What’s a pool commission?
Pool commissions are excellent for targeting specific behaviors. They are the most flexible of all commissions allowing a company to target any group in the organization. There are two main variations on this commission type equal shares and proportional. First in the equal shares pool, everyone who qualifies gets an equal share of the pool. Second, in the proportional-shares pool everyone who qualifies earns the proportion that their downline contributed to the overall value of the pool. A pool commission is an excellent way to keep the company’s payout from becoming too large but still create some innovative commissionable opportunities.
How pool commissions work
Let’s say that a company has a million dollars in sales volume and sets up a 1% equal shares pool bonus targeting 3-star distributors who generate $2,000 in personal sales volume. The total pool size is $10,000, and if 50 people qualify, those 50 people will receive checks of $200 each. The $200 can make an immediate impact on those distributors.
Calculating a pool commission has three parts:
1. Determine the value of the pool. For example, a company may allocate 1% of total sales to a pool.
2. Determine the number of shares that each distributor earns shares based on the commission rules. For example, I might receive one share for each personal customer who purchased product this month.
3. Determine the value of each share. The company now takes the total value of the pool and divides it by the total shares awarded by the commission plan. For example, if the pool value is $10,000, and the company awarded 5,000, each share is worth $2, so if a distributor had five shares, they would receive a commission of $10.
What pools do well
Pool commissions can be good for short-term or targeted incentives where the incentive is high. Because of the flexibility, companies can use pool commissions to enhance front-end, mid-level, or high-end compensation. It’s rarely the primary commission because distributors cannot calculate their payout until the commission period has ended and the company has calculated the pool. Because of this, if a company improperly designs the pool, distributors’ earnings can fluctuate wildly depending on how many qualify that month.
Companies should not use pool bonuses for a large portion of a compensation plan because they are too variable and unpredictable. Think of them as the “dessert” of a plan; they should never be the main course.
Why use a pool?
If a company wants to encourage recruiting, it can define a proportional-shares pool that includes anyone who sponsors a defined number of people. Or, if a company is worried that its top distributors are maxing out their earnings too quickly, it can set up a pool targeting distributors with large downline sales.
The best pools tend to be a relatively small portion of the compensation plan and focus on rewarding a specific activity.
Companies can use pools for three reasons:
• To fund incentives like car programs and other targeted or special purpose incentives.
• To give an added incentive to reach an intermediate rank in the compensation plan. For example, if a company wants to encourage distributors to achieve the rank of 3-star and to earn at least $400 per month, a pool commission designed to pay $100 to all qualified 3-star distributors helps to ensure that the earnings goals are met and gives an added incentive to achieve the rank.
• To add additional earning capabilities to a plan in which dream builders will hit an earnings ceiling. For example, a company might divide 1% of sales among all the 9-star distributors in a proportional-shares pool based on each 9-star’s organizational sales volume. This pool can encourage the dream builders to continue to build their organization even though most of their downline growth may be beyond their payline.
Rewards specific activities
Pool bonuses are an excellent way of rewarding specific activities with limited payout. They are also immediate. A pool bonus can make a real difference if a company is trying to encourage a specific behavior in its distributors.
Encourages top distributors
A pool is a good way of encouraging distributors to continue to build even after reaching the top rank.
Value is unknown
Unless a company is careful, distributors won’t know the value of their shares until the commission runs for the pool. What motivates the distributors to qualify if a company can’t tell its distributors whether they will earn $10 or $1,000?
If the pool isn’t properly designed, shares of the pool can devalue as the company grows. If the company becomes wildly successful with poorly designed qualifications, too many people may qualify for the pool. At this point, each person’s share is so minimal that it no longer has value.
In my experience, industry professionals either love pools or hate them. No one seems to be in the middle. The wide range of responses is an indication of the importance of “doing them right.” The other vital issue about pool commissions is not to center too much of the compensation plan dollars around them. Use pools only as finishing touch commissions. Additionally, companies must do enough modeling with pools to have a general idea of the pool’s range. They must ensure (using rules) that the pool stays within the defined range or it loses its efficacy as a commission type.
Want help designing a pool commission that drives the right behaviors? Reach out to us at MLM Compensation Consulting. We offer data-driven compensation plan design and analysis.
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