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Can You Support Your Compensation Plan?

Article by: Brian Little
September 17, 2013

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One of the most important questions to ask as you are designing your compensation plan is, can you support it? Can you afford the staff, technology and field expenditures necessary to support it? Is it duplicable, and if so, do you have the bandwidth to do what is necessary to get the ball rolling and train and support it in the field? How about legal issues? Does the comp plan run the risk of promoting legally risky discussions in the field? Can you police what is being said to the extent needed in order to keep the doors open? Can you maintain ownership of your comp plan, or are the distributors going to be able to strong arm you into making changes that are not necessarily in your best interest?

This is not meant to be a design or even a philosophy conversation. This is meant to be a “bottom line” discussion. I would like to discuss the mechanics of compensation plans as it relates to your ability to manage them and stay profitable. Determining your compensation plan requires a matrix full of variables too many to be mentioned here. Supportability is just a piece of the puzzle. That being said, discussing comp plans is a little like discussing politics or religion. For some people the cost, in not only dollars, but also time and energy, is no match (or deterrent for that matter) to their commitment to the plan. You have to believe whole-heartedly in your comp plan; sometimes your commitment to your plan really does outweigh the challenges. My intent is only to raise those red flags so you can make an educated decision.

Where does the level of complexity, marketability, supportability, and profitability intersect? And is this intersection a 4 way stop or is it a round-about?

We often focus on what multiples we have on our product when opening a discussion concerning the bottom-line; but your comp plan is by far your largest expense. In fact, product is often time not even your second largest expense. It usually falls behind staffing or marketing as well as possibly others. So if comp plan staffing and marketing are your two largest expenses, the decision you make concerning this subject becomes critical.

At a 30,000 ft. level, most compensation plans these days are hybrids. They generally have one or two bonus types addressing fast start and early money, one or two types addressing sustainability (car payment, house payment etc.) and one or two types addressing lifestyle (life changing, big money). Sometimes they incorporate bonuses specifically for leadership and sometimes leadership is addressed within the previously mentioned segments. For the sake of simplicity in this “non-philosophical” discussion, a hybrid is a strategic mix of bonus types and those types fit in 3 earning levels:

  • First money
  • Quit your job money
  • Life changing, big money

In general, the actual payout of most competitive, lasting comp plans are somewhere between 40% and 45%. Their marketing material usually says something a little different but the majority of plans actually payout in that range. The question is, how do you divvy that 40-45% up? Viewed through the paradigm of supportability, simplicity is the name of the game. On all accounts—staffing, tech, legal, dissemination and duplication, marketing, time and money expenditures, etc.—the simpler the plan, the easier it will be to support.

The other thing to keep in mind is: plans mature over time. Your demographic will look different at launch than it will when you are doing a million a month in revenue. You need to give yourself room to grow. A lot of the complexities you see in other plans are not there for the purpose of being competitive. They were implemented somewhere along the way to solve some specific issue, either internally or in the field.

I used to start the discussion about compensation plans at the department level and look at how the plan affects each person. I would then pull all of that information together for the purpose of influencing comp plan discussions. Of course since this is startup, those departments are hypothetical and the experience of other companies is subject to interpretation and opinion. Along the way I’ve noticed there is one issue that affects everyone and touches everything concerning this subject: the level to which a company incorporates forced structure in their plan.

Rules, requirements, and structure define a comp plan; they are part of what makes this industry unique. They are put in place to drive specific behaviors in the field and they are utilized in varying degrees in each bonus type. They are all good things, but the “structure” I am referring to is the level of forced structure in the tree. Here are some examples of plans that are high-structure, or at least high-structure leaning:

  • Binary
  • Matrix
  • Coded and 2-, 3-, 4-ups

Low structure plans are plans with fewer walls. Again there are varying degrees of structure but here are some examples of plans that are generally considered low structure plans:

  • Retail
  • Most fast start bonuses
  • Unilevel
  • Stair step break away
  • Some party plans
  • Pools

Every situation is going to be different but what are some of the most common questions you need to answer to determine if you can support your comp plan?

  • Of course plan philosophy and how it relates to your culture.
  • What are the technical aspects (both programming and supporting the plan)?
  • What are the legal ramifications?
  • What about dissemination and duplicability?
  • What are the staffing needs?
  • Marketing costs?

Plan Philosophy

Culture is the name of the game in this industry. Along with people, product, events, lifestyle, etc., comp plan is a critical piece of the culture puzzle. We undoubtedly could fill volumes with discussions concerning our overall compensation plan philosophy. As it relates to the subject at hand, you first need to determine what you want your culture to be. For example, if your culture is going to center around your product with a focus on grass roots distributors and a long-term vision you will build a comp plan that fits those values.

If your focus is on lifestyle and you need to quickly attract some big leaders to make that happen, then you may use a variety of types and structures to attract those leaders; or you may want to land somewhere in the middle. As you make comp plan decisions as it relates to culture, remember one fact. The overwhelming number of companies that reach over 100 million in annual revenue have been relatively low structure plans, and—as far as I know—there is only one company with a high structured plan to claim to have reached 1 billion in annual revenue, which is Monavie (just food for thought).

Technology

Technology touches everything you do in this industry, and nothing more so than commissioning. It is also (in my experience) one of the most underestimated challenges in launching a company. We are used to using technology in our daily lives—technology which consistently does its job and give us relatively little to complain about. I am using half a dozen pieces of technology just to write this article.

The difference between the user experience with, for example Word and MLM commissioning software is with Word we have to operate within the rules of the software (we have to do what Bill tells us). The software doesn’t have to operate as defined by me. In other words, just because we can dream it doesn’t mean our MLM software inherently addresses it. This is custom programming. Even if you think you are just going to do something standard, it never ends up that way. You will customize your programs to some extent and nothing affects custom bonus programming as much as structure.

Programming and Supporting Low Structure Plans

Open commission types have been around for a long time and many of them are plug-and-play for the technology company or team programming them. For example: a unilevel hybrid uses a unilevel commission as the core of the plan. It then includes other commission types such as fast start, pools and matching bonuses that often times use qualifications from activities in the unilevel to determine participation and pay.

From a programming standpoint these plans do not have to take structure into account. They push qualification and dollars from where the order was placed up through the top of the tree and they make the calculation. It is pretty straightforward. Of course you can complicate the $%&%#$ out of it (as many of my clients have in the past) but you don’t have to. Much of the discussion in low structure plans is focused on customization related to rank advancement, compression decisions, and how the components of the plan relate to each other. Placement is generally not part of this discussion.

Programming and Supporting High-structure Plans

High-structure plans require a programmer to think just a little harder. Matrix plans for example are similar to a unilevel from the standpoint of payout. It starts at the transaction and pushes volume and qualifications up the tree to determine who gets paid and how much but they have to also deal with structure and placement. Those two words (structure and placement) encompass many more complications than you may think. Binaries are also structured plans. Even though it looks like a level commission on paper they are actually a pool commission so the program has to think a little harder.

Aside from structure it has to look at personal volume, group volume, and organizational volume qualities, but also things like leg volume ratios, business centers, and possibly cycling, flushing, breaking, and factoring. One of the latest additions to this concept is expandability. With that comes a new layer of qualifications and other rules. That being said (concerning commission payout in these plans), the tech guys know how to do this; in fact, much of it is plug and play. However, there are many more decisions to be made and requirements documents to write and fine tune.

From a programming standpoint, high structured plans start to become more challenging when we start talking about how people get in the tree and what to do if you need to move people. Let’s start with signup method:

Paper application

This is usually not too big of a deal because highly trained staff will enter the applications. Also, the company software is usually better suited to handle placement issues than the distributor back office, which is usually restricted to only placement based on the placement routine or plan rules. Distributor tools do not usually account for exceptions. That being said, any placement routines generally are implemented in the company software as well—if it doesn’t fit within the rules you might be out of luck without doing some programming.

Online application through distributor site or portal

There seem to be as many potential complications once you put it in the distributors’ court as there are distributors.

  • Is there a placement routine and are they forced to use it?
  • Does the application self-populate or do they need to research the spot?
  • Does it default but let them change it?
  • Is there graphic placement?
  • What happens if they get it wrong?
  • Is there a specific period of time where they can change their mind?
  • Can they change their mind?
  • How do moves work?
  • If you allow moves how does it affect each tree?
  • When does a move affect something other than just the sponsor placement tree?
  • How do you avoid creating loops?
  • What is a loop?

The list goes on but I think you get the point. It isn’t a matter of the distributor inputting their ID as enroller and then—if the sponsor is someone other than themselves—inputting the placement sponsor’s ID. It is much more complicated and the software has to address it. I will also add, if you get it wrong, it could break the bank cleaning it up. Programming is not cheap and distributors are not very forgiving.

How they get in the system is one thing; the rules, once they are there, is another. Moves are generally frowned upon in high-structure plans but they are also inevitable. Your software has to address that issue. It may simply be that your software allows changes in the raw data—as some do. My experience is: this is a terrible idea. You are much better off having actual move programs in place that incorporate the rules so that your staff is not corrupting the data. Even the most experienced bonus person will inevitably make a mistake concerning tree structure. There is just too much to account for.

Another issue in these plans is termination and inactivity. If having a hole in the tree creates a problem for the plan you need to program a solution. For example, a binary has a width restriction or 2 on your first level. If you terminate someone, you have (in essence) created a 3-wide front line to someone. Compression decisions affect “dead spot” issues as well—one way or another they need to be addressed.

In my opinion, coded bonuses are in a class of their own. Most of the challenges above apply depending on how it relates to the rest of your plan and they also add another level of programming complication. A coded bonus is where one distributor is programmatically tethered to another for the purpose of commissioning. That link between two distributors is not inherently difficult to program, but depending on how it relates to all of the issues above as well as all of the issues we don’t have time to include, it can be a difficult bonus type to program and operate.

We are just scratching the surface concerning the technical challenges as it relates to your comp plan and your ability to support it. Do not try to get your out-of-work cousin to program your comp plan! Even some of the most experienced programmers don’t always know what questions to ask. Outsource this challenge and pick a provider that has the depth and experience to ask all the questions and get it right.

Legal Issues

You are responsible for what your distributors say. That statement is true regardless of any specific law because your image is everything in this industry. If some regulatory body doesn’t like what your distributors are saying, all they have to do is launch a very public investigation and you’re done.

I’m familiar with the legal talking points concerning bonuses, but I am not a lawyer. I would refer you to MLMlaw.com and Spenser Reese for any questions you have concerning the legality of your plan. Legal is an important part of this discussion because many of the laws concerning bonus have to do with the structure of the plan and distributor placement. There are legal issues with both high and low structures, but in my experience one of the primary reasons for a closed structure is to make the claim that your upline is going to build it for you. That the system is going to make you money with the least amount of effort on your part possible. That claim is great for recruiting, but it generally doesn’t work that way. Especially in weak leg binaries. This lends itself to unrealistic (and often times illegal) earnings discussions.

No matter if it is open or closed the question is, can you teach a message that is consistently honest and in compliance with the laws? And, just as importantly, can you duplicate that in the field? If the message goes off-course do you have a compliance team that can: first of all, identify it; and second, rectify it? If your plan is to cover your ears and just keeping your fingers crossed, wishing for the best… well the result is probably going to be something other than what you are wishing for.

Dissemination and Duplication

The largest bonus requirements document I ever wrote was almost 30 pages long. The designer was an industry veteran, but I think he fell into the trap of trying to be everything to everyone. This thing had high-structure types, low structure types, volume traveling back and forth—being shared or even split between types. It had multiple placement routines and two separate coded bonuses. It was a mess. It was also a huge failure because he was the only one that could understand it. If you can’t disseminate the information deep into the field, and then if the distributors can’t easily commit it to memory, you will either have no growth or they will start making things up.

There is a strange fixation in the startup world with wanting to create a new commission type that will change the world. It’s a great ambition, but lends itself to over-complication and it doesn’t change anything in the field. You can only split the pie so many ways—it is still the same pie and the distributors want something they can sell. To that end, open structure plans are easier to teach and, in turn, easier to start the ball rolling on duplication. Structured plans always become about the structure. You talk less about product and more about positioning people with them, which is a tougher, more strategic discussion. For the grass roots distributor who is just trying to make a few hundred extra bucks, doing what it takes to fully understand the structure and support their small team may be the difference between success and failure.

Staffing

The wrong comp plan can exponentially increase your staffing needs and thus your payroll cost. In general, the actual payout of most competitive, lasting comp plans are somewhere between 40% and 45%. The marketing material usually says something a little different but the majority of plans actually payout in that range.

Your customer service department has to defend your choices on how you divvy that 40-45% up. I’ve done my time with the headphones taking those calls and it is a tough job! High-structure plans put limitations on distributors. They have great selling points but there is much less flexibility. If your team is constantly getting attacked because of limitations or any number of issues, it’s not going to be a very fun place to work. The customer service department looks and functions differently supporting those plans as opposed to, for example, more open plans. With additional rules comes the increased need for quality customer service people to handle money calls, which are usually loads of fun. I was working with a company that went from unilevel to fairly complex binary hybrid a few years back. The increased structure and rules caused them to have to almost double their customer service department.

You also need to take into account the marketing, design, sales staff, and event needed to support the field. Plan complexities are every bit as demanding on those departments as branding your product. How about your IT staff? Once your plan is programmed and tested, bonus accuracy becomes all about the data. How hard does your technical team have to work to validate and keep that data clean? Also: are they having to support any additional tech such as rule-specific placement routines and structure, move/terminate programs, Coded bonuses, distributor tools etc.

Of course as volume justifies it, you will probably develop a bonus department. Is that going to be one or two employees or is it going to take up a whole floor? The one thing that is for sure is this: starting an MLM company can be expensive. Simple plans are as successful as complex plans, depending on who is telling the story. From my perspective, the K.I.S.S. method makes a lot of sense.

Sales and Marketing

Marketing is often your second largest expense. The less you spend on technology, compliance, operations, staffing, etc., the more you can spend on marketing. The more money you spend on marketing, the bigger the “pie” gets. This is all common sense, but how efficiently are you allocating those marketing dollars? Are the distributors able to understand the plan and pitch it or do they have to schedule a time to get people online to see a presentation? If so, how many people do they lose because of the extra step and what does it cost in time and money to support that technology? Can you fit enough info to keep the conversation legal and in line on one page, or do you need an elaborate brochure to cover everything? What do your field meetings, web meetings, home meetings, conference calls, and events look like? How big is the team that supports these things and what print and tech tools need to be in place for the presentation to cross the threshold of duplicability?

What about retention? Retention usually belongs in a plan philosophy discussion; but as it relates to sales and marketing, if you have low retention then you are going to be doing many, many more meetings and events, which means more of everything else to support them. I know you have been told that retention is a result of product devotion. Although that is partially true it is every bit as much a result of your comp plan. Retention is actually a result of a well-developed culture, which includes all of it, but there is an undeniable correlation between highly supportable, low structure plans and longevity in our industry. There are of course many factors but this has to at least be part of the discussion.

Regardless of the plan type, the more you can streamline and simplify the message, the easier (and more cost effective) your life is going to be. As a rule, if you keep it simple—focus on behaviors and make the reward proportional to the behavior—these aspects will fall into place. I will also note, that if you have to spin anything in your plan, it will limit you greatly. People will figure it out. Start with an honest open foundation and focus on creating longevity.

 

If you have questions or comments for Brian, email him at: blittle@dsicat.com

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Brian Little

L. Brian Little has over 20 years of experience in the Direct Sales industry. Currently he serves as the President and Chief Executive Officer of...

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