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Is it time to change your compensation plan? (Part 2)

Podcast episode 18

Article by: Mitch Stowell
Kenny Rawlins
December 18, 2017

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Mitch Stowell, Vice President of Commission Consulting at InfoTrax Systems, joins us for this two part episode to discuss the process of fine tuning compensation plans over time. How do you know when it’s time to change your commissions? What do you change? Mitch and Kenny talk over these critical decisions, discussing hard data analysis, commission types, distributor retention, residual income, and build strategy.

Full Transcript

Kenny: Hello and welcome to the MLM.com podcast. I’m your host, Kenny Rawlins. This episode is a conclusion of our previous episode with Mitch Stowell. In order to have coherency in the content, we join in progress our last episode:

In any compensation plan, there are certain behaviors that are incentivized and disincentivized. If the company doesn’t do a good job of training on what behaviors they want and training on what behaviors are going to be rewarded and keeping the behaviors consistent in the comp plan, you can get comp plans where on the front end they reward driving depth but then on the back end you get totally bit because you weren’t thinking that far ahead or nobody told you “Hey don’t just worry about the binary, also worry about the enroller tree so that you can maximize your matching bonus.” This is one of the things that is just so crucial. This goes back to maybe one of the higher points that I think is important to make. People need to really think through not just “what is our comp plan?” but “what is our philosophy? what are the behaviors that matter to us? and why are we picking the elements of the comp plan that we are?” You and I have talked about this a lot so I know we both get this question of “what’s the best comp plan?” Well the best comp plan is the comp plan that’s clear and fair and that you buy in to how it rewards people and that you can be passionate in training it. A binary is great if you’re a person who understands a binary, who understands how to teach a binary, who can explain to people the benefits of different build strategies. A unilevel is great if you can do the same for that. So how do you help people walk through that when you’re working with somebody brand new that just wants the comp plan de jour?

Mitch: Well the main thing is: getting down to the culture is the biggest part of it. What do you want your culture for that to be? As an example, a binary is a good plan to use if you want to drive rapid growth and the reason is the way distributors build it. They build their outside legs. It’s the only plan that has a built-in fear of loss because distributors will go out and say, “we’re building our power legs. Get in here now because all that volume will be underneath you.” But they fail to train, “well you get paid on your weak leg and so you’ve got to be building that leg even though you’re in the power leg.” So, they’ve got to know and train all of that build strategy—what you talked about. From the unilevel or breakaway perspective, the same thing happens.

 

I just recently met with someone on their comp plan and we were talking about how important training is. the comment was “We’ve trained our leaders. We’ve worked with that. We’ve done that.” But he had just told me that people down below really aren’t working and don’t know what to do with it. So, I told him “what you need to do is bypass your leaders and go down to these others and start working with the other people in there.” That’s important to understand too. You can’t just put training out there and say, “Here it is. Do it.” You’ve got to have the networking side in there where the leaders are training them. What is the build strategy? What’s the best way to get to where you’re going to? Companies will frequently have “Here’s how we get to this point. How do we get to silver? How do we get to gold?” and we’ll have training to get to those pieces but even then, that comes back to analysis.

One of the reports that we do is what we call a forward retention report and we look at a particular month of everyone that could have had volume or had earnings or just purchased product, and then we go forward six months and we break out everybody based on what their earnings were from zero to ten- or fifty-thousand dollars—whatever it is—and we go forward for six months and look how many of them purchased every month. One of the things that we’ve learned from all of that is that a company’s sweet spot is usually not where they think their sweet spot is.

This company had this training that they did of “go for gold” and their whole focus was to get the leaders to train people to get people in and to do these certain things to get to gold. But when we did the analysis with a forward retention report, we found that the sweet spot was about three- to five-hundred dollars—and that actually becomes a sweet spot for the majority of companies. But we found that if they could get people to that level—earning three-hundred dollars a month—that the retention was anywhere from 85 to the low 90 percents for those six months. So, we looked at changing the build strategy. It was no longer “go for gold” because we found that if we can get people to bronze that was where they started earning the three-hundred-dollar range. So, we knew that we could keep retention higher and we focused on that and not only did we start getting better retention from within that company, but the leaders’ checks start going up too because of that.

Kenny: Yeah. That’s the thing where I do think it’s important for people to build a foundational set of metrics that they’re watching. That’s where I think reaching out to people with a trained eye or collaborating within the industry becomes helpful because we do need to refine the metrics that we’re looking at. We need to help be clear on what constitutes success and then help build comp plans that give the industry a good name and give people the best chance of succeeding. I think there’s a lot that can be done within that when we’re more transparent with the metrics and the definitions of success. I’d be curious what your recommendation would be to a company that’s maybe not considering a comp plan change right now—not seriously considering one. How do you monitor the health of your comp plan?

Mitch: The best way is really looking at the breakdown of how each of your ranks are earning and how much they’re earning. Then within that, look at their organization volumes within each one of them and see the percentage of organization volume that their earnings are. that’s the best way to look at it. To see if you’ve got good healthy payout—good consistent payout—watch the retention, see what’s going on with it.

 

Not only looking at retention like what I was talking about with the forward retention report but retention by class. On average, we look to see in the industry that if we take a class—a group of people that came in in a specific month—how many of those a year later are still active in what they’re doing? On average, it’s around 35%. We’re seeing some low, some higher, but typically it’s right around that level of where they’re at a year down the road with a lot of companies.

At the same time, you can have companies—in fact this is another area that I think companies, particularly successful companies, overlook—and they get to be so successful that they have so much that is coming through that they don’t worry about the attrition and yet if they could turn around and work on that attrition they could move that level several percent. That could be very lucrative to them if they would just work on that side of it. One company actually focused on that at one time and went back and hired an independent company to call their people that had left—that had ordered for a while and then stopped—and they asked them “Why did you quit ordering? What happened?” The highest percentage answer was “I stopped getting contact from my upline, from my leaders.” And just that little change can you know help tremendously. as a company looks at what’s going on to decide whether they need to change, that’s probably the biggest area. Are we paying healthy? And what’s going on with our attrition in company?

Kenny: Yeah and I think one of the problems that I see, and I’m sure you’ve seen this as well, is people don’t start looking at those things until they start to sense there’s a problem. If you can build up a baseline of knowledge it helps you do a lot of things. It helps you monitor more than just your comp plan. Comp plans need to, in my view, be more closely tied to your marketing and customer service efforts. And you can see “hey are there certain promotions that we run throughout the year that either improve or hurt our retention?” It can be surprising. The marketing department can come up with… If you’ve got a membership fee right, reducing the membership fee may spike your enrollments for a month but it may hurt your overall retention and it may hurt the way those people feel about your company because maybe they would have been better off being preferred customers or being just retail customers. So, it can help you judge a lot what’s going on in your business if you build up these baseline metrics that you can monitor.

Mitch: And the other question is: monitor them how much? I just recently did an analysis for a company that I did the same analysis three years ago and so I was able to compare the two. They came thinking they had a really bad problem and they needed to change. But once I did the analysis and showed the comparison between what we had changed three years ago and where they are now, they really didn’t have a problem. It was just something happened within a month. So, that’s the other gotcha that companies need to look at. Something may spike or may happen just in one month and that’s not the time to have a knee-jerk reaction to make a change. You need to watch and see what happens at least one more month to see what’s going on with it—and probably three months unless it is so drastic that you just can’t hang with it. But for the most part, you want to make sure what’s causing that when you see that happen and get in and do that. But as far as a regular analysis, as you say, if you get the metrics and really monitor them monthly, you’re going to be looking at catching some of those spikes or some of those changes even before they happen potentially. And if they do happen you typically can see where it is and what’s going on with it.

 

Kenny: To your point of not having knee-jerk reactions, you start to get a little bit better of an idea of what the patterns in your business are, and these hold true in all businesses. Weight loss companies talk about the fact that the holidays are not their best time. Spring is more of their time or after the holidays as people are getting ready for the summer. Versus somebody who’s in a different line—whether it’s jewelry or clothing or nutraceuticals—maybe coming into the holidays is a big time. So, if you’re doing weight loss and you see things start to decline in September, October, November, you might not have a problem.

I was just doing an analysis where a company wanted to build better projections on volume and the flow of volume and I had a much higher correlation of being correct if you look at previous years that same month versus like a rolling month of average volume flow. Each month takes on its own kind of personality. By watching the data, month in and month out, you have a much better chance of separating the noise out versus real issues.

I think that is one of the problems that people have is they say “oh well our retention this month was horrible” or “our signups are down this month” and they start to get a knee-jerk reaction which can then cause a chain reaction of other problems because now you’re changing something that wasn’t broken, you’ve got people who are frustrated with the change. One of the things that we’ve gotten better at handling over the years is more precision. Rather than hacking away with the chainsaw it’s more a fine art of cutting away with a scalpel.

So, I think we’ll get close to wrapping up here, but I’m just wondering if you have any other thoughts for our listeners of what they should be watching and how they should treat their comp plan.

Mitch: You brought up a good point that ties in to this really good. Particularly party plans are notorious for saying “the j months are the bad months.” But the one thing that you’ve got to look at with that as far as analysis goes, is “what happens in those low months?” and “what happens to our people? In other words, if you’ve got those waves and rolling going on, you can have people that are going to qualify at their TITLE rank in the good months but then they don’t in the bad months. Is there something that we can do to change that so that we can even it out over time? The other side that we haven’t discussed is “what do you do in making a change?” and “after you make the change how do you know is it working?” You really need to model to get in to see “is it rewarding the right people? are we getting to the point of the change that we wanted to?”

Kenny: So, somebody does the research, they do the analysis, they think they have a change that they want to make. One of the things, like you said, that we are a proponent of is modeling that change. What should they be looking for in that?

Mitch: Well as I said the one thing you want to do is… you’ve got basically a hypothesis that “if we make this change this is what’s going to happen. This is who it’s going to reward. This is the change that it’s going to have in our payout.” So, you model it to make sure that it does do that. The second thing that you always look at is you can’t make a change to the compensation plan without having winners and losers. You’ve got to make sure who your winners and losers are. Are we having the right winners? There are times that you may need to cut or make a change that may cut your leaders pay just a little bit as it pushes some of that pay down lower. But that in turn will increase the leaders’ checks because it keeps people around longer and rewards the lower ranks. Then it helps doing that overall. But once you do the model, then make sure that you’ve got your leaders on board with whatever change you’re going to make. Whether it’s going to affect them as a winner or a loser or whatever it is, they’ve got to be on board because as you put this out, they’re the ones that really are going to be supporting the change that you’ve made. It’s that process that you analyze, decide what needs to be changed, model it to make sure that it’s going to achieve the goal that you want it to, and then, last, get with your leaders and make sure that they’re on board with it. And you may want to bring them… maybe you’ve got an advisory board or something that you may want to bring them in earlier on so that they’re a part of the change. That helps sometimes too.

Kenny: Yeah and that is a fine line to walk because it can muddy the waters. Most people are gonna see through the lens of “how does this affect me?” and not necessarily “is this the right move for the company?” So that can be that can be difficult. But I do think it is important that before you go rolling this out, you help get them on board and especially get some advocates. You see this in all walks of life: people who are unhappy tend to be more outspoken than the people who are happy in a lot of cases. So, you do need to get some advocates because you are going to have some dissenting voices as well. You can’t then end your monitoring. Really after a change, you got to take your monitoring into hyperdrive to make sure you’re getting the desired results.

Mitch: Yeah and that’s why I say that the best way to do it is to monitor monthly and make sure where it’s at. That’s the best way. If you can’t do monthly then look to six months or look to a year. But at least have some point where you’re stopping to do an analysis again—where you’re looking to say “okay how is my plan changing.”

Kenny: I completely agree with that. And it’s less cumbersome than it used to be to monitor this stuff. In the end, the reward is so dramatic, in my mind, I passionately believe that people should be closely monitoring this stuff at least monthly. Like you say, that can sometimes—especially for smaller companies—be a little bit of a burden. But it’s such an important thing to have a pulse on the behaviors of your field.

Mitch: And “pulse” is a good word because, as I said, you may not… the change may happen (and probably will happen) subtley and if you can watch those subtle changes along the way, and if something does change say “okay why is that?” and maybe catch it right then to say “now we know what’s causing this. Let’s watch it.” And that’s why I think monthly is the best way. Even though it just may be the same report, same report and look the same all along. That’s okay too because it’s just that one spot where you start getting a tweak or a blip that you go alright “what happened?” So that’s why I think monthly is important.

Kenny: This gets my mind going because there’s so much more you can go into. You really ought to be looking at the company as a whole but then also look at your different leaders’ organizations. You can get different behaviors within different organizations. You can save yourself some embarrassment if you don’t end up bringing someone on stage and really singing their praises and then finding out that, hey, actually the behaviors within their organization are counterproductive. They might look a little sexy because they’re driving a lot of growth but the retention is not there. There’s a lot and I’m sure…

Mitch: But even to that point, you can turn it the other way too. If you’ve got an organization that is growing and really doing better than some of the other organizations, look to see what they’re doing and analyze that part of it so that you can use it as a training tool to turn around and help your other organizations. It works both ways. That can be beneficial to it you as a company.

Kenny: Yeah, well Mitch I think we’re gonna have to end it here, but it sounds like we need to have you back on sooner than later to talk about some more of the ways that we can help companies reward the right behavior and monitor their comp plan in a way that’s meaningful. Do you have any closing words of wisdom for our listeners?

Mitch: I think just the main thing is what we said: analyze! That’s probably the best thing that you can do with your compensation plan. And don’t make knee-jerk reactions because that can cause you more damage than even the damage that you were feeling before you made the change.

Kenny: Absolutely. Well, we appreciate your time. Thank you very much.

Mitch: Thank you.

Kenny: That concludes today’s episode. We want to give a special thanks to Mitch Stowell for his time and expertise. We also want to thank Adam Holdaway and Jana Bangerter for production support. As always, I’m your host, Kenny Rawlins, and we hope you’ll join us next time.

 

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The MLM.com Podcast, How to Compensate Distributors in Direct Sales

Kenny Rawlins

Kenny Rawlins has been fortunate enough to have been around the network marketing industry his entire life and has experienced its power...

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