DirectLine: Payment Plan

by: Jeffrey Babener
1994

You want to get into network marketing, but you're having difficulty choosing the right company. Although there are many issues to research, including product quality, management qualifications, purchase requirements and training programs, one key area to look at is the compensation plan the company uses.

There are so many compensation plans out there, however, that comparing them can be bewildering unless you know some of the industry lingo and the important goals a compensation plan should achieve.

Multilevel sales plans arose in the 1950s and have since come to dominate the network marketing industry. In a multilevel sales plan, distributors not only earn money on their own direct sales, but also earn override commissions on the sales of their recruited salespeople, the sales of the salespeople recruited by their recruits, and so on down the line.

In the early multilevel programs, direct distributors were entitled to purchase directly from the company and supply their downline distributors with product. They might also be entrusted with paying commissions to their downline distributors. Most of these companies started when computer technology was not advanced and it was hard for them to manage all the downline information and payouts. Therefore, they had distributors take care of these tasks.

With advances in computer technology, the need for the direct distributor to act as a go-between has disappeared. Most network marketing companies started in the past decade, as well as some of the older ones, now allow all distributors to order directly from the company.

GOING FOR THE GOALS

When choosing a company, the most important factor is not the type of compensation plan, but whether that plan is achieving important goals for distributors. Alfred White, senior management consultant at San Diego-based Hamilton LaRonde & Associates Inc., recommends evaluating each company you are considering against the following characteristics of a good compensation plan:

  1. Is it easy to enter into the opportunity? You should only have to buy a modestly priced sales kit.
  2. Are you rewarded primarily for direct sales, rather than override commissions?
  3. Are you rewarded for personally sponsoring others?
  4. Are you rewarded for recruiting multiple levels?
  5. Is the focus on selling products to the end consumer, as opposed to your downline?
  6. Are you rewarded for training and supporting your downline?
  7. Are you rewarded for high personal volume?
  8. Are you rewarded for high group volume?
  9. Are you rewarded for maintaining a monthly volume?
  10. Does the plan provide for recognition?
  11. Does the plan offer non-monetary rewards and incentives such as trips or cars?
  12. Is the plan's monthly maintenance requirement reasonable-not so high that you can never achieve it, and thus never receive compensation?

Conversely, here are some things to watch out for when evaluating an opportunity.

  1. A company that does nothing to discourage deadweight distributors and nonproducers.
  2. A company that encourages inventory loading or large investments in product.
  3. A company that allows you to manipulate the compensation plan.
  4. A company that emphasizes gimmicks rather than selling a product.


PROS AND CONS

You may have heard of a variety of compensation plans, with names like binary plan, Australian plan and more. To some extent, however, they are all variations of three major types.

  1. Unilevel. In this plan, recruits do not advance to positions above basic distributors, regardless of performance. According to White, the principal advantage of the unilevel plan is it's easy for companies to administer and for distributors to explain to potential recruits. Its chief disadvantage is lack of flexibility in achieving some of the goals mentioned earlier. Over time, most companies that start with unilevel plans adapt them to look more like a stairstep breakaway plan.
  2. Stairstep Breakaway. This is the oldest and most common type of plan. After meeting certain performance criteria, a distributor advances in rank and 'breaks away' from his or her original sponsorship line. The original sponsor receives a percentage override on the sales of the entire breakaway organization.

    In a way, a stairstep breakaway plan is a unilevel plan with the flexibility to motivate distributors to perform and advance. Its chief advantage, says White, is it has a good track record, is easy to modify, is accepted by regulatory agencies, and is driven by volume and performance.

    The primary disadvantage of this plan is it sometimes becomes so complicated that it's difficult to explain to new recruits. Another disadvantage is if the company does not monitor its distributors, they tend to get involved in inventory loading or be given unreasonably high monthly maintenance requirements.

    Nevertheless, the stairstep breakaway plan is the most tried-and-true type of plan and the one most likely to survive in the decades to come.

  3. Matrix Plan. This plan looks like a grid in which a distributor is limited to a certain number of recruits at each level. For instance, in a 3-by-5 matrix, each level down to five will have only three downline distributors.

    The matrix plan is sometimes considered more gimmicky than others since, because of the width limitation, new recruits may find themselves placed underneath upline distributors who did not directly recruit them. For instance, in a three-wide matrix program, the fourth distributor sponsored would be placed underneath the first-level recruit.

    This automatic filling of spots can be attractive to novice distributors if they sign on with strong leaders who help fill their grids. It works well in companies where most of the products are used by the distributors rather than sold to outside consumers.

    However, matrix plans have been subject to regulatory attack because they sometimes look like "a game." They have not had a successful record. And they often foster nonproducers, which makes the uplines resentful. Still, several major companies operate such plans. Time will tell whether this plan is here to stay.


LAST, BUT NOT LEAST

So how much do plans pay out? Most plans pay between 35 and 45 percent of wholesale purchase volume and about 30 percent of suggested retail volume. Look for a plan that divides the pie in your favor.

A few other pointers: Avoid plans in which "orphan" commissions return to the company. In other words, if a distributor fails to qualify for earned commissions in a certain month, they should roll up to the next qualified distributor rather than return to the company. The same is true for a terminated distributor.

Look for a plan in which "lock in" occurs; that is, when you reach a certain level, you "lock in" and can't be demoted because of a temporary drop in monthly performance.

And don't forget to look for other perks that may be part of a good compensation plan - bonuses for top performers, company cars, health insurance, free training, lead and co-op advertising programs, and even, in a few publicly traded companies, stock or stock options.

No matter what the plan, always ask this question: Does the plan emphasize getting products or services to consumers, or does it emphasize making money by finding other recruits? If the latter, run away - fast. In the end, says White, it's the product, not the plan, that drives success.


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.

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