The binary compensation plan is the newest of the three common plan types. When it arrived on the industry scene, this type of plan was the complete opposite approach to commissions than existing plans—the difference was night and day. Every other compensation plan up to that point had been built on the following two premises:
- Commissions are paid on a limited number of levels of a distributor’s downline, but on an unlimited amount of sales volume.
- All commissions for a given product order are paid in a single commission run.
In contrast, the binary plan is built on the following two opposite premises:
- Commissions are paid on an unlimited number of levels of a distributor’s downline, but on a limited amount of sales volume.
- Commissions for a given product order can be paid across several commission runs, and in fact, it’s impossible to know when all the commissions on a single order have been paid.
This represents quite a break from the traditional way of doing business. But this plan survived the test of time to become one of the dominant compensation plan types in the MLM industry.
How does a binary work?
A binary compensation plan uses a limited-width structure that restricts distributors to two first-level recruits, creating two downline “legs.” A leg is a portion of a distributor’s organization starting with one of his or her first-level distributors and encompassing that first-level distributor’s entire organization. Let’s look at Karen’s organization.
One leg is Karen’s strong leg (the leg with more volume, also known as her reference leg) and the other is her weak leg (the leg with less volume, also known as her pay leg). These labels aren’t permanent, they’re practical. If her weak leg grows and surpasses her strong leg in volume, it becomes her strong leg.
A binary compensation plan does not pay on levels like other plans, but on the sales volume of the weak leg. Karen is paid 10% on her weak leg, so if her two legs are close to each other in volume, she’s getting roughly 5% of her entire organization’s volume. With a binary plan, depth really doesn’t matter, because distributors are paid on their volume all the way to the bottom of the tree. What matters is the balance of sales volume between the legs.
- A distributor sponsors two people, creating two downline legs, and then builds a downline under each of those two legs.
- Some binaries allow distributors to have multiple business centers—usually three or seven.
- Traditionally, binaries pay their downline commissions once a week, however, some still pay monthly.
- Distributors must generate downline sales volume that is balanced between the two downline legs. When individuals reach specific levels of sales volume, they receive a commission check.
- Sales volume can be accumulated in one week or across several pay periods. In this respect, binary compensation plans are unique. With most plans, a distributor is paid on whatever volume they accumulate in one pay period. If they don’t accumulate enough to get paid, that money is simply lost—they will never get paid on it. With a binary, a distributor can accumulate volume for several pay periods. When they accumulate enough to get paid, they get paid—binary has that cumulative effect. For example: If a distributor is required to earn $500 in volume to get paid, but accumulates only $100 per pay period, then on the fifth pay period—Bingo! They will get paid.
The challenge with a binary plan is trying to keep both legs balanced. If you get $100,000 on one side and $10,000 on the other side, then you’re going to get paid on the $10,000. If you have $100,000 on one side and $99,000 on the other side, you’re going to get paid on the $99,000. However, today a popular variation of this plan allows the volume to be split 1/3-2/3.
Most binary plans pay a weekly pool commission. A distributor has two first-level distributors who must each generate an amount of sales volume. An amount of money is put aside in a pool and then is divided up among those who qualify.
A multi-center tree is a concept that allows a distributor to have more than one position in the downline tree. Having more than one business center means having more than one pay leg. And in some cases, it means getting paid twice on the same volume.
Multi-center trees are implemented in two ways:
- After distributors succeed in filling in their original matrix, they can have a new business center in the tree and build a new downline from that center.
- All of the business centers are created at the time the distributor is sponsored, and the distributor’s entire downline is placed under these multiple business centers.
If Karen gets three business centers and they’re created at the time of her enrollment, her second and third center go directly below her first center, so they constitute the tops of each of her first center’s legs. Here’s a visual representation of that, breaking it down by the payout for each business center.
In this example, Karen’s first center gets a 10% commission on all the volume under her third center. Her second center is the top of her reference leg, so her first center isn’t paid on it, but the second center itself gets 10% on the weak leg of the organization beneath it.
Her third center is also paid on its pay leg which constitutes half of her first center’s pay leg. In other words, she gets paid 10% on her third center’s pay leg, and another 10% on the same volume because it’s also in her first center’s pay leg.
The total payout looks like this:
Again, she’s paid on all her volume except that generated in her second center’s reference leg and she’s paid twice on her third center’s pay leg.
Hitting the Cap
A typical binary compensation plan would specify that if a distributor has at least $500 in volume on the weak leg, they would receive 10% of their weak leg in commission. However, one of the rules of almost all binaries is that they have a payout cap of somewhere between 40 and 50%. This means that if a company adds up all of its commission payments and the total exceeds the payout cap, everyone’s payment will be reduced proportionally to keep the total payout below this cap. This scenario is called hitting the cap. All binaries hit the cap, so it’s is important to be familiar with this feature.
If a company:
- Has a 50% payout cap to limit payout to no more than 50% of sales
- Makes $1 million in sales
It should pay out $550,000 in commissions, which is 10% over the set cap. Instead of doing that, the company will reduce everyone’s commissions by 10% in order to stay below the payout cap. Distributors get only 90 cents on every dollar.
Strengths of Binaries
- The initial selling feature of the binary compensation plan was that it was much easier to understand and maintain qualifications for than other plans of the day. What could be simpler? A distributor sponsors two people and builds those two legs. If those legs generate business, the distributor receives commissions. If they generate a lot of business, the distributor makes a lot of money! Of course, when something sounds too good to be true, it usually is, and binary plans turned out to be more complex than they seemed.
- A major selling point is that volume never moves out of a distributor’s payline no matter how many levels deep their genealogy goes.
- The binary does an excellent job of paying mid-range commissions. This is its strength and probably the reason it has survived. On the other hand, it does not do well on very low-end commissions or high-end commissions.
- The binary compensation plan’s behavior is very well understood.
Weaknesses of Binaries
- Many of the original binaries were built by promising distributors that their upline would build their downline. This created a welfare mentality.
- Most binaries have a maximum upper limit on earnings—the payout cap. Some distributors don’t realize this. However, binaries may be combined with other commission types to fix this capped earnings problem.
- Binary pays well but the structure aspects of the plan can be difficult to deal with.
Distributors seem to either love binary compensation plans or hate them. These plans inherently reward salespeople and sales leaders better than almost any other type of plan. They pay well, but the structure can be challenging to deal with. It is a big plus that distributors no longer have to evenly balance the volume of the two legs. The success of a binary plan can be maximized by combining it with other types of commissions.