Understanding MLM Compensation Plans
1995 - 2007 By: DORIS WOOD
In Multi-Level (Network) Marketing, Distributors (independent contractors) earn their income (retail and wholesale profits, called commissions and bonus) through a compensation (sometime erroneously called marketing) plan based on their abilities and results. Marketing is how we sell; compensation is how we are paid for that sale. There are generally two parts to the compensation, commission and bonus. The commission is the amount earned when the Distributor, who has purchased the product at wholesale from her/his company, sells the product at retail. Bonus is the amount(s) paid on downline sales. There is normally more than one type of bonus.
It is wise to remember that a compensation plan should be developed after taking into consideration many factors. Under no circumstances should a plan be copied from ‘’a company that is really doing great’’ or by trying to write one from this article, which is for explanation of the types of plans only. In the case of using someone else’s successful plan, you need to have been there from the beginning of that plan to see why it works.
Many components go into making up a plan and circumstances change with time. For instance, back in 1932, when MLM first began, and for another 20 years, the vast majority of companies developed their compensation plans without the benefit of computers. For those companies that started back before every business had a computer, and there are still a few around, it probably would cause a major shake up (as well as the loss of many dollars) if these companies were to make any major change in their program. Yet, it is doubtful if they would create the exact same program today.
Some factors to consider when considering the type of plan you will use…
- Direct sales (party plan) or MLM
- Type of product
- Consumable, not consumable
- Product or service (a service is the product)
- The product mix
- Cost to consumer ratio
- Corporate goals (going public or sell the
company within 3 years)
- Postal laws
- Ease of sales
- Internet Based
- National or International
- Room for incentives like travel and cars
- Ease for Distributors to get others involved.
- Types of recognition for Distributors
- Monthly maintenance
- Ease of introducing new products
All should be considered when structuring a compensation plan. Many of those same questions should also be considered when deciding to become a Distributor for a company. Look over the plan carefully. Remember there is a lot more to a company than just the compensation plan that should be taken into consideration.
This article concentrates on the types of plans used by most Multi-Level companies. Except, of course, for those who use a hybrid or a mixture of several plans. Although both Direct Sales and Multi Level use similar programs, they would put their emphasis on different areas.
In all plans, the following almost always remains constant.
- The Distributor is given a discount off the suggested retail price that becomes known as the wholesale cost or personal purchase volume (PPV) and is considered the commission.
- Distributor (A) sponsors (B) who is placed on his/her (A’s) first level (can change in a matrix and in a Binary). When B sponsors (C) on their first level, this constitutes A’s second level and when C sponsors his/her first level it becomes A’s third level and B’s second, etc. This group constitutes a leg for A. When A sponsors a second person on their 1st level it begins the start of the second leg, third person, 3rd leg, etc. All of the people in all of the legs are called A’s downline. All of those same people are in A’s sponsor’s downline because A is the first level of his sponsor and begins one leg.
- When a company has a varied product line that doesn’t have the same amount of mark up, the company may establish a bonus value (BV) for the product. The Distributor is paid his bonus on either BV or PV. Watch this. It can make a difference in what you think you’ll make and in many cases is absolutely necessary for the company to introduce new products and compete in the industry...
- The total sales of each person’s legs (downline) are called GPV (Group Purchase Volume or GBV (Group Bonus Value) and it is on this amount (which can also include personal sales) that the bonus or override is based.
* The amount of compensation paid on the sales of a Distributor depends on the position of the sponsor and the sponsored person in the organization.
* All moneys are (must be) paid on the sales, never on recruiting.
- Although a Distributor is paid on x number of levels in many plans (example six), in reality, when the Distributor makes a purchase his upline, x number of levels (example 6 levels), makes a bonus on the amount of his purchase
- Most plans offer a discount of 25/30% off retail and then pay out a total of 40% to
60% of wholesale.
* Most plans require a certain amount of personal purchase volume (the Distributor should have personally sold some of that or more) per month to collect bonus.
* Most plans pay bonus on the wholesale amount not retail.
* Taxes are paid on product according to the state in which the product is sold. No commission is paid on the taxes or handling charges, such as shipping.
There are basically five types of compensation plans used in Multi-Lever (Network) Marketing, with many variations of each. There is probably no one plan that is perfect or right for everyone at every time. What may be the best plan for you today could change due to regulations, your experience in the industry and/or the type of product, even new technology. And, it’s those variations that can make the difference. Most successful companies review their compensation plan on a yearly basis with a competent consultant to make minor changes as needed so they do not have to make major changes and disrupt and sometimes loose their sales force.
Let’s take a look at the 5 different types of plans in their most basis forms without the
“toots and whistles.”
- Stair-Step Break-A-Way,
- Uni Level,
- Australian and
The Stair Step Break-A-Way is probably the best known and most often used of the five basic different programs. It was the first type used and once it was declared legal because of Amway fighting a great legal battle for it, it got copied more and more. Most of the copycats are no longer around cause they didn’t take the important things into consideration.
It calls for unlimited first level personal sponsoring on the front end and limited depth (levels) on the back end. All of this is dependent upon the amount the company can afford to pay out and how they want to pay it. The Stair Step Break A Way is called by many different names
- Conventional, Amway, Management, etc. and has a great many variations. Different names were given to appear to have a different approach. Even the graphic depicting the program is sometimes drawn differently to give it a new look.
There are always at least two parts to a stair step.
1. The ‘’front half’’ or “front end” (or stair step) is the sales plan. Compensation rises at each different level (step), with the highest compensation at the top step. The goal is to reach the top of the stair step through different qualifications. Some qualifications are fulfilled by personal (retailing) sales; others by group (depth) sales, as well as personal sponsoring requirements and group sponsoring, while some require all. The steps usually have different names to show that the person has reached a certain achievement level.
Depending on the type of product (service is considered product) being sold, as well as other factors, achievement sales levels can be reached by volume accumulation over time, which can be a month or several months. Some plans even give years. Encouraging high purchase volume to get to the top quickly is considered front loading and is a “no no” with the industry and regulators.
In traditional marketing the wholesaler gets the full wholesale profit but is required to make large minimum purchases. In MLM the wholesale profit is usually broken into several segments (the levels) according to the volume of purchase. The Distributor can earn according to her/his efforts.
The first half usually goes something like this illustration. (The figure on top of the line represents the volume discount or the bonus. The figure below the line represents the group purchase volume (GPV) or group bonus volume (GBV) it takes to get the bonus (rebate) on your downline sales. Remember these are for illustration only. Not to be used for a real program.
A Distributor becomes a Manager (first step) when her/his personal volume or legs (group) reach $300. S/he then earns 5% on the amount personally purchased and on the people purchases in the legs that have not reached the $300. When the group reaches $600 s/he becomes a Supervisor and earns 10% on personal volume and all those who have not reached $300. And earns 5% on those that have reached $300, but not yet $600. As $1200 in volume is reached, s/he becomes a Senior Supervisor and now receives 15% on personal sales volume and all those who have not reached $300. And earns 10% on those that have reached $300, but not yet $600 and 5% on those that have reached $600, but not yet $1200. ETC. Up to 25% and $5000.
Once a person reaches the top there is usually a monthly minimum group volume requirement (you’ll understand why) to maintain that position. By continuing to build, by retailing and sponsoring new people, they continue to earn the difference between their bonus and the person climbing the stairs. Although the percentage on the individual climbing the stairs is gradually less, the dollar amount is much greater since earnings are derived on that persons group volume. Today, most companies have a “lock in” where the Distributor will always claim the title but earn the bonus on the amount of sales generated in her/his organization (leg, group).
The stair step program doesn’t stop rewarding one for their efforts once they have reached the top step and someone they have sponsored also reaches the highest level of discount/rebate. In MLM with the stair step there is the incentive to go beyond this first half:
The second half, the back half (back end), or break-a-way, is the managing half. Here is where one gets paid based on their management and training abilities, plus their consistency (remember the group volume requirement). They continue to be paid on the front end as before, plus they are paid on the sales volume of those legs in their organization who have reached the same top bonus (step) ... who break-a-way, taking their organization with them.
The back half, which looks like the Uni-Level (explained later) but definitely isn’t, is where a person who works can achieve stability and financial independence with a residual income. This is accomplished by working with their organization and helping those who are success oriented build large organizations of their own. When a break a way (usually requires personally sponsored or being on the first level for first break a way) occurs, a percentage is earned on the break a ways group purchase volume. When the 1st level break a way has a break- a-way (could be second generation not necessarily level) they earn and you earn. When that second generation has a break-a-way (your third) all earn, etc., down as many generations (or levels) as the plan can afford to pay.
Remember that there are many variations. Compression plays a big part of a Stair Step program and there are several different definitions for compression. One must know what one means for it to work. It is not discussed in this article. Qualifications need to be determined as to when certain (and what amount of) percentages are paid. How hard (levels) or easy (generations) do those break a ways need to be?
Although this plan is the oldest and has gone through fire (Amway) many feel that it is too difficult to understand, it can lend itself to inventory loading (called front end loading) and in some instances there can be quite high volume maintenance requirements. Variations of the ‘’Stair Step’’ have been used for over fifty years. My prediction, it will be around for the next
The ‘’Uni-Level’’ plan also has a good track record. Although, as with the stair step plan and any other plan, there have been successes during the last twenty five years, it is not necessarily the result of the compensation plan. There have also been many failures, again not necessarily the result of the compensation plan.
As with any type of business it takes more than one factor to make or break a company. In a Uni-Level program,
1) (See explanation common to all programs.)
2) Everyone (A) sponsors goes on their first level and A can sponsor as many as s/he wishes (called unlimited width).
3) Uni-Level does not mean one level. When the plan was first originated, all levels were treated the same as the first and paid the same percentage. Although there are many variations today, the name Uni-Level has stuck; only now an Uni-Level is sometimes called Modified Uni- Level. It can have as many levels as there is money (percentages) to pay out. From three levels to nine levels are currently being used in the industry. And the more levels the more scrutiny by the government officials. Remember, a Distributor is supposed to manage (keep in touch) with those s/he earns money on.
When a larger percentage is paid on the first levels, a Distributor stands a better opportunity to break even or earn back his monthly purchase volume (PV) required to collect bonus. This is not to say that either way is right or wrong. Again, it depends on many things.
Recently, because of the ease of explanation and the relative ease for the company to administer there has been a reoccurrence of Uni-level programs. Particularly over the Internet! This is one that most “Affiliate” programs use. Without the depth of understanding they are making many mistakes. Many of the benefits of the stair step can be brought into a Uni-level but a company must remember that they need to add up all those percentages on each level and add them together to get their true payout.
There are ways to make this type of program exciting… but I said no “toots and whistles.”
One of the things that have helped this type of program grow is to pay the Distributor making the sale a higher percentage on her/his personal sales over his required purchases for the month. This can provide an incentive to do more personal selling, which is not inherent in the Uni-level program. There are many different ways to make a Uni-Level attractive but this could take away from the ease of explanation.
When checking out an Uni-Level program, be aware of the total amount paid out and where there are different amounts on different levels (modified). A Distributor should ask: If small amounts are paid out on the first levels and the real income is on the lower levels, do you stand a chance to recoup your monthly output? What is your real chance of making a good residual income? You will have to recruit people who are recruiters. However, without volume, which comes from lots of Distributors, it is doubtful if anyone will make any money.
A question you might want to ask of this and all plans is can the person just starting part time and the person that has decided to make MLM a career make an amount sufficient to compensate for the time, effort and money they invest?
THE MATRIX PLAN:
Some times called Forced Matrix (which AGs love to take a look at - the word forced is the key) or Fixed Matrix, this type of plan usually provides quick growth and some quick depth for Company and Distributor. The Matrix plan is relatively new compared with Stair Step and Uni-Level first hitting popularity around 1984/85. Companies’ not understanding this type of program and it’s true potential have failed miserably and missed tremendous potential for both themselves and their Distributors.
See those factors that apply to all types of plans.
The Matrix incorporates many of the characteristics of Uni-Level except that it always has a fixed number of people on the 1st level and pays bonus for a fixed number of levels in multiples of that fixed lst level number. For instance, in a 3x3 Matrix, each Distributor would have 3 people on the lst level, 9 on the 2nd level and 27 on the 3rd. Like Uni-Level, the Matrix can go down as many levels as there is money to pay out. Again, for those who like the Matrix there are lots of possibilities for variation.
In a Matrix, when A sponsors B and A’s 1st level is full (upline could have filled that level for A, called spill over), B is placed in the lst vacant position in the matrix. This is at the discretion of the computer or the person sponsoring, depending on how the plan is written. This allows someone else to also collect bonus on B. That person had nothing to do with the sponsoring of B and normally does not do the training since the training is felt to be the responsibility of the sponsor (A). In some instances this is considered an element of chance. Qualifiers can alleviate some of this chance. All who collect bonus on B must keep in touch with B on a regular basis. Keep in touch means phone calls, letters, newsletters, personal training, emails, taking to meetings, etc. You must do something for B or don’t take the money is the feeling of regulatory agencies, which I happen to agree with.
In its relatively short history (compared with the Stair Step and Uni Level) there have been a high percentage of failures among some companies using a Matrix. Some reasons:
1) With Regulators, when Distributors (and companies) tend to show the full progression of the Matrix, shaped somewhat like a pyramid (it really looks like a triangle not a pyramid), in numbers and dollars there are misunderstandings.
2) With postal authorities, who may consider it a lottery because of the element of chance?
3) Companies, because of their lack of understanding of percentages and where they are placed, and other factors including their explanation of the plan.
In spite of the above, as of this writing, there are several very successful companies operating for over 15 years with a Matrix. They have the right mix of qualifiers for their product and plan. They have done extensive modifications to their Matrix Plans to overcome their vulnerability, one being an expandable Matrix that means that when certain qualifiers are met the Matrix shifts to a Uni-Level program.
The advantage that is cited as the major reasons for using either Uni-Level or Matrix Plan is simplicity and ease for Distributors to understand and implement. This can be negated by the extensive modification necessary to make the plan operative.
A question you might want to ask in this type of program is what is the advancement after filling the Matrix. Does it offer other possibilities? Can you start another Matrix? Filling this will depend on the width and depth as well as the other things I suggested that you take into consideration at the beginning of this article.
THE AUSTRALIAN PLAN:
The ‘’Australian Plan’’ seems the most complex of the most used plans in the MLM industry.
In its simplest form, each person must recruit a fixed number who must move a certain amount of product for the sponsor to advance (actually break a way). Yet this program is not like any other program.
For example: A sponsors B, C and D. A must leave (give up) B & C with her/his original sponsor and take D to start her/his own group. D sponsors D1, D2, and D3. D1 and D2 remain with A and D3 goes with D when D has met the requirement. A sponsors E & F and they remain with A until they do what D has done, then they break a way. Depending on the plan, A is usually paid on the volume of her/his organization and on personal break a ways, but not on their break a ways.
This has worked in some variations with Party Plan companies, but in Multi-Level, where people usually sponsor their family and friends first, it tends to divide people and has not worked on any large scale.
THE BINARY PLAN:
A program that is somewhat similar in concept to the Australian Plan is the Binary Plan. Again, they are not easy to understand or in my opinion work efficiently. Binary plans started (late 80s) with land and other types of contract sales, mostly in gold or silver coins. They usually are designed around a high-ticket item. i.e.: travel agent programs, pre paid phone cards, etc. The plan provides lots of roll over (in this case, people reenter the program usually directly under themselves or their first level). Quite recently there have been some variations again. The type explained was the first wave of binary and where there have been additional or changes I’ve tried to explain.
Almost every company that comes out with this type of plan starts their Distributors as a Business Center (called by other names as well). Each Business Center has two legs (also called Business Centers.) You can be (buy) more than one Center but understand that each Center has a cost and must have two legs. You have just filled your second level if you buy a total of three and met your qualification. However, those two Business Centers must now each get two. In order to gain any compensation rewards both legs must produce the same amount of volume or some companies require a two thirds/one third ratio. Example: A becomes a Business Center and signs up two centers, B & C. B & C must do the same for A to progress. B's downline does
$3000 in volume and C's downline does $1000 in volume. When the pay period comes around, A
is paid on $1000 in volume on each leg (B & C). C must produce an additional $2000 in volume within a given period of time (check this out) or there is no commission paid on that (additional $2000) amount from leg B. If you are not paid in the given amount of time it is called flush.
Commissions are usually paid weekly in this type of program, but that is the decision of the company. Again, check to make sure, especially on the part of the extra $2000 (which could just as easily be $10,000). Is that pay-periods or months that you have to catch up? If the sales commission is not paid because the right and left sides not equal, the commissions are flushed or rolled up to the company.
The advantages to the Binary plan are
- A Distributor will usually have her/his upline working closely with her/him in order
to maximize their own commissions.
- With multiple Business Centers you can earn multiple commissions on the same sales
- Commissions are usually paid weekly (some even daily)
- Commission is based on accumulated group volume to an unlimited depth
The disadvantages are
- It has gained a lot of attention from regulatory agents whom
1) Don’t understand MLM
2) Especially don't understand something so different
3) Are familiar with it primarily from the standpoint of coins (selling money)
4) Do understand that when a Distributor purchases more than one Business Center and that goes over the threshold (in California that’s $500) that the amount can be considered front loading. (That’s another article)
- There are many lost commissions primarily due to lack of both legs having met the volume requirement of equal or two thirds/one third … by not keeping up or catching up.
- They require more work and understanding to maximize commissions
- The upline spend more time and efforts working with the weaker Distributor to keep
the legs even than they spend with producers.
- By a new Distributor having a large number of Business Centers it can be construed
- as front loading, depending of course on the amount required to acquire a Business
All of these programs, Stair Step, Uni-Level, Matrix, Australian and Binary, can also be written to reflect a Matching Funds Plan. Matching Funds is a hybrid and has begun to show up a few times over the past couple of years. Funds are not always matching equally but a percentage of the amount if matched.
In conclusion, I hope this article has helped to clarify some of the mysteries for you. Having been involved in the writing of many comp plans for over thirty years, I know several things for certain, “every plan of every company is special to someone” and “the perfect plan has yet to be written”.