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What’s a differential commission?

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Article by: Mark Rawlins | Founder & CEO, InfoTrax
March 28, 2016

Differential commissions focus earnings based on a specific distributor behavior. Where level commissions are designed to stabilize earnings and spread the wealth, differential commissions are designed to maximize commissions to those who are performing the activity the company chooses to reward.

How differential commissions work

In a differential commission, each rank qualifies for a different percentage of the commissionable volume and then receives that percentage minus the percentage that has already been taken by qualifying distributors below them in the tree. So, if you qualify for 10% of the total differential commission, you’ll get 10% if no one beneath you qualifies at all, 5% if someone below you qualifies for 5%, and 0% if someone below you qualifies for 10% or more.

commission 1

In the chart above we can see an example of ranks and what they qualify for in a differential. In this example we can see that a rank 4 distributor gets 5% if the commission comes to them by way of a rank 3 distributor.

The concept of a differential commission can be difficult to understand. Let’s think about the total commission—meaning all of the money that commission will pay on one sale—as a pie. Let’s say that the pie is cut into six pieces. It’s traveling upline, and as it goes up, each distributor it passes qualifies (based on rank) to take certain pieces of the pie, if they’re still there. So rank 1 distributors can take piece 1, rank 2 distributors can take pieces 1 and 2, rank 3 distributors can take pieces 1–3, and so on.

The pie arrives at the nearest rank 1 distributor, and that distributor takes the first piece. The pie then arrives at the nearest rank 2 distributor and that distributor takes the second piece. However, if there is no rank 1 distributor between the customer and the rank 2 distributor, that distributor gets both the first and second piece.

Here’s an illustration of how a differential might pay out.

differential-commission-illustrated

• The customer generates the volume.

• The first upline distributor is at rank 1—she qualifies for piece 1 and the whole pie is still there—so she gets 1 piece.

• The second upline distributor is at rank 3—he qualifies for pieces 1, 2, & 3, but piece 1 has already been taken—so he gets 2 pieces.

• The third upline distributor is at rank 6—she qualifies for the whole pie, but half of it has already been taken—so she gets 3 pieces.

If the next distributor above our rank 6 was also rank 6, he wouldn’t get any of the differential commission even though he qualifies for it, because there is none left to pay.

Pros

Pays the sales people

Differential commissions are a good way to make sure that salespeople get paid enough to be motivated to work with consumers and new distributors.

Targets specific activity

It’s self-adjusting, in that if distributors become more involved and start building the business appropriately, the commissions automatically start to migrate to them. This allows the cream to rise to the top. The distributors are in charge of their own destinies. They know in advance what’s required, and they always get the reward if they perform the predefined tasks.

Resistant to stacking

Differential commissions are not susceptible to stacking, meaning that even if an organization stacks, it doesn’t take payout away from the upline. This commission is harder to manipulate, and distributors must build appropriately in order to earn commissions.

Cons

One person can take all the “pie”

Counter to the stable earnings base created by a level commission where everyone gets an equal slice of each pie, with differential commissions all of the pie can be eaten before it gets to me. If I have someone in my downline that is equal to or at a higher rank than I am, they will qualify for more pieces of the pie and I will never get any.

Volatile payout

You cannot build an entire compensation plan around differential commissions. Companies need to add other commission families to build a stable earnings base.

Complex

It’s the most difficult to understand of all the families. Even though it’s been in use for many years by some of the most successful companies, few can calculate a differential commission with accuracy.

Examples of level commissions

Stairstep differential

For many years, the most popular member of this commission family has been the stairstep. It is designed to pay the salespeople for the time they must spend to take care of their customers. Stairstep bonuses typically pay between 0-25%.

When distributors join a company they are on the lowest “step.” As they meet the requirements to climb the steps, they earn increasing percentages on their personal and group volume. For example, at rank 4, a distributor might earn 15% on their own sales, 5% on the sales of any rank 3, 10% on any rank 2, and 15% on any rank 1.

Stepped infinity differential

The second major member of the differential family is the stepped infinity bonus. In this structure, it’s in theory possible for distributors to be paid on their entire organization (in other words, “to infinity”). The key difference between stepped infinity and stairstep commissions is the amount of downline volume required to qualify and the percentage paid for each.

It is important to note, that someone in their downline who is eligible for the same percentage of commission will “block” them from that point down. This commission is more complex, but it rewards distributors who build wider.

Summary

Differential commissions have proven to be valuable components for a long-term stable and successful network marketing business. This family falls in and out of favor but has weathered the test of time.

This article is an adapted excerpt from Mark Rawlins’ book From Commission Plan to Compensation Strategy. Give it a read if you want even more information about commissions and how they come together in compensation plans.

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Mark Rawlins | Founder & CEO, InfoTrax

With a career managing MLM/network marketing companies that spans more than 30 years, Mark Rawlins is recognized as one of the pioneers and...

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