A compensation plan is one of the most important ingredients to creating a successful direct selling, party plan or MLM company.

Some of the others are pleasing products, a logical set of business-building steps that can be taught easily to new recruits, internal systems to manage the growth, healthy margins, and adequate cash to keep the business running smoothly.

This article focuses on behavior considerations for your compensation plan.

The primary purpose of a compensation plan is to motivate specific behaviors, those that you determine are required to help bond your consultants to the products, the business opportunity, and your Company. So, before you decide whether what kind of compensation plan you’d like to build, think first about the behaviors you wish your consultants to exhibit for you.

The construction of a compensation plan should begin with a determination of the minimum level of personal sales for a consultant to be considered “active” and eligible for the primary rewards of the plan. To properly set this amount, you will need to examine both the price points of your products and the consumption habits of the final consumers.

The types of measurements typically used for building teams are the number of personally sponsored “active” recruits, the number of these recruits with specific titles, and group or team volumes expected from the group based on its number of members.

Once you have determined the minimum amount of personal sales to stay “active”, you can extrapolate these numbers in determining group or team volumes expected when sponsoring new recruits.

Next, you should examine the margins of your products and services. Ideally, your cost of goods sold (delivered to your facility) should be no more than 1/5 of the retail price to the end consumer. For some products like gourmet food, margins of 4 times COGS may be the best that you can do.

I am often asked if a keystone markup (2 times COGS) will be good enough. The answer is “no” and the reason for the “no” is simple. Most companies pay between 40 and 50% of the retail price in commissions to the selling consultant and her upline. On an item that might sell for $40, this would mean that between $16 and $20 of the $40 would be paid out in commissions, leaving $20 to $24 in gross profit. If your cost was $20, there would be little or no profit for you, and this is before you consider your expenses to run the business.

Let’s assume that you decide to pay out 50% of sales in commissions. You will need to decide how to divide up the pot. If you offered your consultants a 40% personal sales commission, then 10% would be left to pay the upline the bonuses they expect and deserve for building downline sales organizations.

While there are different types of compensation plans (unilevel, generation breakaway, binary and matrix), at its core, all compensation plan design is a balancing act.

First, determine the requirements for activity and promotion to each title in the plan. Then, match the rewards as best you can so that the value of the rewards are in line with the efforts to meet the requirements.

As you decide upon the rules of the road, consider the behaviors you expect of your consultants at every turn. The behaviors to be rewarded include personal sales, recruitment of active frontline consultants, development of a team, and development of leaders.

Every dollar you pay in commissions should be in exchange for a specific behavior.