FREQUENTLY ASKED QUESTIONS ABOUT COMPENSATION PLANS
THE SHEFFIELD GROUP
We are often asked questions about MLM compensation plans. We hope you find these answers helpful.
What is the total commission we can expect to pay on our compensation plan?
It depends on the style and structure of the plan (and subsequent MLM corporate software) and the distributor performance qualifications necessary to receive various income opportunities.
What is Breakage?
Breakage is defined as unearned and unpaid commissions. These are commissions that do not get paid and, thus, increase the company’s eventual profits.
How much is the average unpaid commissions in an MLM compensation plan?
The consensus suggests that the average unpaid commissions of a traditional style plan are usually in a range of 10% to 15%. Any more than that and distributors will lose confidence in the compensation plan.
What is the most important perception that distributors must have about the comp plan?
It is important that the independent distributors believe the plan as fair and they can achieve various levels of profit if they work hard enough.
What does breakage do for a compensation plan?
As MLM compensation plans mature, breakage acts as a control factor that can be altered to increase or decrease payout. This may delay the need to drastically alter the plan’s basic structure. “Breakage” is an important factor in your ultimate corporate success. In addition, if a company’s bonus payout did not have the flexibility of “breakage”, it would be more difficult to reward the best distributors based on their level of sales and sponsoring contribution. Also, the plan would be forced to show much lower potential and, thus, would appear to be less lucrative than plans incorporating breakage into their compensation plan model.
Is rank achievement in MLM compensation plans necessary?
Yes. As is customary in the development of compensation plans, the rank attainment and bonus maintenance qualification become increasingly more difficult to attain as the distributor advances in the plan. While this may seem a bit unfair on the surface, it is important that you understand that plans that succeed in the long run are designed to reward workers who contribute to the growth and success of the company with significantly increased income potential.
Why not design a plan that pays out exactly the maximum amount that the company can afford?
The answer has to do with properly packaging the opportunity to not only be competitive but to look competitive as well as other financial considerations. The image package is an important factor in development of compensation plans because the compensation plan model will be compared to other competitive opportunities. Your plan must compete cosmetically as well as in actual financial potential with your competitions offering if your company to attain stability and retain its distributors.
What is Compression?
Most companies incorporate a concept called “compression” in their plan. Compression occurs when distributors fail to meet the required qualifications for receiving bonuses. The non-qualifying distributor and customer volume available in their downline will compress to the next qualified person in their upline. Typically, compression in a compensation plan is mandated by professional mlm distributors that are evaluating a company.
Can compression be misused?
It is important that the concept of compression is used wisely and that it rewards the desired distributor behavior. Allowing income to compress to non-producers creates a “something for nothing” attitude. Using compression to extend the depth of income stream for business builders based on specific performance can redistribute some unpaid income wisely while still allowing for desired breakage percentages.
Is it wise to recruit master distributor?
A master distributor is normally one person at the top of the entire distributor organization, possibly trapping all the breakage percentages. This windfall potential for the master distributor can spell disaster for the company if it was not planned for in advance. I am not suggesting that you shouldn’t create special financial opportunities to attract top performers. It is just a warning to plan for it in your compensation plan strategy if you decide to limit the width of direct company legs.
Can an MLM company adjust the comp plan after they launch?
Corporate executives or industry consultants cannot totally predict how much a plan will pay, but a properly designed plan can be adjusted quite easily and with very little pain for the current distributors.
What factors would require adjustments to the comp plan?
There are several specific things that can create the need for a plan change. 1. The plan is paying too much. There is too little profit for the company. 2. The plan is not paying enough. There is too little profit for the distributor.. 3. Competition dictates changes to stay current with trends. 4. The plan is not encouraging the right distributor behavior. 5. There are changes in laws or legal interpretations of laws by federal or state agencies. If the design and general structure of your compensation plan is based on time tested and proven concepts still valid in today’s marketplace, it should not require major adjustments for quite some time.
How do you decide what changes need to be made?
This can only be determined through test marketing. Only field-testing a new plan will allow you to make the necessary minor adjustments. These are easily handled by adjusting the distributor maintenance qualifications.
When is the best time to test a compensation plan?
For new companies, test marketing can only be accomplished during a Pre-Launch period. This is usually considered to be the first six months of MLM business operations. Established companies can run financial models based on current distributor production information. It is not uncommon to adjust the plan during this time based on the facts determined.
Can distributor qualifiers be too hard or too easy?
If the plan’s qualifiers are too difficult, no one makes money so you will need to soften the requirements for earning various bonuses. If the qualifiers are too easy, your plan may mature too soon, creating a socialistic effect of spreading the wealth with no one making any serious money, including the company.
What can be done to correct a comp plan that is paying out too much to early?
In this case, you could increase qualifiers while “grand fathering in” those present distributors at their old qualifier amounts for a certain period of time, but increasing it for all new applicants. Other than adjusting qualifiers to increase or decrease payouts, it is important to avoid major changes in a compensation plan too soon so as not to erode distributor confidence and create lost momentum.
Is Distributor confidence important?
It is important that your distributes have confidence in the comp plan as your business matures. They should be able to interpret the significance of sales activity, sponsoring activity, and distributor attitudes to assist in fine-tuning your business model.
How important is comp plan analysis?
Just as your chief financial officer (CFO) interprets your financial information, you must be able to interpret your distributor activity and commission information to understand where you company is headed.
Customer satisfaction is our goal. Listening to our customers has improved our customer loyalty and created a larger customer base with increased activity. Reducing service failures, lowered operating costs and enhanced employee performance are our goals. We strive to meet or beat our customers goals.