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Understanding How Compression Impacts Your Paycheck by Mark Rawlins

Date: Jul 29, 09
Author: Mark Rawlins
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URL: http://www.mlm.com//articles/view/understanding-how-compression-impacts-your-paycheck-by-mark-rawlins/print

Compression isn't just an Ace bandage on a sprained ankle. It's also an MLM compensation tool that can affect your pay in a good way.

Compression isn’t just an Ace bandage on a sprained ankle! It’s also a network marketing compensation tool. If your MLM company has a uni-level commission in its compensation plan, it’s important to understand compression because it affects your pay in a good way. It’s probably the greatest innovation to ever come along in the world of level commissions.

To understand compression, you first have to know a little about a level commission and particularly about a uni-level. The level commission is the most common type of compensation found in network marketing.

Uni-level Commission

A level commission pays a distributor a percentage on a certain number of levels of his/her downline. It is a spread-the-wealth tool. Its goal is to ensure that distributors are always paid on their downline. It tends to have a very smooth, stable line of earnings growth. It grows slowly and steadily over time. The chart below illustrates the level commission typically implemented by network marketing companies.

Figure 1. Level Commission.

What exactly does this chart tell you?

A distributor who has achieved the rank of 1-Star is qualified to receive 5% commissions on sales generated on the first three levels of distributors under him/her. The 1-Star will be paid that commission, regardless of the ranks achieved by any of his/her downline distributors.

Distributors who achieve the rank of 2-Star earn 5% commissions on sales generated on four levels of sponsorship.

Distributors who achieve the rank of 3-Star earn 5% commissions on five levels of sponsorship.

Uni-level Commission

A variation of the level commission is the unilevel commission, which pays percentages on personal or group volume so many levels deep in the organization. With a Unilevel Compensation Plan, once a sponsor signs up a distributor, as long as the sponsor stays active, he or she receives commissions on any product the distributor sells.

Figure 2: Uni-level Commission.

This chart illustrates how in a Unilevel Compensation Plan, distributors might be paid according to rank and level.

Uni-level Payout Process

So, let’s walk through the payout process for a Unilevel Compensation Plan for a hypothetical network marketing company—Acme Widgets. That way, you can better understand how a uni-level commission works, which is basic to understanding how compression affects payout.

Figure 3 represents a single downline in Acme Widgets. Note that these distributors are all part of the larger tree structure of the company.

Figure 3: Single Downline in a Uni-level Tree.

Example 1: Uni-level Compensation Plan – No Compression.

This chart tracks payout for each distributor. You can see exactly how commissions on each distributor’s sales volume are calculated and disseminated. The distributor’s rank is next to his/her name. This rank may affect the percentage the distributor receives for sales in his/her downline. An X in the circle indicates that the distributor is not qualified to receive a commission. It is important to always remember compensation should be figured from the bottom up.

1. Marcus, whose rank is 1-Star (lowest rank), places an order for $100. Distributors are not paid on their own volume, so this transaction counts as Level 0.

2. Up one level is Marcus’ sponsor, Beth, who is a 1-Star. She is qualified to receive commissions. She probably generated enough sales herself in order to qualify, or she may have recruited a certain number of distributors. Since Beth is up one level from the person making the sale, she earns 8%--in this case $8. This position in the tree is called the pay matrix.

3. Next up the tree is Beth’s sponsor, Franklin, who is ranked 1-Star and qualified to receive commissions. He is two levels up from Marcus, and is, therefore, entitled to 8% or $8 because a qualified 1-Star is paid on three levels (see Figure 2).

4. Moving up to Level 3, there’s Cecily, who is not qualified to receive commissions this month. She receives $0.

5. Next up the tree is Bill, who is a qualified 1-Star and four levels up from Marcus. When you look at the chart in Figure 2, you see that 1-Stars are paid only on three levels. Therefore, Bill makes 0% on Marcus’ sales volume.

6. Carmen comes next in the tree. Even if she has a high enough rank to be paid five levels deep, she isn’t qualified to receive commissions, and therefore, is paid $0. Carmen may not have felt like selling widgets this month.

7. The next distributor up the tree is Mishka, who is a qualified 3-Star. 3-Stars are paid down only five levels. Because we’re at Level 6, she receives $0.

Example 2: Uni-level Compensation Plan – No Compression.

Now, let’s trace the payout on another distributor’s personal volume:

1. Beth places an order for $100. Since distributors are not paid on their own volume, it counts as Level 0.

2. Beth’s sponsor, Franklin, is next in line up the tree. He is a qualified 1-Star and is therefore paid $8 at Level 1.

3. Next up the tree is Cecily, who is not qualified to receive commissions, and therefore, is paid $0 at Level 2 (meaning the second level up from the distributor who made the sale).

4. Moving up the tree to Level 3, there’s Bill, who is a qualified 1-Star, therefore, he is paid $8 at Level 3. (Figure 2 indicates that 1-Stars are paid on three levels.)

5. The next upline is Carmen, who is unqualified, so she receives $0.

6. Moving up the tree, there’s Mishka, a qualified 3-Star. 3-Stars are paid on five levels, so Mishka is paid 48 at Level 5.

7. Richard comes next in the tree as a qualified 4-Star and is paid $3 at Level 6. (See the chart in Figure 2, which indicates the payout for Level 6 drops from 8% to 3%).

If all possible commission payments with this uni-level plan were paid, the plan would pay $43 on each of the $100 orders we traced, for a total of $86. The total paid in this example, however, is only $43, because in each case, some distributors were not qualified to receive their commissions. The remainder—$43—is retained by the company as profit.

Compression

So, what about compression? How does it fit in?

Compression is a technique that keeps inactive or non-qualified distributors from occupying a payout level in a level commission plan. For example, if you sponsor Fred and he doesn’t qualify to earn a level commission, you receive commissions on his first-level distributors as though you had personally sponsored them.

Compression:

A mechanism for bypassing unqualified or inactive distributors when determining payout so that the upline is paid on the number of active levels. Only active distributors count as levels in the commission plan.

Figure 4. Before and After Compression.

Standard Compression

Now, let’s look at the effect that standard compression has on payout. With standard compression, an unqualified distributor does not count as a level. Because unqualified levels are skipped over, commissions can be paid to distributors at additional levels up the tree.

Furthermore, if one of these first-level distributors isn’t qualified, that person’s first-level distributors are also treated as your first level. This goes on until a qualified distributor appears in the organization to occupy the first level. Then, the process is repeated until we find a qualified distributor to occupy the second level, and so forth.

The following examples are based on the same tree, ranks, qualifications, and orders used in the previous examples. The only difference is that standard compression is applied to the payout process.

Example 3: Uni-level Compensation Plan - Standard Compression.

1. Marcus places an order for $100. Distributors are not paid on their own volume, so it counts as Level 0.

2. Going up the tree, next is Marcus’ sponsor, Beth. Beth is qualified to receive commissions. Since Beth is one level up from the pay matrix, she earns 8%--in this case, $8.

3. Next up the tree is Beth’s sponsor, Franklin, who is ranked 1-Star and qualified to receive commissions. Franklin is two levels up from the pay matrix, and is therefore, entitled to 8%, or $8.

4. Going up to Level 3, there’s Cecily, who is not qualified to receive commissions this month. So, she receives $0. Because she is unqualified, the level does not change to the next upline.

5. Next in line is Bill, a qualified 1-Star. Because Cecily is not qualified, Level 3 was skipped, leaving Bill only three levels up from Marcus. When we look at the chart in Figure 2, we see that 1-Stars are paid 8% on three levels. That means that Bill makes $8 on Marcus’ $100 sales volume.

6. Carmen is next up the tree at Level 4. She is not qualified, so she’s paid $0 and the level does not change.

7. The next upline is Mishka, who is a qualified 3-Star, paid down five levels. Because of compression, we’re still at Level 4. Mishka receives $8.

8. Next up the tree is Richard, who is a qualified 4-Star, and is paid $8 at Level 5.

9. At the top at Level 6, there’s Claudine, who is also a qualified 4-Star. She is paid $3 because a qualified 4-Star receives 3% on sales volume generated six levels down.

Example 4. Uni-level Compensation Plan – Standard Compression.

Now, let’s trace the payout with standard compression on Beth’s sales volume of $100:

1. Beth places an order for $100. Distributors are not paid on their own volume, so it counts as Level 0.

2. Above Beth is her sponsor, Franklin, who as a qualified 1-Star, is paid $8 at Level 1.

3. Next up the tree is Cecily, who is unqualified to receive commissions and is paid $0 at Level 2. The level does not change.

4. The next upline is Bill, who is a qualified 2-Star and is, therefore, paid $8 at Level 2.

5. Above Bill is Carmen, who is unqualified and is, therefore, paid $0.

6. Up next is Mishka, who is a qualified 3-Star and is paid $8 at Level 3.

7. Next up the tree is Richard, who as a qualified 4-Star, is paid $8 at Level 4.

8. At the top of the tree, there’s Claudine, a qualified 4-Star, who receives $8 on Level 5.

Note that $40 was paid this time, whereas $27 was paid without compression. Because unqualified distributors don’t count as levels, commissions can be paid to distributors at additional levels up the tree. However, if the payout level reaches the top of the tree, any commission that remains is profit to the company.

If all commissions from this uni-level compensation plan were paid, the plan would pay $43 on each of the above orders for a total of $86. Note that applying compression to the payout process gives more to the distributors at the top of the tree because unqualified distributors are dropped out of the tree for commission purposes.

Dynamic Compression

With dynamic compression, you not only skip a level for each unqualified distributor, but you also skip a level for each distributor who wasn’t paid. For example, a distributor may have been qualified for commissions that month, but didn’t have the rank to enable him to be paid on his level.

Let’s trace the same orders through the tree, but this time, notice what changes occur in the payout because of dynamic compression. Much of what occurs is the same as before, so watch carefully for the differences and their effects.

Example 5. Uni-level Compensation Plan - Dynamic Compression.

1. Marcus places an order for $100. Distributors are not paid on their own volume, so it counts as Level 0.

2. Up the tree is Marcus’ sponsor, Beth, who is a rank 1-Star. She is qualified to receive commissions. Since Beth is one level up from the pay matrix, she earns 8%--in this case, $8.

3. Next up the tree is Beth’s sponsor, Franklin, who is a 1-Star and qualified to receive commissions. Franklin is two levels up from the pay matrix and is therefore entitled to 8%--$8.

4. Next comes Cecily, who is qualified and is therefore paid $8. The level is now 3 because there has been no reason so far to skip a level.

5. Above Cecily is Bill, who is a qualified 1-Star, four levels up from Marcus. When we look at the chart in Figure 2, we see that 1-Stars are paid on three levels only. Therefore, Bill makes $0 on Marcus. Because the payout was 0, the level stays the same.

6. Up the tree is Carmen, who is qualified. We’re still at Level 4. Carmen is paid $0 because 1-Stars are paid only on three levels. Therefore, the level stays the same for the next upline.

7. Next in line is Mishka, who is a qualified 3-Star, and therefore paid down five levels. Because we’re at Level 4, Mishka receives $8 and the level increases to Level 5.

8. The next upline is Richard, who is a qualified 4-Star and paid $8 at Level 5.

9. At the top, there’s Claudine, who is a qualified 4-Star and is paid $3 at Level 6. At Level 6, the payout stops.

Example 6. Uni-level Compensation Plan – Dynamic Compression.

Now, let’s move on to Beth:

1. Beth places an order for $100. Distributors are not paid on their own volume, so it counts as Level 0.

2. Next up the tree is Beth’s sponsor, Franklin, who as a qualified 1-Star, is paid $8 at Level 1.

3. Above Franklin is Cecily, who is qualified and paid $8 at Level 2.

4. Next comes Bill, who is a qualified 1-Star and is therefore paid $8 at Level 3.

5. Up the tree is Carmen, who is a qualified 1-Star at Level 4. Since 1-Stars are paid on only three levels, this distributor is paid $0, even though qualified to receive commissions. Because the payout is zero, the level does not change. This is the difference between standard and dynamic compression.

6. Next comes Mishka, who is a qualified 3-Star. She is paid $8 at Level 4.

7. Above Mishka, there’s Richard, who as a qualified 4-Star is paid $8 at Level 5.

8. At the top, there’s Claudine, who is a qualified 4-Star and is paid $3 at Level 6. At Level 6, the payout stops.

If all the commissions from this Uni-level Compensation Plan were paid, the plan would pay $43 on each of the above orders for a total of $86. The total paid in this example is $86. Note that applying dynamic compression results in a payout of $27 more than when you apply standard compression as in Examples 3 and 4.

Conclusion

Compression allows you to get paid around your inactive or non-qualifying downline distributors, but leaves them in place and gives them time to build their organizations. It provides an incentive for you to work with your downlines, even those many levels of sponsorship down the genealogy. The bottom line is it puts more money into your pockets!

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Source: Understanding Multi-Level Commissions and Their Role in a Successful Company, Mark Rawlins.

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