"...the upshot of the approach is that a one-time bonus is paid on the first month's sales volume of a new distributor that has been "referred" into the sales organization by the enroller."

Enroller / Coding Bonuses

By Jeffrey A. Babener

1998

 

 

Enroller/Coding Bonuses - A New Incentive.

Network marketing companies and their distributors are constantly looking for new ways to jump-start sales force recruitment and sales. It is for this reason over the years that many new variations on compensation plans have surfaced. Among them have been matrix plans, binary plans, Australian two-up plans, training bonuses and customer acquisition bonuses, etc. Some have worked wonderfully and some have worked abysmally, including all the attendant legal problems.

The newest kid on the block is referred to by different names, including enroller bonus and (one-time) coding bonus. Although there are variations on its implementation, the upshot of the approach is that a one-time bonus is paid on the first month's sales volume of a new distributor that has been "referred" into the sales organization by the enroller. The word "referred" is used because the new recruit will not necessarily be personally sponsored to the enroller, but may be, in fact, placed deep in the sales organization under another distributor. The enroller receives a leadership bonus on the first month's activity volume and all other downline bonuses on the sales organization are paid normally. Also, in order to receive enroller bonuses, the enroller must have achieved a requisite volume themselves in their first month's activity.

 

On The Plus Side - Encouraging Activity.

For those companies that are adopting the enroller bonus or one-time coding bonus, several positive results are seen:

  1. Enrolling distributors are encouraged to work with the organization and build deep, assisting their downline to grow, rather than merely widen their frontline.

  2. Enrolling and sponsoring distributors are encouraged to cause their new recruits to be active at an early time, even in their first month.

  3. Because of qualifiers, enrolling distributors are encouraged to maintain their own activity requirements early in their tenure.

  4. By skewing more commissions to award for recruitment and early sales volume activity, companies hope to jump-start recruitment and sales.

 

Variation On An Old Theme.

Companies are always struggling to pep up their sales and recruitment activity. Is the enroller and one-time coding bonus a new phenomenon? Well, yes and no. Almost all leading companies have always had quick-start programs for new distributors to encourage early sales volume activity. These options have always worked, as well, to the benefit of the sponsoring distributors. Upline distributors have always been the beneficiaries of total sales organization activity as well.

Network marketing companies have a finite number of dollars to pay out in commissions. Typical downline commission payouts have ranged from a low of 30 percent to a high of 60 percent. How companies allocate the payment of the commissions to the distributor force is a determinate of the motivation to distributors. The message to distributors with an enroller bonus or one-time coding bonus program is to encourage existing distributors to spend additional percentages of their time in recruiting new distributors and to promote new distributors to have early activity volume. Those companies and distributors that are successful in this regard find the enroller bonus and one-time coding bonus an exciting enhancement.

 

Is There Some Downside?

Are there drawbacks to the enroller bonus and coding bonus approach? Well, any program that motivates a change in behavior and a reallocation of payout must have some drawbacks. In this case, the potential drawbacks are business and legal.

  1. The Business Issue.

    This type of program generally offers a one-time incentive. Some observers might call it a "gimmick." If there is a business drawback, it would be that the payment draws away from long-term payouts and focuses on the short-term. In addition, the "sizzle" component to a marketing plan may also draw individuals who jump from program to program interested in short-term gain. Most industry experts agree that in the long run, it is a company's product and management that drives the success of a sales organization, rather than "gimmicks." On the other hand, many in the industry do not feel that such bonuses are gimmicks, but rather are a part of a balanced compensation plan payout.

  2. Legal Issues.

    Companies that adopt enroller bonuses or coding bonuses have to think through this approach. In the absence of consumer protection safeguards, such programs can be accused of front-loading, headhunting fees and lottery elements - all indicia of pyramid schemes. Laying the legal groundwork is important.

 

Laying the Right Legal Groundwork.

Both companies and distributors should be rightfully concerned that an improperly implemented enroller bonus or coding bonus program can draw regulatory criticism. Companies that intend to adopt such programs should consider the following factors and distributors who are considering participating in companies should consider the following factors to see if the proper groundwork has been laid:

  1. To avoid accusations of lottery under postal statutes and multilevel distribution statutes, it is important to require supervisory responsibilities of distributors that receive override commissions. Distributors need to perform bona fide, supervisory, management and communication responsibilities. In the case of enroller and coding bonuses, these responsibilities must be imposed both upon the enroller, as well as upon the sponsoring distributor, i.e. the distributor underneath whom the new recruit is placed.

  2. Although the enroller bonus or coding bonus may be an important monetary incentive and source of income for enrolling distributors, it is important that it not be the primary source of income in the compensation plan. If this were to be the case, the program would be accused of being some type of headhunting scheme in which individuals get their primary income from finding new distributors.

  3. Companies that have adopted such programs have often explained the qualification in terms of mandatory purchases by enrollers and enrollees. This is a serious mistake for both enroller bonus and coding bonus type programs as well as any other type of compensation plan. Activity qualifiers should always be spoken of in terms of achieving requisite personal and/or group sales volume, whether that be by wholesale activity or by order taking activity by distributors. Using terms, such as mandatory "wholesale purchases," raises connotations of "prohibited investments" and pyramid laws or prohibited "buy-ins," also elements of pyramid schemes. Thus, the method of explanation of qualification itself can have far-reaching legal ramifications. Also, the inappropriate description of qualification can cause a company to be accused of "front-loading" distributors.

  4. Some companies have made the mistake of basing the reward upon the mere finding of other distributors, rather than upon the volume of distributors. This approach perhaps represents a misunderstanding of customer acquisition programs by telecom companies in which distributors are rewarded for finding customers. There is a world of difference between rewarding distributors for finding customers, and rewarding distributors for merely finding other distributors. The latter act is viewed as the payment of a headhunting fee and an element of a pyramid scheme by most regulatory agencies. Companies should never reward distributors for the mere act of finding other distributors.

  5. It is impossible to read recent consent decrees, court cases and regulatory pronouncements without understanding the importance of requiring in this type of program, as well as any program, the specific qualification requirement that distributors demonstrate sales to nonparticipant retail customers. Thus, individuals who are receiving enroller bonuses or coding bonuses should also be able to demonstrate compliance with a retail customer rule and the industry standard 70 percent rule.

  6. Finally, inasmuch as accusations of inventory loading or front-loading may be raised with enroller and coding bonuses, it is important that a company has adopted industry standard buyback policies or refund polices on inventory to demonstrate that its enroller bonus or coding bonus program is not intended to merely be a front-load and abandonment type program. Industry trends suggests a one-year buyback policy.

 

Enroller Bonus\Coding Bonus - a Future?

Companies appear to have found a good and useful tool for promoting recruitment and early sales activity by using the enroller bonus or coding bonus type program. Only time will tell if such programs become a fixture in the network marketing industry and whether they can be implemented in a way that promotes both important business and legal safeguards.

 

Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

www.mlmlegal.com

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