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.
Kenny: Hey, everybody. Kenny here. The episode you’re about to hear went a little longer than we like to normally, so we’ve broken this up into a two-part episode. Here’s part one:
Hello and welcome to the MLM.com podcast. I’m your host, Kenny Rawlins, and today we’re joined by Mitch Stowell who’s the Vice President of Commission Consulting at InfoTrax Systems. Hey Mitch, how’s it going?
Mitch: Good, Kenny. How you doing?
Kenny: Good, good. Luckily, I’m joined by Mitch here in the office so we don’t have to deal with talking over the phone. Today we’re going to be talking about compensation plans and specifically how and when to make changes to your compensation plan. I think it’d be good for the listeners to get a little bit of background on our compensation plan philosophy. We’re huge proponents of analytics based compensation. Mitch why don’t you give people the overview of what that means to us?
Mitch: Well basically that’s taking your plan and making sure—to a lowest level of it—that you’re rewarding the right behaviors so that you’re incentivizing those people that go out and do whatever behaviors you want them to within your plan.
Kenny: One of my favorite examples of this—over the years that I’ve stuck with, that I think helps people understand where we’re coming from—is several years ago we had someone that consulted with us. They had basically two main leaders and one of the leaders was a big proponent of pack sales (of enrolling people through pack sales) and one of the leaders was not. They both were pushing on the owner to either incentivize or disincentivize pack sales and so the owner came to us and said “What do you guys think of this?” Our response always is (or we try to have it always be) “It’s not what we think about it. Let’s see what the data says.” We did an analysis and people who joined the company through a pack purchase actually had a lower retention rate—a much lower retention rate—and a lower lifetime purchase rate and a lower rank advancement rate. So, through the data you could see that making a shift in the comp plan to increase incentives for pack purchasing was probably going to be counterproductive. I think that’s a good example of what you’re talking about. What behaviors are you incentivizing and are those productive for your field? When you’re talking to people what should they be looking at to monitor their comp plan?
Mitch: Well that’s the science and the art part of compensation plans. Frequently when companies come to us they will either be under the mind of “We know we need to change our compensation plan but we don’t know where.” Or they’ll be under the mind that “We think this is where we want to change it and this is what we want to do.” Similar to your pack thing that you were talking about. They say “this is what we want to do” but when we get down into the data and looking at the data it really isn’t the direction to go. A good example of those that don’t know where to change… we had a binary company come to us and say “Our binary is playing and the points are dropping and we’re paying out of whack a lot and we can’t afford to do this.” Well everything in their plan was under their cap for their binary and so even though they were a 10% a weak leg, that 10% was starting to go down because everything was under the cap. When we started doing the analysis it became very clear that the leadership side of their bonus had some rules in it that allowed people to earn it in different ways and earn it to a higher degree than other people. Their leadership plan was the piece of the plan that was going out of whack. Once we changed some rules and even capped that plan separately from everything else, that was all we had to do with it. It really is getting down to see where the problem is and analyzing that part of it, getting down to making sure that it’s rewarding the right behaviors and rewarding the right people. You can have a plan that’s still rewarding the right behaviors but is not rewarding the right people. All of those things are kind of a combination of what we look at.
Kenny: Yeah. Like you said, a lot of times it seems like people will come in with an idea to change the comp plan without even knowing what it is they’re hoping to accomplish. It’s either because a leader pitched an idea or because they look out in the marketplace and say “hey company X is really a hot name right now, let’s take something in their comp plan that we hear is good and incorporate it into ours.” Sometimes that can be counterproductive just because of the way their comp plan rules work. You and I have discussed that sometimes there are companies that are successful in spite of their comp plan. So it’s interesting when people want to adopt that comp plan versus maybe something else that’s making them successful. One of the things we’ve talked about is that a company should have a mindset of wanting to keep their plan pretty stable. What’s your philosophy on when a comp plan should be changed? If a comp plan should be changed, what should a company’s goal be?
Mitch: Well one of the things that I always tell companies is you can’t build a comp plan that won’t be changed. All comp plans have to change. By growth, by whatever happens along the way, changes will need to happen. But you also need to continue to operate under the mindset that “I’m not going to change.” I say that because one of the things that can take a company down is a change in the compensation plan. Even a minor change can sometimes be enough that it can just put distributors over the edge that that they don’t want to deal with it. So moving on to your question of what to do, it really is coming down and saying “alright when do we change and what do we look at?” It comes down to are the people being rewarded? If you’ve got leaders and you’ve got distributors complaining about your plan, saying “I’m not earning enough,” or “I’m doing too much work to earn and what I’m earning,” and so on, that’s a good sign [that it’s time to change]. That’s typically one of the first signs that come into it. Second is that, as a company, you notice that it’s paying out of whack, that you’ve got people that are earning more than what they should or you can just see that the plan as a whole is not paying right. It’s paying more than what we anticipated. Those are the main things that you’re going to get as signs that it’s time, that we need to do something. Now there is one other one that you throw in there and that would be that if you just feel like that you need to do something to either be competitive or to tweak it in a way that it’s going to drive other behaviors and steer it in a little bit different direction. The most common one is that we want to get more growth.
Kenny: One of the things that’s important, like you say, is the culture that you build around your comp plan. If you don’t have that mindset where people can trust the comp plan then that’s where it can be deflating and even counterproductive to make changes. I think that’s where a lot of field communication and relationship has to go in. But there are going to be times that you have to change to meet market needs. When you’re working with companies how do you help them identify where the best changes are to make?
Mitch: Well sometimes it’s very obvious and we can just point it out immediately and say “look this is where your problem is.”
Kenny: And when you say, “very obvious,” you mean within the data?
Mitch: Within the data or even just within the description. I recently met with a company… he came in and he started off by describing his entire plan and he said, “Now within these commission types I feel that we’re losing people because once they don’t earn this commission type then they start dropping out.” Right away that’s a clue. Either your rules are too strong or the way that it’s being paid is all wrong. So that’s a clue. But the best way to really understand what to do is to do a complete data analysis of what’s going on. How is your organization growing? Looking at the different volumes, organization volumes, and how people are earning, what their earnings are as a percent of organization volume, looking at within the ranks how are those being paid? And what commission types are they earning from? Looking at your people in the organization and making sure that you don’t have people that really are making bank and earning a lot just because they happened to bring in the one person that happened to go out and build everything. So you’re rewarding the guy that brought them in as opposed to the guy that’s doing all the work. It’s really digging down into the data and looking at those kind of things that can help you decide where you need to change and what you need to change.
Kenny: So as a quick aside to the path that we’re going on, when talking to people you do get a little bit of pushback on that point. One of the things that I’ve pointed out to people is sometimes you get lottery winners in a comp plan and it really shouldn’t—in my mind—incentivize that. Then you get people who talk about the dream of MLM as that residual income. How do you, when you’re talking to people, how do you balance that? The dream of residual income versus over-rewarding somebody who hasn’t really built a business but just brought one person in who built a business.
Mitch: Well for the most part some of the different compensation plans (between a unilevel, a binary, and a breakaway) will help with that. I mean the binary is one that you can have somebody kind of get the lottery and get the right position and earn based on what’s there even though they may not have built the organization. But the other two plans aren’t that way. Breakaway and unilevel plans don’t allow that as much. You’ve got to be building in those plans right to [earn]. So, part of that is controlled by [the plan type]. But on the other hand, there can be other commission types that you can throw in there that will allow people to do that. Now to the residual that you’re talking about… Forever—since the beginning of network marketing—it’s always been “build your organization and you can live off your residuals” and that’s true however over the years the thing that we have learned working with several of the larger companies—the legacy companies—that have come in and said, “We’ve got these people that have been around forever and they’re making big checks and they’re not working anymore. What do we do?” And so, it’s that type of thing that you’ve got to go in then and say “How do we change this, still leaving in the potential of earning the residual but putting in other rules and making some changes so that they can’t just sit back and do nothing and still earn these large checks.”
Kenny: Yeah and then that echoes my thoughts on it. What’s fair is living by what you said—living by the rules that you set. If you set it up properly, a person who brings in a big leader can still earn a substantial amount of money, but there’s nothing that says, “Because they’re higher in the tree their check should be higher.” There’s some measure of that where you do want to reward them for bringing in that person but you don’t want to disproportionally reward them. There’s companies that I’ve worked with where it can actually engender a lot of bitterness because this person knows the person that’s lower in the tree, knows that they’re the one doing the work, and if they know the guy above them is making more money off of their work, it can be frustrating especially if they’re not out there building an organization. The residual element is important but that doesn’t mean that there’s not some sort of maintenance. If your organization totally dries up, there’s nothing to get residuals on. So, like you say, building some healthy expectations of what a leader needs to do ongoing is something that’s very important. I don’t think it flies in the face of the principles that the industry’s built on of being able to build those residual earnings but just laying the groundwork for what the expectations are, I think is important.
Mitch: Yeah it really is—coming back to that same concept—it’s difficult sometimes for companies just because they don’t think that far ahead, plus sometimes they just don’t want to have that part of the plan in there. But they don’t think ahead far enough to say, “Okay what happens when people get up to these levels? And what should we be doing with those type of rules?” That is another time that companies do need to look at “we need to make some changes in what’s going on here.”
Kenny: When your payout is getting just proportionate to the people who are generating the business versus the people who have gone into retirement mode. Like I said, especially the leaders, I think they hear us talking about that and get a little wary or get a little hesitant. I’m not a proponent of taking away earnings that somebody has made or taking away the earning potential, but just of clearly laying out what the expectations are. There’s no reason you can’t go into retirement mode, but you need to know what that means to your check. It can drive a reduction if you’re not maintaining certain requirements or just if you’re letting your organization either get away from you in depth or even drying up in total volume. That’s just math that you’re not gonna have the same level of earnings.
Mitch: To that point, I had a CEO of a company sit down with me one time and he says, “My leaders are really pushing me to change the compensation plan.” This is one of those situations of “when do we change it and what do we look at?” And looking at the leaders—how much they were earning—they were making a good income. So, it wasn’t like they weren’t earning what they should, they were making a decent income, but they were pushing on the CEO to say, “Let’s change the compensation plan.” And they wanted it of course changed in their favor. He said, “What would you tell them?” I said, “Well I would sit down with them and I would say ‘if you want to make more money go out and build another leg.’” That’s one of the things that leaders get into. They feel like “I’ve built it as much as I need to and want to and I’m not gonna go working it again from that perspective.” Yet if they really wanted more money, all they really need to do is go out and start building new legs and they could increase their income tremendously just by doing that.
Kenny: Yeah. Even within a binary, most binaries have some sort of matching bonus or something that’s paid off of the enrollment tree and people don’t realize that depth becomes a factor. So, you get people who look at their organization as a whole—in the OV number—and say, “Hey this is growing but maybe it’s growing at a rate faster than my earnings.” A lot of that can be driven off of depth and I think one of the things that is important and one of the things I’ve become more a proponent of is companies making sure that they’re putting meaningful metrics in front of their distributors so that they can see that. I remember working with a company a few years ago where the CEO emailed me several times from the same leader—month in and month out. She would hit him up and say, “Hey my OV went up by X percent and my check”—in her case, was actually just flat, it was totally flat. I broke down her organization for him and said, “If you look at all of the growth in her organization, it’s coming way outside of the pay levels of the plan. It was actually coming about 15 levels deep so that means that she’s 15 people (at least) removed from the people purchasing. That’s not a question for me to answer, but there is a question of how much influence does a person have when you’re 15 people removed from that new volume? That’s where I think meaningful metrics come in. For so long we’ve had PV, group volume, org volume, and then (if you get into a binary) weak side/strong side volume, but I think you’re starting to see the industry get a little bit more sophisticated in the metrics that we’re displaying so that people get a better feel for what’s expected of them and what their organization is actually like. I’m one who argues, there comes a point where the volume gets so deep that any leader is not having a meaningful influence on that. I have talked with leaders who disagree with me. I’m willing to debate what point that is but I think there is a point where the depth is just… you’ve got other people who are influencing that growth.
Mitch: I agree with you 100% on that. That’s really where I think that a lot of companies fail in their training and in their working with people. What that says is “I’ve got a leader that’s got a large organization and he may be going around doing meetings and traveling into his organizations and everything, but he may not be working so much with the people down fifteen levels or ten levels or even the leaders in between in training them: “look you need to be working with these people.” As you say, it increases his organization volume but after that volume gets down there so far, even in a binary (because binaries pay like you say weak side/strong side) it’s still important to understand that difference in the volume. The binary is gonna get capped and you’re not going to get everything that’s in your organization. In a unilevel you are not going to get that. Of course, dynamic compression helps a lot with that, but you’re still going to be blocked out after so many levels. It is important to understand that. Back to the binary though, some of the experience that I’ve had with binary companies is they don’t understand how important the enroller side of all of that is. To start showing them the difference in organizations—particularly if they’ve got a matching piece to it like you mentioned—showing them the difference in somebody that has really worked with their enrolling, the difference that it makes in that matching check that they make on top of the binary bonus, compared to somebody else that hasn’t focused on that—they focused on the depth in the binary.
Kenny: Given the great information that Mitch Stowell brought to this podcast, we’ve broken it up across two episodes. This concludes part one. Thanks for joining us. You’ll hear part two in two weeks. We want to give a special thanks to Mitch for his time, and Jana Bangerter and Adam Holdaway for production support. As always, I’m your host, Kenny Rawlins.