MLM Compensation Plans

The MLM compensation plan is the strategy used by network marketing companies that determines how much to pay their distributors on each downline level. These compensation plans govern how much a company pays its distributors when they sell products. Since distributors can recruit a sales force in a network marketing company, commissions are paid on multiple levels. These levels represent the depth of the distributor's sales organization.

A distributor who participates in an MLM has two ways of earning:

1.Direct Sales Volume (DSV) - selling products or services directly to end consumers. They usually make a commission on these sales.
2.Indirect Sales Volume (ISV) - recruiting other members into the company and selling to end consumers. They would earn commission on the sales made by these recruits.

Direct sales can be a very profitable source of revenue for anyone involved in multi-level marketing since there are no middlemen between the distributor and the actual customer.

Indirect sales can offer massive profits. Since distributors can recruit a sales force in a network marketing company, Commissions are paid on multiple levels. There may be hundreds or even thousands of people on each level, generating sales from which the sponsoring distributor benefits.

MLM Compensation Simplified

Multi-level marketing (MLM) compensation programs are often much too complicated. However, the foundation of these plans is quite simple:

The company decides the commission percentage they wish to pay their distributors.
The company then decides how much to pay on each level of the compensation plan.

Some payment plans are more complicated than others, but these two factors make up the basis of all MLM compensation plans.

Commission Percentage

The most fundamental aspect of paying commissions to a sales force is calculating a fixed percentage that motivates salespeople to keep selling and ensures company profitability.

Before calculating any commission percentages, most companies deduct the cost of goods sold (COGS), marketing expenses, and overhead. This is done to determine the exact rate that can be paid as a commission.

For example, retail commissions are typically calculated as a percent of net sales. In other words, if the company sells products for $10 each and it costs them $6 (60%) to produce those products, they could only pay a commission on the remaining $3 (30%) of net profit.

Of course, this would result in no profit for the company, so they would choose a percentage less than 30%.

Level Commissions

Paying distributors commissions on multiple levels is at the heart of any MLM company's compensation plan. These levels occur because all distributors can recruit their own sales teams. These levels of distributors that another distributor has recruited are called downline.

For Example:

Distributor A recruits distributor B - 1st. Level
Distributor B recruits distributor C - 2nd. Level
Distributor C recruits distributor D - 3rd. Level
Etc...

MLM companies pay the distributor a percentage of the volume generated in a certain number of downline levels. For example, let's say a company pays commission on three levels.

If John recruits Bob, and Bob recruits Mike, John is on level 1, Bob is on level 2, and Mike is on level 3. As a result, John would receive commissions from Bob's sales and his own. Likewise, John and Bob receive commissions from Mike's sales and their own.

Income from multiple levels can be very profitable since a distributor can make commissions from many different marketers.

The company decides what percentage to pay on each level and how many levels to pay them. Many multi-level marketing compensation plans are used today; however, there is no one-size-fits-all approach. Each MLM company has specific strategies behind its decision-making process when designing a pay plan.

This article will simplify the pay plans, explore the strategies used, and detail each type of compensation program that MLM companies typically adopt.

MLM companies have a sales force that they need to pay. These companies construct a strategy that:

ensures a profit for the company,
keeps their salesforce happy,
and rewards top reps.

MLM companies build their pay plans using similar strategies. Each company has a different percentage they are willing to pay their salespeople, which affects the factors listed above.

Company Profitability

To remain in business, all companies must make a profit. If a company pays too much in commissions, it will not remain viable. Therefore, formulating an effective compensation plan is essential to the companies survival.

For example, let's say a product that sells for $100 costs $35 to make. After paying executives, expenses, and taxes, the company is left with a $25 wholesale profit. The maximum they would be able to pay in commissions is 25%

$100 sale - $75 expenses = $25 (or 25% of the $100 sales)

If the company pays out the $25 in commissions, they would have no profit left. Therefore the company would not pay a 25% commission if they want to stay in business.

This company may only wish to pay a 5% to %20 percent commission on the revenue of products sold.

A company must build the perfect pay plan that ensures profitability to maximize profits. However, this payment plan may not provide reps with enough motivation to sell products.

A Happy Salesforce

MLM Companies cannot afford to lose their salespeople. Generally, the more money a distributor makes, the longer they will remain with a company. Therefore, companies must structure their compensation plan so that both the company and the distributors can be profitable and happy.

Salesforce happiness is achieved by:

paying them enough to make it worth their time and effort,
ensuring they can make money, and
creating a dedicated sales force.

There's a delicate balance to be struck between keeping a happy sales staff and staying in business. Creating a committed sales force is also essential for continuing the business. The more reps that join, the more money they make. However, if commissions are too low, the representatives may not make enough money to justify their time and effort spent selling products.

Therefore, companies must use various strategies to achieve both company and rep profitability.

Rewarding Top Performers

The top reps in most MLM companies are highly lucrative to the company. As a result, some companies believe that they must greatly reward their top performers to get them excited about selling and recruiting. The belief is that top performers must be paid more to ensure their continued participation and commitment to the company.

Many payment plans are designed to reward their top salespeople. Some have implemented strategies to move money to their top salespeople's as well as having a compensation plan that ensures the company makes a profit.

These strategies include:

sales commission percentages that increase with sales volume,
complicated payment plans designed to create "breakage",
bonus programs, and
awards.

Most of these strategies are fair - more effort deserves more compensation, but some try to hide this from new recruits. They use the term "breakage" to signify parts of the pay plan that disqualifies or lowers commission payment amounts to distributors not achieving hidden sales goals.

Examples of these strategies include:

Paying bonuses for hitting specific sales goals within a time frame,
using a point system instead of dollars to calculate commissions,
or implementing differential commissions.

This will be discussed in more detail in this article's Payment Plan Examples section.

The final strategy is the use of bonuses as a form of compensation for top earners. Most companies using this strategy offer an incentive program based on reaching specific levels in the organization. For example, distributors who reach different milestones, such as recruiting a certain number of new people, are often given bonuses.

To choose a compensation plan, the company often decides the minimum and maximum amounts to pay distributors on each level and then implements the compensation plan that best achieves this. Of course, some payment plans are more complicated than others. Still, these strategies often make up the basis of MLM compensation plans that wish to generously pay their top earners.

These strategies have several advantages:

it ensures that the top earners will be more profitable, so they ignore other opportunities,
it allows for higher commissions at levels where reps are not likely to engage in other business ventures,
it incentivizes distributors to recruit more people into their downline, which helps the company grow.

However, these plans have serious disadvantages:

they can be complicated and difficult for new distributors to understand,
they create widespread distrust among the salesforce that the company is only interested in paying the top distributors, and
the plan may be unsustainable because it is ineffective at bringing in and keeping new distributors.

Some companies are finding these plans unsustainable for their distributors since they are paying out more money to top-performing representatives than to the bulk of the sales force. They may also find that these plans do nothing to discourage representatives from looking elsewhere for opportunities.

They may also find that complicated plans encourage representatives to recruit others in their downline and discourage them from selling products themselves. This happens because they can make more money by sponsoring and recruiting than by selling the product. Thus, this form of compensation plan could contribute to a downline organization with many people with little product sales.

Other MLM companies design their base commissions to pay everyone generously to motivate more people to remain distributors for the opportunity.

Base Commission Percentages

Most MLM companies use a base commission percentage as the foundation payment for all levels in the pay plan. For example, Suppose a company wants to pay out 30% on sales made. In that case, they may decide to just pay a base commission of 15% for the person making the sale and distribute the rest on multiple levels. In this manner, companies can offer a higher overall commission to top-performing sellers and still maintain generosity at other levels. For example, instead of giving a 15% commission on the sale and distributing the rest, they may just decide to pay 25%.

Bonus Programs

Most companies add bonus programs that kick in when reps hit certain performance milestones or sell specific products. For example, when a representative hits a specific sales volume, they may receive a bonus of $1 each time they make a sale.

Programs like this are generous to the top performers and provide an additional motivator for less successful levels to work harder.

Awards

Many companies award trophies or other forms of recognition for their top reps based on their sales volume, dollars they generate, or products sold. Tying success to awards creates an additional incentive for distributors to sell more products and recruit others into the business.

Rewarding all Levels

All levels of an MLM business usually are not equally paid. Therefore, MLM companies must ensure that each level has some motivation to work hard and contribute towards company growth. This is so they can maintain a successful, growing company. If reps are not motivated to sell products or recruit more people, there will be no increase in the sales force, so growth will stagnate.

Payments On Each Level

Paying commissions on multiple levels is the distinguishing characteristic of MLM companies. For more information, read the MLM meaning article on this site.

The strategy of how much to pay distributors on each level can result in various outcomes. However, the primary principle is simple: different payment strategies create different types of sales forces with varying degrees of motivation to sell.

Referring to the illustration used in this site's About Network Marketing section, we can gain insight into how this works.

The various levels of distributors may receive different commission rates. For example, on a sale of $100 and a commission of 20%, the company has $20 to spread around. The distributor making the sale might make $10, leaving $10 for the remaining four.

Suppose Distributor D makes the sale, her direct sponsor. In that case, Distributor C might earn $5, and Distributor A and B might earn $2.50 each. What kind of response might we receive from each of these distributors? Distributor D received a 10% commission for making the sale. Is that enough compensation on a $100 sale?

Distributor C is responsible for training and assisting D. Are they pleased with a 5% commission? Distributor A has built a sales team. Are they happy with the 2.5% commission?

These are some of the questions that need to be answered by the MLM company formulating the commission plan.

Let's flip it to reward the leaders. Distributor D earns $10, C earns $5, A and B earn $2.50 in commissions. Is the distributor making the sale pleased with a 2.5% commission?

The challenge for the MLM company is to generously pay the person making the sale, pay each sponsor, and generously pay the top performers.

To ensure motivation across all levels, MLM companies typically utilize at least one of four types of pay plans: uni-level, matrix, breakaway, and binary compensation plans.

MLM Compensation Plan Examples

All multi-level marketers should understand the various types of pay structures and how these affect their income now and in the future. Likewise, potential distributors should understand the type of payment plan the company uses before joining any MLM company.

When compared to each other, they all have different strengths and weaknesses. Still, one may be more suited for one individual over another.

Uni-level Compensation Plan

Because of its simplicity of use and comprehension by many people, uni-level compensation plans have been the standard payment approach for MLM companies for a long time.

How It Works

The uni-level commission plan pays the distributor a percentage of the sales generated in a certain number of downline levels. A specified percentage of the order total is paid to their upline when someone places an order. For example, a uni-level plan that pays on three levels may pay a 10% commission on the first level, a 4% commission on the second level, and 2% on the third level.

Example

This means that the person making a sale of $100.00 would receive $10.00. In addition, their sponsoring distributor would make $4.00, and their sponsor would earn $2.00 in commissions.

In this example, the company pays out a total commission of $16.00 (16%) on this sale. This would be the minimum amount of commission payment the company has established.

Ranks

Many companies will have a ranking system as part of their uni-level plan that pays out even more. Your rank determines the number of levels you get paid on, but the percentage that you're paid is usually the same on each level.

This means that a distributor can make commissions from the sales of more people. If your company's uni-level plan pays five levels deep for your rank, then the distributor would receive commissions from:

their own sales (first level),
from their sponsored distributor (second level),
and their sponsored distributor (third level),
and so on to the fifth level.

Suppose the example above is expanded where levels 4 and 5 are paid a 2% commission. In that case, the company is paying a total of 20% in commissions.

Bonuses

Uni-level plans often supplement their baseline commissions with other bonuses. These are usually achieved by offering percentage bonuses on upsells or direct sales, volume/threshold bonuses when they reach a specific sales benchmark, and so on.

Uni-level plans are also attractive to companies because they allow more commissions to be paid to their salesforce. In addition, higher compensation can attract a significant number of distributors selling the companies products.

Stacking Problems

Companies have to account for stacking. Stacking occurs when a person recruits themselves, a family member, or a dummy company. For example:

A uni-level plan that pays on five levels - 10% on the first level, 4% on the second level, and 2% on the third through the fifth levels.
A distributor puts their wife on the second, daughter on the third, and son on the fourth level.
A sale is made by the son (fourth level).
The distributor's family would earn 18% of the total 20% commission the company pays.

The father's sponsor deserves the 4% commission, but they would only make the 2% commission because of stacking.

Companies that don't deal with stacking will inevitably suffer at some point because of rumors, backstabbing, and a lack of trust between distributors and the people they sponsor.

Companies can combat stacking by establishing rules of who can be sponsored. In addition, severe penalties such as removal from the company's sales force should be enforced to eliminate the temptation to stack.

It's vital that everyone in a uni-level plan receive their fair share of commissions so each person can be successful.

The Pros

Very easy to explain to new distributors.
It provides a backbone of stability; distributors know exactly how much they'll make on any sale.
The plan can pay commissions to many people for each sale made.

The Cons

Distributors might leave to join companies that pay more to leaders.
Distributors might try to sponsor (stack) family members to make more money.

Uni-level plans are excellent because of their simplicity, stability, and ease of use.

So what do you think? Was this information important to you? Did you learn something new about the uni-level commission structure? If so, please leave your comments below.

Summary

The uni-level plan is one of the most popular plans in the industry. Many top MLM companies use it as their primary compensation plan for this reason. You can see how easy it is to understand, and that's why they love using this type of commission structure.

Matrix Compensation Plan

A matrix consists of multiple levels within the plan, where each level has a pre-defined width and depth. Designated commission percentages are paid on each level.

How It Works

The company decides how much to pay on every level. Of course, specific strategies behind these decisions can differ from one company to another. Still, for everyone in the matrix to succeed, the plan needs to provide everyone with multiple ways to earn commissions.

There are several approaches companies can take, but the most common strategies include different percentage payouts on each level. This can result in distributors earning a profit quickly, fast sales growth, and eventual significant commission earnings.

Example

To the right is an illustration of a 3 X 3 matrix. As you can see, the distributor on top has 3 distributors on their first level and 9 on their second.

This matrix structure can be expanded to any width and depth that the company desires.

For example, a 3 X 5 forced matrix would start with a distributor with a possible 3 recruits on their first level. These recruits might have been sponsored by the distributor or any of their upline.

The distributor can then have 9 recruits on their second level, 27 on their third, and so on. Thus, if the matrix is filled, the distributor would have a total of 363 recruits in their organization.

3 + 9 + 27 + 81 + 243 = 363

This means that the distributor can be paid commissions on the sales of all 363 recruits.

As you might calculate, the number of recruits in a distributor's organization can grow quite large with certain types of matrixes. For example, add another level to the example above, and you have a 3 X 6 forced matrix with a potential of 1,092 recruits.

Commission Percentages

Each level in a matrix can pay the same commission percentage or pay a different rate on each level. A company can decide to pay 10% on level 1, 5% on level 2, and 2% on each additional level. For a 100 dollar sale, the distributor would make $10 if the sale was on their first level, $5 if the sale was on their second, and $2 if the sale was on the third thru the sixth level.

MLM companies can make these matrixes as wide and deep as they wish, as long as they don't go broke by making the matrix too deep or pay too high of percentages.

For example, let's say a company unwisely decides to make a 3 X 5 matrix that pays a generous 25% commission on each level. On a $100 sale, our broke company would pay $25 on all 5 levels, equalling a $125 payout!

Spillover

Matrix compensation plans are designed to create spillover. Spillover occurs when a level fills up, and your upline's recruit must be placed on the vacant level beneath you. As a result, your team did not recruit them, one of your uplines did, and you are compensated for your upline's efforts.

Spillover is attractive for people recruited by a very active distributor. They are hoping that their sponsor's recruiting activities will benefit them.

Strategies

Since there is a limited number of recruits in your organization, the company needs to implement strategies that ensure ongoing sales occur within your matrix. These strategies include:

Placing recruit's sales (sometimes called business centers) in the matrix instead of people.
Using the matrix plan only with products that produce recurring sales.
Remove inactive distributors from the matrix.
Create incentives to sell the company's products to distributors inside the matrix.

A company can create a strong matrix plan that creates teamwork and large profits by implementing solid strategies.

The Pros

Matrix plans are created to reward distributors for building an organization. If handled properly, the program will benefit both the company and the distributor.
The main benefits of a matrix plan can include increased sales, increased commissions, and spillover commissions.

The Cons

Personally recruited leaders may reside in positions at the bottom in a distributors matrix, so the sponsor might not get rewarded for their efforts.
Some people don't like the idea of constant recruiting to build their matrix.
Distributors may become impatient with how long it takes to fill their matrix.

Summary

The main purpose of MLM Compensation Plans is to incentivize distributors to recruit new members into their downline network while also incentivizing them to sell the company's products. Matrix plans can be very effective doing this because they allow you to build an organization efficiently.

Your Comments

Do you use a matrix plan as part of your MLM compensation plan? What benefits have you seen from using a matrix?

What disadvantages do you see with this type of compensation plan?

Let us know by commenting at the bottom of this article!

Breakaway Compensation Plan

The oldest of the four basic compensation plan types is the breakaway compensation plan. It's still the most popular compensation plan among MLM companies using a party sales strategy.

How It Works

A downline member becomes a breakaway distributor by achieving a certain rank established by the company. Thus, the "breakaway" distributor is the linchpin of the system.

The Breakaway Compensation plan gets a bit complicated.

An MLM company using the Breakaway creates two types of compensation payment plans. One is for sales leaders, and the other is for everybody else. It is designed so that when a specific sales volume or total recruits are achieved by a distributor, they become a sales leader and are qualified for additional payments.

Base Compensation Structure

Distributors earn a commission on their team's sales volume. This is usually a percentage on a determined number of levels of their downline. This is referred to as a level commission.

Some companies pay using what's called a stairstep differential commission. This payment plan is comprised of progressing steps that have defined rank requirements.

Stairstep Differential

Distributors earn a commission on their team's sales volume. This is usually a percentage on a determined number of downline levels. This is referred to as a level commission.

Some companies pay using what's called a stairstep differential commission. This payment plan is comprised of progressing steps that have defined rank requirements.

-Stairstep

As distributors meet the requirements to step up, they earn increased commission percentages on their sales.

-Differential

The distributor's commission is decreased by the percentage that has already been taken by qualifying distributors below them. Ouch.

Sales Leaders Compensation

Once the sales leader (breakaway distributor) achieves a certain rank, they go into a different compensation plan. This plan breaks down the pay structure into groups headed by a sales leader.

Example

Let's say we have a distributor named Ada who has become a sales leader. When she breaks away, all her team members that haven't achieved the breakaway ranking are still in her downline. So Ada now earns an increased commission for all these team members.

Suppose one of her team members achieves the breakaway ranking. In that case, that distributor's group leaves Ada's pay structure, and she no longer earns commissions from their sales. Typically, as long as Ada maintains the breakaway rank, her commission percentage increases until it maxes out from the percentage cap set by the MLM company for that rank.

In many cases, the breakaway distributors don't lose their original rank commission even though they have moved into the higher commission plan. So then, the distributor would also earn a percentage of their team's sales volume, as stated in the Base Compensation Structure section above.

The top-performing distributors are also typically paid bonuses and awards to ensure their ongoing commitment.

The Pros

This pay plan motivates the distributor to make sales and move up in rank.
The breakaway plan encourages personal sponsoring versus waiting for your downline to recruit.
It ensures that distributors will receive commissions on their team's sales volume even if they have not broken away.
In many cases, the breakaway distributor doesn't lose their original rank commission even though they have moved into the higher commission plan. So then, the distributor would also earn a percentage of their team's sales volume.
The plan is considered fair because distributors earn a percentage of sales from their team's sales volume. The rate is determined by rank, and sales leaders deserve to make more.

The Cons

The breakaway compensation plan is one of the most complicated payment structures. Some MLM companies create variations of the program that make it extremely difficult to understand.
Differential commissions are a pain. So if the distributor's recruit does well, the distributor's commission is lowered? Really?
The sales leader must constantly replace the lost volume when their downline distributors break away. In other words, residual income can fluctuate drastically.
Some critics consider this compensation plan unfair to the new distributor because the plan divides the commission payments into two levels - the higher level for the top sales producers and a lower one for everyone else.

Summary

Most of the company's total commission percentage is distributed in the breakaway group, but there usually are some incentives in the lower ranks.

Binary Compensation Plan

The Binary Pay Plan has caught the attention of many network marketing businesses and is growing in popularity. The binary plan consists of two legs (or sides) under every distributor. One leg is known as the Strong Leg, while the second is known as the Weak Leg. Every person on your team will be under one of those two sides.

Imagine if you were offered a sales position with the following conditions:

You can build a sales team and earn a percentage of their sales.
There will only be two salespeople directly under you, and the remainder of your sales team will be under them.
You will only be paid on the sales from the least producing of the two downlines under you.
If 90% of the sales are made on one leg and 10% on the other, you will only get a commission on 10% of total revenue.

Would you take the job?

Welcome to the MLM binary compensation plan.

How It Works

Under a binary plan, each rep is paid 49% (or less) of the total sales produced by the entire team. Thus, if one of the two distributor's teams doesn't sell much product, it can drastically hurt the distributor's income.

In a Binary MLM Plan formula, a commission will be calculated based on whichever side has the least total amount of sales. This will benefit the company since they won't have to pay out commissions on most of its sales.

The actual way it works is that the leg with the least sales volume gets calculated, and then a commission is paid out based on that calculation. This means everyone on your team gets paid based on their side with the smallest sales volume.

Example

To the right is an illustration of a binary structure. In this example, the distributor is at the top and there are three levels beneath. The left leg has five recruits and the right has six recruits.

Most of the time, the right leg would produce the most sales, therefore the distributor would be paid commissions from the sales on the left leg.

In a Binary MLM Plan, a percentage is usually calculated as follows: If one side has $1,000 sales and the other has $500 sales. The payout is based on whichever side has the least amount of volume, so the commission paid out is based on the $500 sales.

If the company tells you they pay a commission of 10%, you will earn $50 ($500 * 10% = $50) on a total sales volume of $1,500. This equals a 3.33% commission on all sales your team has brought in.

If the company advertises a 50% commission, it would equal a 16.65% commission on the total team sales.

In the example above, the best scenario is to make the sales on your two sides as equal as possible. For instance, if one side has $749 in sales and the other has $751, you would earn $74.90 in commissions on a total of $1,500 in team sales.

This actually equals a 4.99% commission on total team sales.

Why MLM Companies Adopt the Binary Structure

Hello? So the company can make lots of money.

This pay plan has become very popular among MLM companies as it offers a low-risk and low-cost structure. It also frees up a lot of money to provide big bonuses to the top distributors.

Why Distributors Join Companies With a Binary Structure

Since the company is paying a meager commission to most of their salesforce, they can afford to offer big bonuses to those distributors whose teams produce the most sales.

The Pros

The products that the company offers are often of high quality because the company is profiting so much.
Distributors are motivated to keep building the weak leg in order to make a much in commission as possible. This helps the existing team members in that particular leg.
The company may distribute some of the big profits its earning strategically to benefit distributors.
It can also be less time-consuming and can be more rewarding for those who would like to benefit from the MLM world but don't want to spend time building a large downline and recruiting people.

The Cons

You are constantly having to put effort into both sides of the plan which means half of your activities don't earn income.
Also, it is very difficult to build a team where everyone on each side has an equal amount of sales.

Summary

A binary MLM compensation plan is less likely to give big weekly paychecks to new distributors than other MLM compensation plans. This is because a binary has two legs; the company calculates commissions based on whichever side brings in the least sales volume.