The Perfect Compensation Plan
I’ve been working with MLM companies and compensation plans for over 30 years, and one common misconception is that there is a “perfect compensation plan” that would work for any company. There is no perfect compensation plan, but there is a golden rule which, when applied, will create favorable compensation results for the company’s unique situation: your product strategy, compensation strategy, and build strategy must fit together like pieces in a puzzle.
Product strategy. The product, the ways it fits the direct selling model, and the best practices for selling it. Good products for MLMs are those which require distributors to provide customers with—in varying ratios—motivation, education, training, and support (METS). The emphasis among these four things varies from product to product and impacts the way the product is sold.
Compensation strategy. The goals and metrics of a compensation plan. A good compensation strategy takes into account the needs of the product and the needs of distributors.
Build strategy. The combination of methods which, when used, optimize a distributor’s compensation. These are “best practices.” They are driven by the design of the compensation plan.
When these three complement each other, they create a virtuous cycle. If you’ve never heard the phrase before, a virtuous cycle is a self-reinforcing positive feedback loop that creates favorable results. It is the opposite of a vicious cycle, and if these three elements—product strategy, compensation strategy, and build strategy—don’t fit together seamlessly you will have a vicious cycle.
Let’s look at an example to illustrate why this is important. If your consumers need three hours of training in order to use your $200 product correctly, you can’t pay the sales person 5%. 5% of $200 is $10. No one will work three hours for only $10 of pay. If your compensation plan looks like this, it is not a virtuous cycle.
If you’re launching a company, you should design each of these three components with the others in mind. You should be wary of the symbiotic relationship between them. Compensation both creates build strategy and is influenced by build strategy. Product strategy influences both compensation and build.
If you’re a distributor joining a new business, or reevaluating your current business, you should look closely at how each of these things align in the company you distribute for. Does your compensation match your efforts? Does your product align with the MLM business model in general? Does the build strategy your compensation plan incentivizes fit the needs of the product?
All of this feeds into company culture. Culture is essential in direct sales organizations. If the culture of a company is thriving, the company thrives. If distributors and customers grow disillusioned and the culture begins to die, the company as well will die. Culture encompasses the shared ideologies of the individuals in the organization but it also includes things like lifestyle and earnings expectations.
In a party plan marketing company the compensation plan has to support retail sales as well as a consultant’s downline. Party plan companies focus on retail sales of a one-time product purchase; the compensation plan must include a good retail margin. The downline or group volume compensation typically comes second to retail sales. The compensation needs to enforce these elements in the company and culture. Party plans tend toward a culture with lots of people making a little money.
MLM companies—that is, companies which are not party plans—often work differently. Some companies create a culture based on a product that is consumable. Consumable products such as essential oils or energy drinks allow for the compensation plan and build strategy to be built around auto-ship—an arrangement in which distributors and customers purchase product regularly. Compensation focuses on recurring sales that are created from a one to one sales method. In companies with this product strategy, the compensation plan pays more money to the mid-level and top level distributors.
Compensation plans must be built around the cultural norms of the company. They have to be built around a community. Compensation plans affect culture, and are affected by culture. Whether you are a distributor or a company owner, you must understand the culture within your company. When considering a compensation plan, you need to ask this question: “Culturally, what is a lot of money? What is counted as ‘success’ in my company’s culture?” There are as many successful compensation plans out there as there are definitions of success. Build your compensation plan around that. Join or stay with a company whose culture fits with your idea of success.
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