Analyzing your compensation plan
Mark Rawlins, Founder and CEO of InfoTrax Systems, joins Kenny to talk about MLM compensation plans. What direction is the direct selling industry going on compensation? What’s the perfect compensation plan? How do you know if your direct sales commissions are working? How can you use data and analytics to assess your company’s health? How can focusing on distributor types (social enrollers, sales people, sales leaders, and dream builders) make your analytics more meaningful?
Want expert help analyzing your compensation plan? Reach out to Mark and his team at MLM Compensation Consulting. We offer data-driven compensation plan design and analysis.
Kenny: Hello and welcome to the MLM.com podcast. I’m your host, Kenny Rawlins. Today we will be joined by Mark Rawlins, the founder and CEO of InfoTrax Systems. Hello, Mark.
Mark: Hey, Kenny.
Kenny: Today we want to talk a little bit about compensation plans and some of the research that we’ve been doing at InfoTrax. Just to give a little bit of background, how long would you say you’ve been in the industry?
Mark: I’ve been in the industry for 37 years and I bought the predecessor to InfoTrax 35 years ago. So, it’s been a while.
Kenny: We were just discussing… We think that over that time, InfoTrax and its predecessors would have written in the neighborhood of more than 500 different compensation plans.
Mark: That’s what I would think. I know it’s more than a couple of hundred but probably not a thousand.
Kenny: Yeah and that’s across various… Whether we’re doing compensation plan consulting, or programming the compensation plans to be run on our system, or converting existing companies to come on to our system.
Mark: Or helping clients validate whether their commissions are correct.
Kenny: Yeah and because of that experience, one of the things that we often get asked is some variation of the question “is my compensation plan quote unquote working?” And because of that you’ve spent a lot of time… written two books on compensation plans and we spent a lot of time as a company evaluating what does it mean to “work.”
Mark: Well and my favorite question is always people who come to me and say “I know you know the perfect compensation plan that would work and that you would use if you ran your own company. That’s the one I want.” And it’s such a bizarre question because if I knew the perfect compensation plan, I’d sell it to somebody. But the true answer to that question is there’s no such thing as the perfect compensation plan. There are compensation results that you can be better or worse at achieving.
Kenny: And that’s what we want to talk about. How is it that companies should judge their compensation plan? This is obviously an ongoing thing for us. We spend a lot of time and resources in working with companies to analyze their comp plans, but what we wanted to do in this episode is kind of discuss what it is that we’re learning and what we’re seeing in the industry. So, let’s start by having you give us kind of an overview of how your thoughts have evolved as we’ve looked at data and gone about this in more of a scientific method over the years.
Mark: Okay so initially when we first started trying to analyze compensation plans that worked, we’d say “well here are four or five stair-step companies. How did they compare with each other?” But then we found there’s really no way to compare compensation plans even ones that are relatively similar because you have to take into account the growth phase the company’s in.
One of the rules of compensation is that adrenaline outweighs compensation strategy. If you have a company that started up and people are excited about the compensation plan and everybody’s out there and they’re just super excited, they can create adrenaline that trumps all analytics. But at some point, that adrenaline wears off. That’s when you need to know that you have a good compensation plan.
So back to your question of how do we know if a compensation plan is good? After going at it a lot of different ways, here’s what we’ve settled on: there are five basic types of people who are in a company. There are consumers—people who joined only to buy the product. They might sign up as a distributor to buy it at wholesale but they’re a consumer. Two is what we call a social enroller. They will bring people to your company but they also convince people to go to a movie they liked. They just like convincing people to do what they’re doing.
Kenny: Or use a particular app or drive a particular car. And the motivation isn’t necessarily money.
Mark: And what we have found about social enrollers over the years is they do not want… a true social enroller does not want the responsibility of being a salesperson. Because they want to convince you to do it without having any consequences if it’s wrong.
Mark: They just don’t want to have the responsibility to follow up and all these other things. But they can be very valuable to a company in terms of bringing people to it. Those two types are really consumers. And then the three business types of distributors are salespeople, sales leaders, and what we call dream builders. And that’s really who you should be compensating. So, what we’ve really focused in on for the last few years is coming up with the criteria of “what is a salesperson?” “What is a sales leader?” “What is a dream builder?” and then if you can identify the activities—the behaviors—that each of those groups do, then you can say “how much of my compensation dollars are going to each of these groups?”
And then there’s a couple of other groups you have to consider. Retired sales leaders and dream builders. And the “lottery winners”—the people who signed up one person and that one person signed up 90% of the people in your company. Both of those are groups you have to consider in compensation plan analytics but they’re really not a type of distributor.
Kenny: And when you’re talking about categorizing people… our view is that this isn’t categorization that a person tells you [about themselves]. They don’t say “hey I’m a dream builder or going to be a dream builder.” And it’s not even something you judge based off of income. You judge it based off of their behaviors. The data is going to tell you what they are and then by categorizing those people based on their behaviors, you overlay their earnings and say, “how effective is my compensation plan?”
And I think we ought to take just a quick aside. You talk about consumers and one of the things that we learned long ago is that there are a bunch of “distributors” that are actually consumers and customers. I think longer than just recent years, but it’s become another touchpoint again in recent years that becomes a black eye on the industry. Right? I just read an LA Times article about MLM that talked about one of the prominent companies right now only having paid 23% of their distributor force in the past year. To us, that’s not surprising but it’s because [companies are] miscategorizing—
Mark: It’s not only not surprising; it’s what it should be.
Mark: Because if you take everyone who buys products from a company and call them all distributors—which has become increasingly popular over the last 20 years—then yeah 80% of people who buy product from the company shouldn’t make any money. If the only people who buy products are people who want to make money, then your company is gonna die. So, we’ve got to find a better way of getting them in as an industry. And it’s something we’re struggling with because of the Vemma case and the Herbalife case. What is a customer? What is a salesperson?
Kenny: And I think you’re gonna see the industry (and I think we’re starting to see it) zig back the other way and make it more clear to people that if you become a distributor, you are engaging in an entrepreneurial endeavor. You’re even seeing companies that aren’t offering wholesale discounts and things like that strictly to distributors anymore. Even on Amazon you get their Subscribe & Save program. Right? So, you could have customers that are on a recurring order that you know are customers—you’re not treating them like distributors. So, I think moving forward in our conversation, we’re really looking at the latter four types. How are we compensating? Because social enrollers you might compensate in a different way but you’re still compensating them whether it’s through a referral bonus or some sort of product credit or something like that.
Mark: Right but the big thing there is once you can categorize these four distributor types and then these two categories off to the side—retirees and “lottery winners”—then you say “okay, we’ve worked very hard on this and we’re making some real progress.” but once you have a good definition of the activities, the behaviors the subjective activities that you can measure… once you have a good marker on those, then…
Kenny: Objective activities.
Mark: I’m sorry objective. I always get subjective and objective mixed up and it gets me in real trouble. Okay objective activities and behaviors. Then you can say “okay, what percentage of total compensation is going to social enrollers? What percentage of total compensation is going to sales people? Sales leaders? Dream builders? Lottery winners? And retirees?” And then you can start to compare across industry norms. And that’s something that we’re very enthused about, we’re working very hard on. To get these industry norms sort of nailed down so that we can tell our client “here’s where you fit.” We have companies with salespeople who earn as little as five or six percent of total earnings. And then you have companies where the salespeople earn 50 percent of the earnings. What’s right? What’s wrong? Within a range, it depends on your product. But if the salespeople are earning a hundred percent of the earnings, then you’re not really a direct selling company as we know them today. And if a salesperson is earning five percent of total earnings, then you’re not really a product focused sales company.
Kenny: Yeah and I think that is the thing where for so long people judged a compensation plan based on the earnings that it produces instead of based on the behaviors that it drives and therefore how its rewarded. That’s part of the shift that we’re trying to make. I think about it a little bit in the way that sports analytics have evolved over the years. Baseball… you used to really judge people a lot on RBIs right? Well runs batted in is not something that I strictly control. Right? I have to have people ahead of me in the lineup that are getting on base so that I even have that opportunity. And there’s a lot of ways that you can benefit a team that show up in more nuanced and advanced statistics than RBIs. Or in basketball…
Mark: Well the movie Moneyball was one of my favorite movies and the scouts were sitting around deciding a draft. One person said, “I don’t think we should draft him because he has an ugly girlfriend.” And they say, “What?” He says, “If he has an ugly girlfriend, it means he’s not confident.”
Mark: And you go “that’s a criterion we’re gonna use for drafting somebody?” And in direct selling, multilevel marketing, party plans, we have had and we still have the equivalent of that type of thinking going into compensation plan decisions.
Kenny: Yes exactly. You see that in the fact that you sit down with a company who says, “Hey why is our compensation plan—” or “why is our company going the wrong way?” And you say “you’re paying a disproportionate amount of money to these couple of people. And based on all the data, they’re not driving any growth. They’re not driving retention. They’re not driving any of the behaviors you’d like to see.” And they say “oh but you know they’re really out there. They’re working hard and they’re holding these big meetings and they inspire people.” And that inspiration factor should translate into measurable results. Far too often we’ve got people thinking, like you say, “He’s not showing confidence.” “This person is inspiring someone.”
Mark: The number of compensation consulting meetings I’ve been in where the VP of Sales is so invested in their relationship with the ten top leaders… So, if you talk about making a change that reduces it… “You, you can’t reduce Bill’s income! I mean Bill is out there on the road every weekend!” They lose objectivity on that.
But there is one thing that companies can look at that I don’t think a lot of companies do look at. Its salespeople and emerging sales leaders. So, people who are earning a few hundred dollars a month. How many of those people stay with you without growing to the next level? The majority of your company’s sales people will always be salespeople. Some percentage will grow to sales leaders but a very few. And then a very few percent of sales leaders will grow to be dream builders. Are people content to become a salesperson and stay a salesperson?
And if a company looks at those earners and they either promote or die, that is a very objective criterion that companies can look at and determine whether or not (at a very high level) their compensation plan is successful. I mean we’re talking about some in-depth analysis for fine tuning a compensation plan with the tools and the techniques we’re using. But there are things companies can do without having to spend money with us or any other analyst. They just look at people and look at persistence.
Kenny: I think that that is true. People need to start looking at their own data with maybe a different lens. I would hope that by listening to this and thinking about it people would do that. Start thinking about “okay, what are the behaviors that we’re rewarding?” and then “how is the longevity across people who don’t get to your higher ranks?” The people that aren’t making tens of thousands of dollars a month but are making a few hundred up to a couple thousand dollars a month—are you able to retain those people?
Then I also would hope that, out of this, people would start being a little bit more discerning in the advice that they take when it comes to compensation plans. There are so many people out there with such fuzzy objectives. I mean really, anything that you’re doing at this point (like I said, I harken back to sports), if you can’t implement a strategy and then see the results of it in your data, you’ve got to wonder about that strategy. With as much data as there is out there at this point (that all companies should be collecting), you should really be able to see the effectiveness [of your strategies]. And it can help combat a lot of the stigmas that are pervasive about multi-level marketing. Because you have a better feel for what your field is [like]. You can help them understand what’s going on. And you can start finding organizations that are driving abusive recruiting behaviors.
Mark: Or turning a blind eye to it. I mean, I think companies should say “hey are you a customer or are you a salesperson?” and “do salespeople need inventory?” Yes, they need a little inventory. It’s hard to sell from an empty wagon. But I think companies should put right up there “you should never have more inventory than you need for a month’s worth of business or two weeks’ worth of business.” If you are pushing inventory on distributors it’s like pumping water into a water pipe. You pump enough water into that water pipe it will explode. And that’s what happens to companies who are pushing inventory on distributors, not pushing product to the hand of customers.
Kenny: There really should be some sort of evaluation process of saying “okay if we have any distributor (consultant, whatever your terminology is for your company) that’s purchasing more than X dollars of product across a couple of months without receiving Y amount of commissions, we ought to be reaching out to that person and making sure…” And there are some people who run boutiques or whatever and are really just turning retail sales. But there ought to be that reach out from the company to make sure that you’re not…
Mark: …that they’re not just buying product because someone’s telling them to.
Kenny: Yeah. That you’re not enabling predatory practices. And that’s the thing that’s both encouraging to me and in some ways discouraging. It’s encouraging the we have more and more data and better and better analytics. It’s discouraging if we don’t turn that into actionable behaviors where we can help individuals because this really is an industry that’s about empowering individuals. We should do that both by helping them achieve the most success possible but also preventing them from being deceived.
Mark: Right. Just one last thought on this as we’re kind of running out of time on this podcast. This is—I think—the golden age of direct selling because thirty years ago if you were signing up and somebody wanted to sell you product, the first thing they had to do was get you to understand the model. “Wait you’re gonna bring this product to my house?” and “Where’s the store?” But now people buy product on the web all the time and it’s increasing all the time. But it’s getting to the point where having your product show up in the search engines is… you can’t do it. A company’s gonna spend 30–35 maybe even 40 percent of their total dollars in marketing and then in paying Google or being in the Apple Store or whatever to sell product on the web. Well that’s what a commission plan pays. So now if you have distributors who bring customers to the website rather than paying Apple or Google or… all these players. Rather than paying them to bring them customers they’re paying the same amount of money. It used to be that the knock on the industry was the product was overpriced and undervalue because they had to have the way to pay the commissions. But that’s not true anymore because if you have a really unique product, it’s gonna cost you that much any way to sell it.
Kenny: Yeah and I think people are more skeptical and questioning because there are so many channels to receive a product [through]. And then every product is knocked off so quickly that you don’t know that you’re… Now reviews and word of mouth and endorsements—you know personal endorsements of a product—mean so much because people are starting to question you know the quality. “Am I getting a knockoff?” “What’s behind all this?”
Mark: “Who is this company I’m buying from? Are they a legitimate company? Are they a front for the Russian mafia who’s selling me this cheap product so they can pull my credit cards and other information?” And so, having someone—a friend of yours—who says “I have dealt with this company and this company has integrity” is incredibly valuable and, as I said, you do not have to pay any more for that than you would to get your product sold over an e-commerce channel anyway.
Kenny: Yeah and like you said we’re running out of time but I appreciate you taking the time to bring us up to speed on where we’re going as an industry and as a company. I think it is valuable for companies to know that there are people out there investing in this because it’s going to become more and more important that we recognize and reward behavior specific actions.
Mark: Yeah. Just one last thought. It is interesting that for most companies their commission expense is not just the biggest expense they have but it’s equivalent to all the other expenses they have in many cases. And yet they will haggle with the UPS and FedEx and USPS to try and get a 1% discount on shipping rate. They will spend weeks and months analyzing [their other expenses]… And commissions, they just throw it out there and hope it works. I’m hoping that the day will arrive soon when people put the same kind of energy into analyzing whether they’re getting value from their commission plan that they do analyzing whether they get value from their shipper or from their manufacturer or from any other expense that they have.
Kenny: Yeah. I 100% agree with that and we will we will end on that note. Thank you again.
Mark: Thank you for having me.
Kenny: That’s it for today’s episode. Again, I’m your host, Kenny Rawlins, and we want to thank you for joining us. A special thank you to Mark Rawlins for his time and expertise and a thank you to Jana Bangerter and Adam Holdaway for production support. We hope you’ll join us again next time.
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