Types of compensation plans (part 2)
Check out part 1 if you haven’t read it yet.
To continue our review of the three major compensation plan types, let’s look at the other areas in which each plan differs. Aside from the primary characteristics that make each plan unique, there are several other differentiating factors. Let’s take a look at the monthly qualifiers, paid volume, and pay percentages of each plan.
Probably the biggest difference between breakaway plans and the other two common plan types (binary and unilevel) comes from the personal monthly qualifiers. That is, the method by which a distributor qualifies for his/her commissions.
Binaries. Distributors in binary plans qualify on their personal volume and on the balance of volume between their two downline legs.
Unilevels. With unilevels, distributors qualify on personal volume until they become sales leaders. Then they achieve their monthly qualifying volume either with total organizational volume or the volume within a specific number of levels.
Breakaways. In breakaway plans, new distributors qualify on their personal volume, but once they achieve the breakaway rank they qualify monthly on their group volume. Each distributor’s group extends from their place in the tree to the breakaway distributor beneath them. Reaching the breakaway rank removes your volume (and the volume of anyone beneath you) from the group volume of anyone above you.
Another major difference is which volumes a distributor is paid on. Unilevel and binary plans pay on the personal purchases of distributors in the downline. In a unilevel, distributors are paid a certain number of levels down the tree. In a binary, distributors are paid for every personal purchase in the entire pay leg of their downlines.
Breakaway plans pay distributors who haven’t reached the breakaway rank on personal purchases in the downline, but once a distributor breaks away he or she is also paid on the group sales volumes of other breakaways in his or her downline.
As I mentioned in part one of this series, binaries and unilevels often add additional bonuses to their plans in order to supplement the work of top leaders, but breakaways by design compensate leaders. The bonus type used to pay those breakaway distributors inherently pays deeper into the downline because distributors who qualify for it aren’t just paid on a certain number of levels of individuals, they’re paid on a certain number of levels of groups. This means that the generation commissions in a breakaway are typically much larger and the distributor is paid much deeper into his/her organization.
Each plan type has its baseline commission which pays about 5% on a distributor’s downline volume. In a unilevel, baseline compensation is the unilevel bonus and typically distributors get 5% on the volume generated in each of the levels they qualify for. In a breakaway, baseline compensation is the generation bonus and distributors typically get 5% on the group volume for the generations they qualify for. In a binary, baseline compensation is the pay leg bonus and typically distributors get 10% on the volume in their pay leg and 0% on their reference leg—if they’re legs are balanced this is roughly 5% of the overall volume. So as long as you do a good job building a balanced organization, you’re going to get about 5% on the volume of your organization.
Baseline compensation is designed to ensure distributors a continuous stream of commissions that grow as their organizations grow, however—as I’ve already mentioned—it doesn’t usually provide enough compensation to motivate each distributor type, so organizations add extra bonuses to supplement salespeople and top distributors.
So each company has to decide how they’re going to supplement their baseline compensation in order to motivate these distributor types. Companies are able to pay out a certain percentage of their revenue while maintaining profitability. This percentage is surprisingly predictable. It is always between 40% and 50%. So supplemental commissions have to come from whatever remains of that percentage after the baseline has taken its share.
Unilevels and binaries typically use fast start bonuses to motivate salespeople to build their businesses. Fast start bonuses give salespeople a higher percentage on their new recruits and in some cases new customers. Without the fast start you might get $5 on a $100 sale. With it, you might get $15.
Commission plans are carefully calculated. The smallest nuances can determine if the company is profitable, or if it quickly overpays and diminishes returns to the point of closing.
Want help designing the qualifications for your ranks and commissions? Reach out to us at MLM Compensation Consulting. We offer data-driven compensation plan design and analysis.
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