted as 2nd level to A and A receives 10% on D’s $100 purchase. Conceptually, A receives commissions on two active levels with roll up and, therefore, reaches deeper, ignoring inactives, when counting levels.

If “C” had purchased some product, but not enough to be active, then “C” would also be counted as 2ndlevel to “A”. In this case, both C and D would be counted as 2nd level to A, but only for the current month. Confused? Who said network marketing was simple?

Why offer Roll Up?

A golden rule of compensation plan design is to apply the incentive dollars toward the behavior that is desired (see “Are You Wasting Your Hard-Earned Commission Dollars?” Jenkon Newsletter). What behavior can roll up buy?

To help sales leaders work deeply in their downline

Sales leaders often find a one or more distributors many levels below them who need their help and attention because they cannot get it from their immediate upline. The sales leader is forced to work around the inactive or uncooperative manager(s) directly with the needful distributors. Would a sales leader spend their valuable time with these needful distributors, however, if he or she felt there was little potential reward? The deeper a group is, the less the potential reward for the upline sales leader because when the group catches fire, they will build below themselves even deeper and eventually out of reach of the salesleader’s commission check. Hence, sales leaders soon learn that without roll up, they need to ignore the deep distributors needing help and focus on the closer ones. With roll up, however, the inactive sponsors in between are ignored, so the sales leader can expect to reap the benefits of their efforts on a long term basis – depth is determined only by those who are active. Roll up, therefore, entices sales leaders to work deep because it offers them a return on their time.

To entice sales leaders to move up the ranks by reaching deeper

The deeper a person can reach for commissions, the larger their check will be (assuming they have a large downline). Sales leaders know that the largest earnings come from the volume at their deepest reach because there are more producers there – the deeper you go, the more people in the downline, level by level. Roll up can be used as a significant enticement for ambitious sales leaders who want to earn from yet deeper ranks of distributors in their organizations. For example, if a plan provides roll up to only the top three ranks of sales leaders, then lesser sales leaders will be striving aggressively to reach those top three positions because their commission checks will be substantially larger from the existing volume being generated. It would be like getting a huge raise!

Mistakes to avoid

Mistake #1: Offering roll up to most distributors

Many plans I have seen offer roll up to most distributors as if it would turn on a huge amount of additional performance across the board. This is not so. Roll up works most effectively with sales leaders who have large organizations. It offers little incentive for distributors with shallow organizations because they already earn commissions from them.

Mistake #2: My competitors do it, so I should, too

Don’t fall into the trap of doing it just because others do it. Do it because it’s right for you. Roll Up costs your competitors a lot of money which you, instead, could put into other parts of your plan and get higher returns (desirable distributor behavior).

Mistake #3: Giving roll up to non producers

Understanding what behavior is bought with roll up, it becomes apparent that it should focus on active, qualified, performing sales leaders. Giving roll up to less performing distributors should be considered a waste of precious incentive dollars.

Mistake #4: Not budgeting for roll up

Roll up is expensive because it almost always pays out to the maximum limit of the plan. Without roll up, the company retains breakage to a much larger degree. Plans with roll up should expect to pay out close to their theoretical maximum.

Conclusion

Roll up can be a tremendous incentive for your active sales leaders who have large downlines. If you are giving away roll up commissions to nonproducers, to the less active, or to those with shallow downlines, consider making some changes in your plan in the future.
The 10 Most Common Mistakes in Direct Selling – Part 3
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#5: Lack of a Selling System

As noted previously, a system is a process or approach that is duplicatable and provides predictable results. A selling system, therefore, is a method of selling that you can train to your sales force that provides them with consistent sales success. What are examples of sales systems used in the direct selling industry that’d result in lucrative figures when you pull up the Sales Statistics?

Party Plan

Catalog

Office parties

Automatic monthly shipments to customers

Door-to-door

Lead follow-up

Free video with follow-up

Free gift or sample

If you fail to develop an effective selling system, your distributors will try to develop their own and, for the most part, will fail. Your attrition rate will be high and your business will not grow. An effective selling system is essential to your success. It also allows you to exert some control over your product message to avoid unfounded claims that might put your company in a bad light.

#6: Inexperienced Management Team

No business can rise to the pinnacle of success and sustain it without effective management and leadership. It’s been said that leadership is doing the right things. Management is doing things right.2 You need both. Yet, the graveyard of free enterprise is littered with the bones of companies who were poorly managed and poorly led. Most often, the mismanagement started with an enthusiastic business owner with little or no direct selling or business experience believing that he or she could handle the job. Statistics show that across all industries 80% of new business startups end in failure within their first year. While there are many who launch businesses successfully, there are few who have the skills to sustain the success. Make no mistake, direct selling businesses fail from the top down, rarely from the bottom up.

A wise business owner recognizes that there are people he can hire who are better than him or her in many areas of the business. He seeks for these people. He must then empower them to do their job effectively. Don’t hire skilled people and then ignore their wisdom and talent!

The ideal role of the business owner is to lead and then get out of the way of his effective and competent managers who are empowered to handle the various departmental needs of the business. Leadership becomes one of planning, reviewing results, accountability, promoting and motivating… selling the vision! Let managers do their job according to the business plan which should be the yardstick by which the managers are accountable.

Training

What NBA basketball team would recruit a new player, place him on the floor his first day, and expect him to perform like the rest of the team? Without training with the rest of the team his performance at best would be mediocre. At worst it would be disastrous and the game would be lost.

So it is with any new manager or employee, especially if the whole staff is new as in a new business launch. Who should train them? What should they be trained to do? How do we know if they have completed their training? These questions need to be addressed individually:

Who should train new employees?

Don’t let the old adage, the blind leading the blind be said of your trainers. Find very competent people to lead and manage each department and have an experienced general manager orchestrate the various departments like a symphony. Experience in direct selling is vital in most key roles. Don’t be led into the trap of saving money on inexpensive workers in the beginning; it will cost far more than it saves.

To find experienced and friendly people to do the training, look to professional consultants, the direct selling Association (DSA), and other direct selling business owners for names. Advertise in industry publications such as Direct Selling News (www.directsellingnews.com). Executive search firms can often be fruitful as well. There are several firms that specialize in direct selling talent which can be found in the supplier members list at www.dsa.org. Many people find they must hire from outside the industry and train them on the principles of direct selling because experienced direct selling people are hard to find. If you do, plan on them having a steep learning curve.

What should they be trained to do?

As an experienced person is hired to supervise a department, their first task is to design and document a “system” or method of operation. For example, to process sales orders, a diagram of how an order must flow through the office should be created. Exceptions should be noted with a flow chart or diagram to handle each case. What do you do if the credit card is declined? What should a warehouse person do if some of the products ordered are not in stock? Every conceivable problem must be documented in advance with an appropriate solution. Policies need to be documented and organized into a handbook for the staff. These policies might even be put on the office computer system for instant look up. Professional direct selling consultants can be an invaluable source to help prepare these flow charts and documentation, which can be set in digital documents using software from https://www.sodapdf.com/pdf-editor/ online.

Once the systems, policies, and procedures are documented, training can begin. With documented systems in place, training proceeds quickly and thoroughly. Without systems, policies, and procedures, training can never be complete, and takes many times longer.

How do we know if the employee has been trained?

An evaluation process should be established which takes a new employee through a sequence of duties and responsibilities. For example, a distributor services rep might not be allowed to handle commission related questions for Digital Marketing services in Hanover until they have explained the compensation plan to the department supervisor thoroughly, top to bottom. Each department must also establish a minimum level of competence before allowing an employee to perform their assigned tasks alone. Until then, they are “buddied up” with another peer or supervisor. Some companies have tests that are taken and scored which focus on the various objectives of the job. The best tests focus on objectives rather than on the mechanics of the job.

Success comes when:

Your staff catches ‘the vision’

They are rewarded for excellence

They feel accountable to the sales force

They are empowered to succeed

The barrier between office staff and the field is gone… it can never be ‘we’ versus ‘them’, but rather, ‘us’.

The 10 Most Common Mistakes in Direct Selling – Part 2

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#2: The Wrong Business Model

The world of direct selling has a variety of business models. The model you choose will determine the type of compensation strategy you employ, how you sell your product, and how you grow the business. For example, Avon’s business model relies mostly on retail sellers using catalogs to sell their products to customers. Melaleuca and Arbonne, instead, have thousands of customers who signed up as distributors to buy their products at a substantial discount off retail. They have few people buying their products at the full retail price. Pampered Chef and Tupperware rely extensively on the home party to demonstrate their products to customers.

These three examples of different business models for direct selling have a profound effect on every aspect of how their business is operated. It will be the same for you. Choose your model wisely! It’s one of the first decisions you will need to make. That decision determines your method of selling, your compensation plan, your product pricing strategies, your marketing strategy, the growth rate of your business, your training systems, and your internal operating procedures.

#3: Poorly Designed Compensation Plan

A compensation plan that fails to motivate distributors can become a brick wall to the growth of your company. Some people believe that the greatest key to success is a good compensation plan. While there is some truth to this, I have also observed a few successful companies reach very enviable sales volumes with poorly designed compensation plans. But the truly successful companies always have a sound compensation plan.

At the heart of the issue is the question what makes a compensation plan good? Let’s address a few points:

Reasonable compensation percentages. Most compensation plans of today pay between 25% to 45% of company income to field distributors. If a company promotes a plan paying only 20% or so,

they may have a hard time recruiting and keeping distributors. They may find great difficulty competing in the marketplace against other direct selling companies.

How much can you afford?

Look at the table below (an expanded version is found at www.danjensen-consulting.com). If your markup from your product cost to your retail price is 500% (5x) and a distributor makes 25% for selling the product (retail profit), it shows that you should be able to pay about 28% of wholesale (wholesale is revenue to the company on the sale of each product to a distributor exclusive of tax and freight).

	3x	4x	5x	6x
Retail Price	$100	$100	$100	$100
Wholesale	$75	$75	$75	$75
Retail Profit to Distributor	$25	$25	$25	$25
Upline Payout	$15	$18	$21	$24
Upline Payout as % of the $75	20%	24%	28%	32%
Product Cost	$33	$25	$20	$17
G&A Expenses	$15	$15	$15	$15
Profit	$8	$13	$15	$15

Be sure you know the true long-term cost of your compensation plan before you announce it. Your estimate of the percent of sales you will pay out should be done at “maturity”, usually about 4 to 8 years from launch. A direct selling company’s compensation plan payout is mature when:

Almost all volume is deep enough from the company (at the top of the tree) that it does not run out of people to pay commissions to. Shallow volume never pays out the full commission because as commissions are calculated upline from sponsor to sponsor on each dollar of volume, it eventually hits the top of the tree before all commissions are paid. In a mature company, this almost never happens.
There are some top leaders who have achieved the top recognition title or rank and qualify for the maximum commission payout.
The payout of the plan is stable for six months, within 0.5 percent month-to-month, adjusted for seasonality, if any.

It takes experience and a good analytical approach to accurately project plan payout at maturity. Some may need to call upon a competent consultant for help who has done this before.

Design it for the part-timer: Unfortunately, many plans are designed by direct selling “big hitters” for direct selling big hitters. Yet DSA agents conducting surveys for online jobs seekers shows that 95% of distributors are part-timers. While a sound understanding of the principles employed in a successful compensation strategy is essential when designing compensation plans, one must never forget that ordinary part-time people are the ones who must be motivated by it, more so than the “big hitter”. Plans designed for the part-timer always generate bigger checks for your full-time leaders.

Design it for the long-term. Changing a compensation plan is costly in terms of lost momentum and distributor commitment. When a distributor recruits another person, the compensation plan is often a significant part of the recruiting process. They build their business according to the rules of your compensation plan. To change the plan later will often devastate them. Most people don’t handle “change” very well. Some may perceive the change as a “bait and switch” tactic. Avoid designing a plan that works for now but that you expect will need to be replaced later. That approach will eventually hurt many of the distributors who build your business and may ruin any positive momentum you build in your early years.

Don’t copy someone else’s plan. While you may want to have the same success as another company, don’t fall prey to the temptation to copy their compensation plan. Rarely will it work well for you and can often be a disaster waiting to happen. Do you sell the same products as the other company? Are your margins the same as theirs? Can you afford to pay out as much as they can? Is their business model the same one as yours? It is not uncommon for me to hear a prospective client tell me how they would like a plan like XYZ company while knowing that XYZ company has asked me to help them fix their plan because it isn’t working for them anymore. Don’t copy another company’s plan.

Avoid “fad” plans. By staying within more traditional plan concepts, plans that have proven themselves over the years, a new direct selling company can be innovative but still have a plan that has long-term viability. Stick to proven plan approaches that won’t need to be changed as new fads come and go.

Avoid recruiting “heavy hitters.” These very successful direct selling professionals can bring tremendous short term success but they can also be a major cause for failure when they grow bored with your company and join another, often taking many of their downline with them. Wise companies always build slowly for the first year or two until they have the critical mass and experience to handle big increases in business volumes. Don’t design your compensation plan to focus on attracting these heavy hitters. If a ‘heavy hitter’ wants to work for you, then allow them to do so on the same terms as any other sales representative. Avoid offering special deals as inevitably the rest of your sales force will hear about it through the grapevine and you’ll have egg on your face!

Design the plan around the behaviors that build success. Remember that a compensation plan should be designed to compensate and reward the producers while not rewarding the non-producers. What one man receives without working, another man works for without receiving.

A compensation plan should provide incentives for the Five Golden Behaviors:

Product retailing
Recruiting
Building managers
Building leaders
Retention and consistency

These Five Golden Behaviors are the basis of every successful compensation plan. Compensation plans that perform poorly, do so because they fail to reward good behavior. You can read more about these Five Golden Behaviors at www.danjensen-consulting.com.

#4: Lack of an Effective Field Training System

You need a system for training your sales force. A “system” is a process or approach that is both duplicatable and provides predictable results. Even with the world’s best products and the industry’s best compensation plan, without field training you won’t be going very far. There are two key elements in developing human behavior:

Motivation: “why should I do it?”
Competence: “I don’t know how to do it!”

These two key concepts are critical to your future success. Once you train your sales force and give them a great reason to work (motivation through the compensation plan), your business will grow.

How does one develop a training program or system? You rely on people who have done it before. Find people with experience training direct selling distributors how to sell, recruit, and build successful businesses. How can you find these people? There are a number of successful entrepreneurs like Andrew Defrancesco available to help. Look at www.dsa.org for supplier members who are consultants that do field training. It will be one of the best investments you make.