Pool commissions are excellent for targeting specific behaviors. They are the most flexible of all commissions allowing a company to target any group in the organization. There are two major variations on this commission type. In the equal-shares pool, everyone who qualifies gets an equal share of the pool. In the proportional-shares pool, everyone who qualifies earns the proportion that their downline contributed to the overall value of the pool. A pool commission is a good way to keep the company’s payout from becoming too large, but still create some innovative commissionable opportunities.
How pool commissions work
Let’s say for example that a company has a million dollars in sales volume and sets up a 1% equal shares pool bonus targeting 3 star distributors who generate $2,000 in personal sales volume. The total pool size is $10,000, and if 50 people qualify, those 50 people will receive checks of $200 each. You can see how this can make an immediate impact on those distributors.
Calculating a pool commission is done in three parts:
1. Determine the value of the pool. For example a company may allocate 1% of total sales to a pool, so the value of the pool is 1% of all sales.
2. Determine the number of shares; each distributor earns shares based on the commission rules. For example I might receive one share for each personal customer who purchased product this month.
3. Determine the value of each share. The company now takes the total value of the pool and divides it by the total shares awarded by the commission plan. For example if the pool value is $10,000 and 5,000 shares were awarded, each share is worth $2 so if a distributor had 5 shares, they would receive a commission of $10.
What pools do well
Pool commissions can be good for short-term or targeted incentives where the incentive is high. Because of the flexibility, companies can use pool commissions to enhance front-end, mid-level, or high end compensation. It’s almost never the primary commission because distributors cannot calculate their payout until the commission period has ended and the pool has been defined. Because of this, if the qualifications for the pool are improperly designed, distributors’ earnings can fluctuate wildly depending on who happened to qualify that month.
Pool bonuses should not be used for a large portion of a compensation plan because they are too variable and too unpredictable. Think of them as the “dessert” of a plan; they should never be the main course.
What pools are used for
If a company wants to encourage recruiting, it can define a proportional-shares pool that includes anyone who sponsors a defined number of people. Or if the company is worried that its top distributors are maxing out their earnings too quickly, it can set up a pool targeting distributors with large downline sales.
The best pools tend to be relatively small portion of the compensation plan, and tend to be focused on rewarding a very specific activity. Three common reasons pool commissions are used are:
• To fund incentives like car programs and other targeted or special purpose incentives.
• To give an added incentive to reach an intermediate rank in the compensation plan. For example, if a company wants to encourage distributors to achieve the rank of 3 star and to earn at least $400 per month, a pool commission designed to pay $100 to all qualified 3 star distributors helps to ensure that the earnings goals are met and gives an added incentive to achieve the rank.
• To add additional earning capabilities to a plan in which dream builders will hit an earnings ceiling. For example, a company might divide 1% of sales among all the 9 star distributors in a proportional-shares pool based on each 9 star’s organizational sales volume. This pool can encourage the dream builders to continue to build their organization even though most of their downline growth may be beyond their payline.
Rewards specific activities
Pool bonuses are an excellent way of rewarding specific activities with limited payout. They are also immediate. If a company is trying to encourage a certain behavior in its distributors, a pool bonus can make a real difference.
Encourages top distributors
A pool is a good way of encouraging distributors to continue to build even after reaching the top rank.
Value is unknown
Unless a company is careful, distributors won’t know the value of their shares until the commission run for the pool. If a company can’t tell its distributors whether they will earn $10 or $1,000, what is the motivation for the distributors to qualify?
If the pool isn’t properly designed, shares of the pool can devalue as the company grows. With poorly designed qualifications, if the company becomes wildly successful, too many people may qualify for the pool. At this point, each person’s share is so minimal that it no longer has value.
In my experience, industry professionals either love pools or hate them. No one seems to be in the middle. This is an indication of the importance of “doing them right.” The other important issue to remember about pool commissions is not to center too much of a company’s compensation plan dollars around them. Use pools only as finishing touch commissions. Additionally, companies must do enough modeling with pools so that they have a general idea what the range of the pool will be. They must ensure (using rules) that the pool stays within the defined range or it loses its efficacy as a commission type.
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.