Level commissions are the most common network marketing commissions. Virtually every company we’ve worked with at InfoTrax—except for a few older binary plans—has had at least one level commission in their plan.
How level commissions work
Level commissions pay the distributor a percentage of the volume generated in a certain number of downline levels. The percentage is the same at every level, but as you advance through the ranks you qualify to be paid on volume from more levels. For example, a Rank 1 distributor might be paid for only the volume generated on the first level beneath him, while a Rank 3 distributor might be paid for the volume generated on her first, second, and third levels. One way to visualize the payout of this commission is to imagine the total commission paid as a pie. As the pie moves upline, each distributor that qualifies for payment takes one piece of the pie.
When someone places an order, a specified percentage of the order total is paid to his or her upline. In the illustration above the total percentage is 15%, and each qualifying distributor gets 5% of that 15%. The actual percentage paid, and the number of upline distributors who receive this commission varies from compensation plan to compensation plan.
A distributor who qualifies for a level commission is paid on any sale that occurs on the downline levels he or she qualifies for. This is known as a distributor’s pay line. There’s typically no limit to the amount of sales on which a distributor can earn commissions, nor do the number of levels paid, or the percentage paid change due to downline distributors advancing in rank.
Keep in mind that with “compression” (in which non-qualifying distributors are “compressed” out of the tree) the level that a downline distributor is on can change from month to month depending on who else stays qualified in the downline.
What level commissions do well
The purpose of the level bonus is to even out the earnings peaks and valleys caused by the other commissions and to ensure that as volume grows, earnings also grow. It’s a tool to stabilize payout and spread the wealth and its goal is to ensure that working distributors are always paid on their downline. It tends to have a smooth, stable line of earnings growth, increasing slowly and steadily over time.
Easy to understand
The level commission is the easiest commission type to understand. Over the years it has been used by hundreds of companies, and its behaviors are well known.
Stable earnings base
Level commissions can be designed to create a stable earnings base for distributors, which is critical for a successful compensation plan. Once this stable earnings base is in place, other commissions can be used to target specific aspects of a compensation plan.
Spread the wealth
Level commissions help ensure that a broad portion of a distributor’s upline is receiving level commissions.
Lack of urgency
Unlike some other commission types, once a distributor qualifies for level commissions the percentage a distributor earns always stays the same. If the bonus pays 5%, another $100 in sales will always net them $5 in commissions. Some other commission types increase the percentage paid on all volume if a distributor increases their qualification level.
Stacking is a critical problem with level commissions. If you don’t properly define the rules for this commission type, your distributors are likely to add fake distributors into their downlines to increase their own payout. Unchecked, stacking can destroy a company.
Common varieties of the level commission
As you may have guessed, unilevel commissions are the primary compensation in unilevel plans. Distributors receive defined percentages on personal volume generated in their downlines. The requirements that distributors must meet to receive these commissions are minimal.
Generation or leader commissions
Generation commissions are one of the two primary commissions used in breakaway plans. These commissions pay distributors on the group volume of downline distributors at the breakaway rank—rather than on downline personal volume. This means that salespeople, sales leaders, and dream builders all have the potential to qualify.
The qualification requirements for this variety are more difficult—usually including a personal sales volume requirement and a group sales volume requirement. Generation commissions are designed to bring “hubs of activity”—a.k.a. distributors who are doing big business—into an upline distributor’s payline. With a well-designed generation commission, distributors receive payouts on a certain number of levels of these hubs of activity; each level of activity is called a “generation.”
Matching commissions pay distributors a percentage of the earnings—rather than the sales—of the people in their organization. For example, a company may pay a 10% matching commission to the enroller of a given distributor. If that distributor earns $1,000, their enroller would earn $100.
Level commissions have been the mainstay of compensation plans for a long time, and all indications are that they will remain so for the foreseeable future. They provide the backbone of stability that any compensation plan needs to be successful.
Want help designing or updating a level commission for your company’s compensation plan? Reach out to us at MLM Compensation Consulting. We offer data-driven compensation plan design and analysis.
This article is an adapted excerpt from Mark Rawlins’ book From Commission Plan to Compensation Strategy. Give it a read if you want even more information about commissions and how they come together in compensation plans.