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What’s a Binary Compensation Plan?

Article by: Mark Rawlins | Founder, MLM Compensation Consulting
January 29, 2018

When the industry went through the great shake-up in the 1980s, binaries were one type that survived. It is important to talk about binary because there are some successful ones in the industry. However, they are going down in popularity. When it arrived on the industry scene, this type of plan was the complete opposite approach to commissions than that of existing plans. The difference was night and day. Before the binary emerged, every other compensation plan relied on the following two premises:

  • The plan pays commissions on a limited number of levels of a distributor’s downline, but on an unlimited amount of sales volume.
  • For a given product order, the plan pays all commissions in a single commission run.

In contrast, the binary plan relies on the following two opposite premises:

  • The plan pays commissions on an unlimited number of levels of a distributor’s downline, but on a limited amount of sales volume.
  • For a given product order, the plan can pay commissions across several commission runs, and in fact, it’s impossible to know when the plan has paid all the commissions on a single order.

This represents quite a break from the traditional way of doing business. But this plan survived the test of time to become one of the dominant base compensation plan types in the MLM industry.

Two types of binary plans exist, pay leg and cycle. In this article we explain the pay leg type of binary.

Binary compensation plan basics

  • A distributor sponsors two people, creating two downline legs, and then builds a downline under each of those two legs.
  • Spillover occurs when a distributor builds a strong leg and then a distributor in that downline needs to build just the second leg. 
  • Sales volume rolls over from one pay period into the next until the distributor earns a commission on it.
  • Some binaries allow distributors to have multiple business centers—usually three or seven.
  • Traditionally, binaries pay commissions once a week, however, some still pay monthly.
  • Distributors must balance the downline sales volume they generate between the two downline legs. When individuals reach specific levels of sales volume, they receive a commission check.
  • Most binary plans pay a weekly pool commission in addition to the base commission. The company puts aside an amount of money in a pool and then divides it up among those who qualify.

How a binary organization is built

A binary compensation plan uses a limited-width structure that restricts distributors to two first-level recruits, creating two downline legs. A leg is a portion of a distributor’s organization starting with one of his or her first-level distributors and encompassing that first-level distributor’s entire organization. Let’s look at Karen’s organization.

One leg is Karen’s strong leg (the leg with more volume, also known as her reference leg) and the other is her weak leg (the leg with less volume, also known as her pay leg). These labels aren’t permanent, they’re practical. If her weak leg grows and surpasses her strong leg in volume, it becomes her strong leg.

A binary compensation plan does not pay on levels like other plans, but on the sales volume of the weak leg. The plan pays Karen 10% on her weak leg, so if her two legs are close to each other in volume, she’s getting roughly 5% of her entire organization’s volume. With a binary plan, depth really doesn’t matter, because these plans pay distributors on their volume all the way to the bottom of the tree. What matters is the balance of sales volume between the legs. If you get $100,000 on one side and $10,000 on the other side, then you’re going to earn on the $10,000. If you have $100,000 on one side and $99,000 on the other side, you’re going to earn on the $99,000.

How sales volume rolls over

Distributors can accumulate sales volume in one week or across several pay periods. In this respect, binary compensation plans are unique. Most plans pay a distributor on whatever volume they accumulate in one pay period. If they don’t accumulate enough to earn a commission, that volume is simply lost—they will never earn commissions on it.

With a binary, a distributor can accumulate volume for several pay periods. When they accumulate enough to qualify, they earn a commission—binary has that cumulative effect. For example: If a distributor must earn $500 in volume to qualify for a commission, but accumulates only $100 per pay period, then on the fifth pay period—Bingo! They get that commission.

What are multi-center trees?

A multi-center tree is a concept that allows a distributor to have more than one position in the downline tree. Having more than one business center means having more than one pay leg. And in some cases, it means earning a commission twice on the same volume.

Companies implement multi-center trees in two ways:

  • After distributors succeed in filling in their original matrix, they can have a new business center in the tree and build a new downline from that center.
  • OR, the company creates all of the business centers at the time of the distributor’s enrollment, and places the distributor’s entire downline under these multiple business centers.

When you pay on multicenters in a binary, you pay out on the same volume three times. In this example, first you pay on Karen’s center 2. Next you pay on Karen’s center 3. Last you pay on Karen’s center 1. If Karen gets three business centers at the time of her enrollment, her second and third center go directly below her first center, so they constitute the tops of each of her first center’s legs. Here’s a visual representation of that, breaking it down by the payout for each business center.

In this example, Karen’s first center gets a 10% commission on all the volume under her third center. Her second center is the top of her reference leg, so her first center doesn’t earn on its volume, but the second center itself gets 10% on the weak leg of the organization beneath it.

Her third center also earns on its pay leg which constitutes half of her first center’s pay leg. In other words, she earns 10% on her third center’s pay leg, and another 10% on the same volume because it’s also in her first center’s pay leg.

The total payout looks like this:

Again, she earns on all her volume except that generated in her second center’s reference leg and she earns twice on her third center’s pay leg.

This is difficult to understand and the confusion the binary structure causes is a draw back to the plan type.

What’s the “cap”?

A typical binary compensation plan would specify that if a distributor has at least $500 in volume on the weak leg, they would receive 10% of their weak leg volume in commission. However, one of the rules of almost all binaries is that they have a payout cap of somewhere between 40 and 50% of wholesale amount. This means that if a company adds up all of its commission payments and the total exceeds the payout cap, the company has to reduce everyone’s payment proportionally to keep the total payout below this cap. We call this scenario hitting the cap. All binaries hit the cap, so it’s important to be familiar with this feature.

Let’s imagine a company that wants to have a cap of 39%—in other words, the plan will pay out 39% of the wholesale dollar. There are two ways to cap a binary plan.

Method 1:

Set a different wholesale price to commissionable volume. For example, 130 wholesale price to 100 in commissionable volume. This method allows the company to say payout percentage is higher (50%) because they list the payout on commissionable volume.

Example

If a company:

  • Has one product with the wholesale price set at $130
  • Has the commission volume for the same product set at 100 points
  • Payout is 50%
  • Makes $1M in sales and therefore 769K commission volume points

Calculate payout using the points value (50% of 769K). Total companywide payout is 384K, slightly less than 39% of $1M.

Method 2:

The second method is to state that the cap is 39%, calculate earnings, then reduce them all proportionally to make the company-wide payout match that 39%.

Example

If a company:

  •  Has a 39% payout cap to limit payout to no more than 39% of sales
  •  Makes $1M in sales

You calculate earnings and find that pay out should be $490,000, which is 10% over the set cap. Now you reduce everyone’s commissions by 10% in order to stay below the payout cap. Distributors get only 90 cents on every dollar.

This has some marketing disadvantages if distributors compare payout and believe that others are paying a higher percent.

One strategy for offsetting the potential marketing disadvantage is to include conventions and trips in the cap amount. Conventions and trips typically cost the company 6% of wholesale volume. Adding these into the cap brings the overall payout percent to 45%. Now the commission pays out 39% and reserves 6% for trips and conventions.  

Combination of methods:

A company can also do a combination of capping methods. A combination approach might set a small difference between wholesale price and commissionable volume and lower the cap to 45% and include some other incentive expenses.

Customer programs in binary compensation plans

Today a major problem binaries are facing is the need for customers. The FTC has pushed the industry to acquire non-distributor customers. At least in the US market, if you don’t have a part of your sales process dedicated to bringing people in as preferred customers, you’ve got a problem. And with a binary, it can be very hard to bring in customers. Why?

Because of the rigid structure of the tree. Where do you put your customers? You can have two separate trees—a customer tree and a binary tree. But that can be tricky.

One issue is it divides the distributor’s focus. There’s this real sense of urgency to a binary. “Get in now,  have your downline built for you and get that volume that’s gonna roll over.” That’s the binary focus. A customer focus is different. It’s “let’s sell the product,” not “let’s sell the plan.” Those are two different behaviors. Any time you have your distributors working at cross purposes, you’re going to lose some momentum to your growth.

Another issue is what to do if a customer wants to become a distributor later on. You can have them come in as a customer and move up to become a distributor later, but they will have lost opportunity. They could have had a big downline underneath them if they had come in as a distributor in the beginning. Therefore, you need to train your distributors to make sure that their enrollees do not want to be distributors before you put them in as customers.

What do you do with customers? And what do you do with people who aren’t certain whether they want to be distributors?

Don’t get me wrong. There are ways to make it work. Isagenix, USANA, and Team National, have all figured out how to have customer programs in a binary and make a billion dollars a year. (You can look at their plans to get some ideas.) So, it’s possible. But, in order to accomplish it, you have to do a fair amount of twisting and turning.

Strengths of binary compensation plans

  • The binary does an excellent job of paying mid-range commissions. This is its strength and probably the reason it has survived. On the other hand, it does not do well on very low-end commissions or high-end commissions.
  • The initial selling feature of the binary compensation plan was that it was much easier for distributors to understand and maintain qualifications than other plans of the day. What could be simpler? A distributor sponsors two people and builds those two legs. If those legs generate business, the distributor receives commissions. If they generate a lot of business, the distributor makes a lot of money! 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.
  • Volume never moves out of a distributor’s payline no matter how many levels deep their genealogy goes.
  • The binary compensation plan’s behavior is very well understood by industry experts.

Weaknesses of binary compensation plans

  • It’s difficult to create customer programs that don’t come with opportunity costs for the customer who later transitions to be a distributor.
  • Many of the original binaries promised 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, combining binaries with other commission types can fix this capped earnings problem.
  • Binary pays well but distributors sometimes struggle with the structure aspects of the plan.

Summary

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 distributors can find the structure challenging to deal with. Binary companies can maximize their success by combining the base commission with other types of commissions.


Want help designing a binary compensation plan? Reach out to us at MLM Compensation Consulting. We offer data-driven compensation plan design and analysis.

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Mark Rawlins | Founder, MLM Compensation Consulting

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Mark brings extensive experience to the industry. Mark began work in the direct selling arena in 1981. He has...

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