Bringing Compensation Plans Into Perspective Part 4
Hybrid Uni-level and the 5% Plus Theory
How does a Hybrid Uni-level Compensation Plan create the above- referenced 5% Plus Commission? (See Foundation Principles, 5% Plus Theory.) With this plan, there are only customers and distributors. You can receive retail commission on customers if they’re first level to you. You receive a uni-level commission on distributors. When you move up in rank, you don’t receive a new type of commission. The commission you get is not based on what rank you are, like in a Breakaway Plan as a sales leader. This plan pays the standard 5% commission to everyone and then uses add-ons to target groups.
Strengths of Hybrid Uni-levels
• Because of the many variations, companies truly can create a unique compensation plan for themselves.
Weaknesses of Hybrid Uni-levels
• Distributors may be expecting one result and have something totally different occur. This often requires a company to spend more time training distributors on the compensation plan.
• Distributors become frustrated when a plan they expect to be simple and easy proves to be complex and difficult.
If you’re thinking about starting a company using this type compensation plan, spend the time and energy to create realistic data models with lots of variations of the plan. Do dozens of commission runs before you decide on a final compensation plan so you know exactly what you have when you’re finished. This will enable you to confidently tell your distributors how the plan is going to pay.
A Binary Compensation Plan features a limited-width structure that requires a distributor to specifically have two first-level distributors—two legs—in his/her organization. A leg is a portion of a distributor’s organization starting with one of his first level distributors and encompassing that individual’s entire organization. In other words, it is a line of sponsorship including each personally-sponsored distributor and all his/her downline. A Binary Compensation Plan does not pay on levels, but on the balance between the two legs. A person does not get paid on his/her downline sales, but receives commission on the sales volume of the weakest of the two legs. With a Binary Plan, depth really doesn’t matter. What matters is balance of sales volume between the legs.
The basic concepts entailed in a Binary include:
• A distributor sponsors two people, creating two downline legs, and then builds a downline under those two legs.
• Some binaries allow distributors to have multiple business centers— usually three, or seven.
• Traditionally, binaries pay their downline commissions once a week, however, some pay monthly.
• Distributors have to generate downline sales volume that is balanced between the two downline legs. When individuals reach specific levels of sales volume, they receive a commission check.
• Sales volume can be accumulated in one week or across several pay periods. Binary Compensation Plans are different than any others. With most plans, whatever volume you accumulate in one pay period, you get paid on. If you don’t accumulate enough to get paid, it’s just lost. You never get paid on it. But with a Binary, you can accumulate volume of profit for several pay periods. When you accumulate enough to get paid, you get paid. Binary has that cumulative effect. For example: If you are required to earn $500 in volume in a week to get paid and you’re only accumulating $100 a week, or $100 per pay period, then on the fifth pay period—Bingo! You get paid.
The challenge with a Binary Plan has traditionally been trying to keep both legs balanced. If you get $100,000 on one side and $10,000 on the other side, then you’re going to get paid on the $10,000. If you have $100,000 on one side and $99,000 on the other side, you’re going to get paid on the $99,000. However, today a popular variation of this plan allows the volume to be split 1/3-2/3.
Figure 7: Example Binary (1 Business Center – Direct Income from Group Volume)
Most Binary Plans pay a pool commission in a weekly pay plan. A distributor has two first levels who must each generate an amount of sales volume. An amount of money is put aside in a pool and then is divided up among those who qualify.
The challenge the Binary Compensation Plan presented when it arrived on the industry scene was it proved to be a completely opposite approach to commissions than the existing plans. The difference was like between night and day. Every other compensation plan up to that point had been built on the following two premises:
1. Commissions are paid on a limited number of levels of a distributor’s downline, but on an unlimited amount of sales volume.
2.All commissions for a given product order are paid in a single commission run.
In contrast, the Binary Plan is built on the following two opposite premises:
1. Commissions are paid on an unlimited number of levels of a distributor’s downline, but on a limited amount of sales volume.
2. Commissions for a given product order can be paid across several commission runs, and in fact, it’s impossible to know when all the commissions on a single order have been paid.
Hitting the Cap
A fairly typical Binary Compensation Plan would say if you have at least $500 in volume on the weak leg, then you receive 10% of your weak leg in commission. However, one of the rules of almost all Binaries is that they have a payout cap of from 40-60%. This means if a company adds up all of its payments and the total exceeds the payout cap, then everyone’s payment is reduced enough proportionally to keep total payout under this cap. This scenario is called hitting the cap. All binaries hit the cap, so this is a very important feature to be familiar with.
In the original Binary Plans, if each of the distributor’s two downline legs generated $5,000, then the distributor received $1,500. That, of course, is the simple case. In reality, if the two legs generate more volume or if it takes longer than a week, the plan becomes much more complex to understand. In the Binary Plans that allow distributors to have multiple centers or multiple positions in the downline, if they have seven centers, they can potentially earn 7 x $1,500 each week, or $10,500 per week!
Binary and the 5% Plus Theory
How does a Binary Compensation Plan create the above-referenced 5% Plus Commission? (See Foundation Principles, 5% Plus Theory.) The 5% aspect of the Binary Commission is the standard 5% commission, itself. Most Binary commissions pay 10% on the weak side, so, if you balance your sales, then you’re going to make about 5% on your overall volume. Then, you’re going to make plus money on that volume.
The plus aspect of the 5% Plus Theory is really the fast start commission or a second center, for those who have a multiple center. These days, Binaries use fast start commissions as well as others, like a matching bonus, which is a level commission that pays distributors a percentage of the earnings of the people in their organizations. The Binary Fast Starts are typically the same as the Hybrid Uni-level Fast Starts. You can receive fast start commissions on a new recruit not because he moved up from one class to another, but simply because he was in for his first 30 days. This constitutes a time-based division, not a rank-based division. With a Binary, you make your plus because while you’re in build mode, when you sponsor people, you make that higher fast start commission, which can be 10%, 12%, 15%.
Strengths of Binaries
• The initial selling feature of the Binary Compensation Plan was that it was much easier to understand and maintain qualifications for than other plans of the day. What could be simpler? You sponsor two people and build those two legs. If those legs generate business, you receive commissions. If they generate a lot of business, you make a lot of money! A major selling point is that volume never moves out of your payline no matter how many levels deep your genealogy goes. Of course, when something sounds too good to be true, it usually is, and Binary Plans turned out to be more complex than they seemed.
• The Binary does an excellent job of paying the mid-range commissions. This is its strength and probably the reason it has survived these many years. It does not do well on very low-end commissions or high-end commissions, but does extremely well on the mid-range commissions. The Binary Compensation Plan’s behavior is very well understood.
Weaknesses of Binaries
• Many of the original Binaries were built by promising distributors that their upline would build their downline. This created a welfare mentality.
• Most Binaries have a maximum upper limit on earnings—the payout cap. Some distributors don’t realize this. However, Binaries may be combined with other commission types to fix this capped earnings problem.
• Binary pays well but the structure aspects of the plan can be difficult to deal with.
• A distributor moves through a chronology time as a leader does and moves to the other leg of the tree. If he/she doesn’t get that bubble—that plus piece configured right—then he/she starves his/her organization for earnings.
Most distributors seem to either love Binary Compensation Plans or hate them. These plans inherently reward salespeople and sales leaders better than almost any other type of plan. They pay well, but the structure can be challenging to deal with. It is a big plus that distributors no longer have to evenly balance the volume of the two legs. The focus with a Binary is to maximize success by combining it with other commission plans.
Breakaway, Hybrid Uni-level, Binary: Differences
If you don’t really understand the differences between these three proven compensation plans, you should! So, here you go. Study up and then when you have a chance, further consult with people who understand the differences like the back of their hand.
A big difference between these three types of compensation plans is how they divide up their sales forces; that is, how they classify distributors:
• Breakaway features two classifications: 1) distributor or pre-sales leader, and 2) sales leader. There are two types of sales plans and commissions: 1) you get paid on your distributors—non-breakaways, and 2) you get paid on your breakaways/sales leaders. You make more money on your distributors than on your sales leaders because of the differential. The Breakaway is the only plan that focuses on building sales leaders.
• Hybrid Uni-level has one sales force classification. Everyone is a distributor. There are no sales leaders. You get paid on your distributors down X number of levels, and then the company pays extra money to you based on another criteria besides sales force classifications. This factor is how long a distributor in your downline has been in the company. Fast start programs provide a period of time where if you sign people up, you make more on them as new recruits and less on them later. These programs also pay higher commissions to a new recruit for the fast start time period.
• Binary also has one sales force classification—distributors. This plan features a division and organization of distributors into business centers consisting of you and your two downline legs under you. This is your line of sponsorship, including each personally-sponsored distributor and all his/her downlines. The Binary Plan’s sales force structure makes it extremely different from the other compensation plans. There’s a whole different set of motivations besides building an organization that’s deep. You don’t get paid on your downline at all, but on the weakest leg of your downline.
To summarize, with the Breakaway Compensation Plan, there are very defined roles. With the Hybrid Uni-level Plan, everybody is the same as everybody else. There are ranks, but bonuses are basically paid the same to everyone. The same is true of Binary Plans. Ranks are almost meaningless. The focus is for distributors to try to balance volume between both legs of their organization.
• Probably the biggest difference between Breakaway Plans and Hybrid Uni-levels comes from the monthly qualifiers. In Breakaway Plans, once distributors achieve the rank of breakaway/ sales leader, their sales volume no longer helps their sponsors achieve their monthly qualifications. They literally break away from their sponsor and get paid at a different commission rate. With Hybrid Uni- levels, sponsors achieve their monthly qualifying volume either with total organizational volume or the volume within a specific number of levels. Sponsors, therefore, never experience losing breakaways/sales leaders plus the income from them, and they never have to replace that volume like in a Breakaway.
• A major difference between Breakaway Plans and Hybrid Uni-levels is that percentages for the Hybrid Uni-levels are paid on personal volumes in the downline. The generation commissions in the Breakaway Plans are paid on the group volume of the downline sales leaders. This means that the generation commissions are typically much larger and a distributor is paid much deeper into his/her organization. In other words, the payline is much deeper. With a Breakaway Plan, if you’re a breakaway/sales leader, you’re always going to make more money on your group volume or on the distributors in your downline than you are on breakaways/sales leaders. That’s because the breakaways/sales leaders have theoretically progressed further in the business.
• With a Hybrid Uni-level Plan, typically everybody that comes into the company will make a higher than average percentage commission on the people they sponsor. As new recruits, distributors receive a higher percentage on volume in the first 30-60 days, depending on the duration of the fast start program. The Hybrid Uni-levels that survive all have some form of fast start or other bonus program to get distributors a higher percentage. For example, a 5% standard commission for Level 1 distributors, but 10- 15% commission on the first 60 days for new recruits.
• Binaries and Hybrid Uni-levels start out at the 5% earnings line, and if you’ve got fast start money, then commissions rise above this line. [See Figure 1: Standard 5% Earnings and 5% Plus Curve.]
• The big difference between a Hybrid Uni-level, Breakaway, and Binary Compensation Plan is the determination of where the plus dollars of the 5% Plus Theory go. (See Breakaway and the 5% Plus Theory, Hybrid Uni-level and the 5% Plus Theory, and Binary and the 5% Plus Theory.) All the plans are based on the standard 5% commission. If distributors do a good job of balancing their organizations, they’re going to make 5% on their overall volume. Then, they’re going to make plus money based on the type(s) of commission add-ons the compensation plan includes.
• One of the challenges of the Breakaway Plan is its image of complexity. However, in the end, most Hybrid Uni-levels are as complex as Breakaways; it’s just they hide the fact better.
• With a Uni-level Plan, you can put a lot of people on your first level and you can build a number of legs. With a Binary Plan, you are limited to two legs.
• Breakaway Compensation Plans have been implemented since 1975. Hybrid Uni-level Plans came on the scene in 1985. Therefore, Breakaway Plans had a ten year head start on Hybrid Uni- levels.
Every network marketing company that’s ever reached a billion dollars in annual sales has been a Breakaway Plan of some sort. There has never been a Uni-level or Binary Plan that has reached this level of success. And, these billion dollar companies are still growing with their Breakaway Compensation Plans! However, this scenario may be a result of the fact that Hybrid Uni-levels and Binaries haven’t been around as long as Breakaways.
A compensation plan is about figuring out how to cause distributors to do the least amount of work—the most important work—for the maximum amount of earnings. It must be designed to allow them to reasonably meet qualifications and rank advancement rules. The goal is to find that illusive state of nirvana out there where distributorships are viable, where distributors make enough money that they’re willing to continue to do the work it takes to maintain their business month in and month out. Let’s call it the Viable Distributorship Point. You must strive to create distributorship viability using your compensation plan to make and compensate the largest crowd of people.
The Viable Distributorship Point has never been documented; nobody really understands exactly what it is. Is it $35 for ten hours of work? Probably not. Is it $150 for that same ten hours of work? Maybe. The question we have to address is, “Where do we get viability?” There has to be enough of a market, the distributor has to be able to spend few enough hours, make enough money, etc. What’s the correct balance to achieve success?
In theory, sponsoring seems like it would be a great tool to achieve distributor viability. The big argument, however, is that what seems and what is are two very different things. Statistics paint a doubtful picture. Anybody who has looked at the sponsoring numbers knows the terrible 70%-25%-5% statistic. Seventy percent of distributors sponsor no one; 25% sponsor maybe 50%, and the top 5% of a company’s sales force sponsor 50% of new recruits. So, in light of these cold, hard facts, how should a direct selling company deal with sponsoring in its compensation plan? Should you make the qualifications so easy that your people simply can’t resist getting up off the couch and going out and sponsoring a few people? Maybe you could get everybody to sponsor somebody. You could make it so easy that they only have to sponsor two people and their upline would sponsor one of those guys. Perhaps the goal needs to be to make it so easy that “even a cave man could do it!”
The bottom line is network marketing companies that rise to the top follow the timeless compensation plan principles outlined in this white paper. They have studied hard and paid their dues to learn how to master compensation! If a company gets the principles right, it can usually make mistakes in other areas and still push ahead. However, if a company is unfortunate and gets them wrong—well, it’s not pretty! Very simply put, those plans that haven’t made it haven’t fit within the parameters outlined above.
The other concept I want to drive home is that Breakaway, Hybrid Uni-level, and Binary Compensation plans are all great plans that can be the vehicle to landslide success, but are fundamentally very different mind sets. They represent three totally different ball games with their own specific rules and regulations.
Mark Rawlins CEO, InfoTrax Systems (801) 431-4900 firstname.lastname@example.org
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