In November 2019, the president of Sylvina Consulting was interviewed by Richard Sletcher for his MLM For CEOs podcast.
This post contains the content of that podcast in written form. You will probably find Jay’s words to be as fascinating as Richard found them to be.
I have the great pleasure of interviewing Jay Leisner of Sylvina Consulting. Jay is a top compensation plan and direct selling expert. He’s helped hundreds of new and established network marketing and party plan companies succeed. He has more than 30 years experience in the industry and is currently the President of Sylvina Consulting,
Hi Jay, thank you very much for joining me, I really appreciate it. Before we get started, I was wondering if you could just give me a little bit of your background and how you got to the point of where you are in the MLM space.
Yes, Richard, it would be my pleasure to do so. I’ve had the honor and privilege to have worked with network marketing, direct selling, and party plan companies for the last 33 years. For the last 20 years, I’ve operated my consulting practice Sylvina Consulting, which provides compensation plan and direct selling consulting services to companies of all sizes, from startups through established multi-billion dollar a year companies in the United States and throughout the globe.
Before that, for 13 years I worked as a software developer, project leader and business analyst for a direct selling software provider. I got my introduction to the industry through this channel, from the technology side. I call that my first life, the software side, but for the last 20 years, I’ve been doing primarily business and compensation plan consulting. I’ve had the privilege to have worked with over 400 companies in 18 countries.
So, let’s start by discussing compensation plans. When you are designing a compensation plan, what is your process? How do you go about helping a company get the compensation plan right?
That’s a good question and I’m going to with your permission, start by answering a slightly different question, which is, how do you design a really good compensation plan and what makes the compensation plan good? I think there are, unfortunately, many people in this industry, as well as individuals who start companies, who try to design their compensation plans and they do it without sufficient knowledge to understand what’s most critical in designing a plan. Would it be okay if I started with that and then I can certainly answer your question about the process?
Compensation plans, at their heart, really are designed to motivate and reward some very specific field behaviors, and in all, there are 12 of these behaviors. You may not know this, but compensation plan expense, what a company spends on field compensation, is its largest expense. It’s larger than all of the expenses of the business put together. So we need to make sure that companies spend this money wisely because it’s their largest expense and they can’t afford to waste any of it.
There are 12 behaviors that we want to motivate and reward in the field.
The first is personally purchasing the company’s products and services. All companies want people to be able to purchase their products and services. The reason they want to do that is they want their money. They want the money of the sales representatives in the pay plan. So, if the representatives themselves are personally purchasing the products, there are more sales. If there are more sales, there’s more commission.
The second behavior is selling to customers or non-participants in the income opportunity. There are two reasons why we want to do that. The first is for legal reasons. We want to have a lot of volume that is sold to people who are not representatives. Network marketing companies traditionally focused just on the consumption of the representatives. That used to be good enough, but today, unfortunately, especially in the United States, this has proven to be a problem. The second reason we want you to sell to customers is, a distributor can only purchase so much for personal use. If a distributor can sell to customers, then the amount of sales per distributor is higher. If the amount of sales per distributor is higher, commissions are higher, the company makes more money, and the field makes more money. So, those are the reasons for selling to customers.
The third behavior is introducing the income opportunity to others, which is sponsoring or recruiting. I like to say unless your company is sponsoring and recruiting new people, you’re shrinking. You have to bring on new blood because people leave. People leave because it’s easy to join and easy to quit. So because it’s so easy to join and easy to quit, we always need new people. That’s just the nature of the beast.
The fourth behavior is building a team. A team is a group of people that work together to accomplish a goal. I love team building because the behavior of one person rewards more than one person. That’s the beautiful thing about teams.
The fifth behavior is training, supporting and nurturing others. We need to make sure that the compensation plan doesn’t just pay a one time bonus based on enrolling someone or based on the sales of someone. We are not looking for a “love them and leave them” approach. We want them to keep loving them and loving them and loving them. To do that, the compensation plan needs to reward training supporting and nurturing others.
The sixth behavior is becoming a leader. Leaders sell more, recruit more and stay in the business longer. The best predictor for the immediate future of your company is how many new leaders you are bringing into the business. So, leaders count. They’re so important to the success recipe of a direct selling company.
The seventh behavior is personally developing leaders. I like to say the purpose of a leader is to get more leaders. So leaders need to be taught how to duplicate themselves, and how to help other people become leaders.
The eighth behavior is helping other leaders to develop leaders. In addition to having leaders develop leaders, we want them to teach other leaders how to develop leaders.
The ninth behavior is meeting or exceeding minimum activity requirements, which is the minimum bar that we set in a plan for activity. We want people doing the minimum, but not just the minimum, we want them doing more than the minimum. The compensation plan needs to motivate and reward that behavior.
The tenth behavior is being promoted to a higher title or rank. The business is all about money, but it’s also about recognition. When you promote to a higher title or rank in the plan, one of the ways that we motivate and reward you is to provide you with increased compensation and additional ways of earning money. So, being promoted is behavior number 10.
Behavior number 11 is meeting or exceeding your title maintenance requirements. To be paid at the level of your title, you need to meet specific requirements. To get paid at the level of the next title, you need to produce more results or meet higher requirements. So, the 11th behavior is meeting or exceeding your requirements.
Behavior number 12 is staying active and engaged in the business as long as possible. That is known as retention. The opposite of retention is attrition. What we want is increased retention and reduced attrition.
Those are the 12 behaviors we need to motivate and reward with a compensation plan. If you said to yourself, my that’s complicated, I bet you couldn’t do that with a really simple compensation plan, you’d be right! A simple compensation plan has only one value, and that is, it is easy to explain. Other than that, everything else about one is bad because it doesn’t motivate and reward these 12 essential behaviors.
How many times do you have clients coming to you saying they want a really simple compensation plan, and fundamentally, it’s because they don’t understand how compensation plans work or the implications of the compensation plan at all?
The answer to your question, Richard, is 90%. I would say 90% of the companies I talk with, who I bring on as clients, one of the first things they say is, I don’t want to have a complicated plan like everyone else. I want it to be simple and easy to explain. One of the questions that I wondered about a while back was, why do people design simple compensation plans? I mean, if they are so bad, why do people design them? I’ve come up with the answer and if it’s okay with you, I’d like to share it.
Reason number one is, they believe in their heart that the reason that people are unsuccessful in the business is that they simply did not understand the compensation plan. Some think that if we can make the compensation plan understandable and easy to explain, then people will be successful, but they’re dead wrong. They’re dead wrong about that assumption. I cite as evidence what I call the whales. Now, you might think whales, what are you talking about? I’m talking about the largest direct selling companies in the world, the ones that do a billion dollars or more of turnover per year. Of those companies, and there are 30 of them in the world that do a billion dollars or more in sales. It’s impressive, you’ve got a nice flock of whales, whatever you call it, I don’t know a school of whales maybe would be the right term. Of all of those whales, all of those large companies, none has a simple compensation plan. My thought is, if you are smart enough to become a whale, you probably would do it with a simple plan if you could, but the whales understand that you can’t.
The other reason why people design simple compensation plans is they don’t know about the 12 behaviors. They don’t know about the purpose of a compensation plan, what are the 12 things we want the field to do. If they knew about the 12 behaviors and they evaluated their simple plan in light of the 12 behaviors, they would realize it doesn’t perform very well. It can’t do all these things. My other analogy is like building a car out of rubber. You need rubber in your car, but it can’t all be rubber. Your car has to have fluids and metals and parts and all sorts of things to make it work. Rubber isn’t enough. So anyway, yes, it’s a challenge. There’s also this balance between simple compensation plans and the 12 behaviors. I say it’s like a teeter-totter or a seesaw. When one is up, the other is down. Most simple compensation plans very poorly motivate and reward the 12 behaviors, and the plans that motivate and reward the 12 behaviors, are not simple.
One of the things that I’ve noticed is that when you get a very simple compensation plan, it rewards the guys at the cutting edge, the guys doing the sales, but doesn’t create any room for developing leadership or to build a leadership team because all of the money has been given away very quickly without any thinking about what happens to the team as you build. No company can look after 30,000 agents by themselves; they need team leaders.
Well, you’ve hit half of the issue with simple plans. And you’re right, folks tend to focus more on two behaviors. One is selling, and one is on building a very shallow team. For example, if we paid you 25% on what you sell personally, and then paid you 5% on three levels of downline sales, who would love that plan? The answer is number one, people that don’t have a downline because they don’t care. Number two, people that have an organization that’s only three levels deep. So here’s the challenge. I like to use a picture of the shape of an independent representative’s downline as a diamond. It’s shaped like two triangles on top of each other with the fat part of the triangle meeting in the middle.
If you look at the shape of that diamond, the fat part of the diamonds is where most of your people are. Now, to be fair, your organization doesn’t look like a pretty diamond, it looks like an ugly diamond, but for example sake, let’s just assume it’s a pretty diamond. As the organization gets larger, the shape doesn’t change. What changes is the size of the diamond. Where is the fat part? Where’s the part of the diamond where most of my downline is? If the downline is only three levels deep, most of the people are on level one and level two. Level three is the tail, the bottom, but as I continue to build my organization, the fat part of the diamond moves further and further away from me, kind of like as you get older your body goes toward the floor.
The challenge is that if we’re looking to attract leaders, and leaders, by the way, who’ve had experience in other direct selling companies, they understand this concept of the diamond. They understand that in the beginning, the organization will be shallow, but where the money is, is in-depth. How big of an organization can they build is the challenge! A simple compensation plan only pays on the top part of the diamond. So as you build a larger and larger organization, the compensation plan appears to be worse and worse for you, and what you don’t want are your top leaders saying “I’ve seen the future and it’s bleak. Get out now while you can”. You want your leaders saying, “I love this company, I love this company’s compensation plan, it takes care of me, it takes care of you, it will take care of me in the future”.
What I also would tell you is if experienced direct selling representatives are looking at your company, and you have a super simple shallow compensation plan, they will pass on you. They will look at you and say, “No, I’m not going to join your company”. I’m going to tell you one other very important thing. The only reason that people shouldn’t join your company is that they don’t want to sell your products. They like jewelry; you’re selling supplements. They like supplements; you’re selling hair care products. Whatever it is, if they don’t like your products, you don’t want them. The last reason you want people not to join your company, or leaving your company is because of your payment plan. You don’t want that.
There’s a big problem out there, this myth that simple compensation plans are better. The myth is growing. I’ve had several people approach me in the last six months, who said, “What do you think about the changing trend of compensation plans being simpler?” That kind of hit at the heart of my passion for this? What I would tell you is simple compensation plans are too hard.
So, let me explain something else that’s critically important to understand about direct selling. I ask my clients this question at the very beginning of the project. Do you want your representatives to be able to earn a full-time income through your opportunity? I know most of them won’t. But do you want it to be possible? Do you want someone to be able to earn $1,000, $2,000, $3,000, $5,000, $10,000, $20,000 a month or more? The question is, do you want them to be able to earn a good full-time income? And 90% of the people say yes, and 10% say no. And for the ones that say no, when I say to them, so you want them to leave your company when they realize they can’t do that, they change their answer to Yes.
Everyone wants people to be able to earn a full-time income. Well, here’s the problem. Network Marketing and direct selling are based on earning a small percentage on a lot of people. Okay, not a large percentage on a small number of people, but a small percentage on a lot of people’s volume. If you had a super simple compensation plan that was three levels deep, how many people would you need to personally recruit? How many people would they need to personally recruit? How many people would need to be on your third level? The answer is way too many. It’s too hard. You can’t say to people with your super-simple shallow plan if you recruit 100 people, and they recruit 1000, you’ll get paid a lot of money. Who’s going to recruit 100 and who’s going to recruit 1000? It’s too hard.
I’m with you.
So the process of designing a compensation plan, getting back to your first question, gets to the heart of what we do and what I think is essential that every company does. Don’t make the mistake of saying, “I’m going to take another company’s compensation plan and use it.” If they’re a jewelry company, and I’m a jewelry company, I can just take their plan and use it. The reason you don’t want to make that mistake is that you don’t know what their budget is for field compensation. It’s probably different from yours and the plan may pay out too much. Remember what I said in the beginning? The compensation plan is your top expense. Is your budgeted percentage the same as theirs? Well, the answer is it’s probably not because of their cost structure. What does the product cost them as a percentage of the retail price versus yours?
Your budget for compensation earnings is defined by behaviors that you want to motivate in the plan and, therefore, where you decide to put the money is different from other companies. So it’s very dangerous to take another company’s compensation plan and use it. It would be kind of like moving into someone’s house and wearing someone else’s clothing.
Let me just tell you a quick story. We had a client come to us and say they’ve got a real problem with their compensation plan – let me call them company A. They wanted to rework it because it was paying out way too much. They had copied it from another company and it was a disaster. In the same week, another client (Company B) came to us and said they wanted to copy Company A’s compensation plan. They were adamant it was the best compensation plan around. So it’s exactly what you’re saying. You have no idea of what’s going on with another company’s compensation plan and you don’t know whether the company is even happy with their compensation plan.
That’s true. You also don’t know if it was designed with consideration of the 12 behaviors because all you did was take it. You can’t see what the thoughts were behind it. Also, do you know how companies say, “We pay people 10 ways, 12 ways, 15 ways?”
Every company says something like that.
Yeah, the reality is, there might be 90 possible ways that you can pay people, but can you pay people all 90 ways? No, you’re going to have to choose how you’re going to pay them. When you took another company’s compensation plan, you didn’t make the choices, they did! You know that in business there can be some good shortcuts, and then there are bad shortcuts. I would tell you using another company’s compensation plan, in my opinion, is a very bad shortcut. It may produce all sorts of unwelcome surprises for you later on.
The first thing that we do when designing a compensation plan is we look at your specific products, and what the relationship is between the retail price and the landed cost of the product. The landed cost of the product or services is, what does it cost for you to get that product or service ready to be shipped out the door or provided to your representatives? That’s your landed cost. The retail price is the price that a retail customer would pay for the product.
We divide the retail price by the landed cost to get to what we call the multiplier. So for example, if the landed cost was $10, and the retail price was $50, the multiplier would be 50 divided by 10 or 5. The higher the multiplier, the more profitable the company will be.
The higher the multiplier, the more we can put into field compensation. It gets to the heart of buy low, sell high. There is no Walmart or discounted compensation direct selling company. Your point of difference should never be price. We have the lowest price, well that means the lowest commissions, it means the lowest profit as a company. If anything, you should be trying to drive your costs down and your price up, and spread them apart as much as you can. Buy low and sell high. That’s the song that we need to sing about this. Once we establish what the multiplier is, then we can establish a budget for total field compensation.
Remember, your compensation plan earnings are the largest expense, but not the only expense. You don’t want to forget contests, incentives, awards, other forms of recognition, possibly a customer loyalty program, and a hostess rewards program if yours is a party plan company. So, compensation plan earnings are the biggest expense, but it’s not the only one.
The next step is to decide what the budget is as a percentage of sales, for the compensation plan and the other pieces. We also have to establish the targeted pre-tax profit of your company. Do you know what the most common answer to the question when I ask my clients, what is your targeted pre-tax profit is? What’s the most common answer?
I don’t know. You tell me.
Exactly. “I don’t know, you tell me”, that’s the most common answer! And when I have conversations with people, sometimes companies will come to me and say they want to have a 30% pre-tax profit. I ask them what their multiplier is, and they tell me it’s four and I say well, to produce a 30% pre-tax profit, you would have a highly uncompetitive compensation plan. With a multiplier of four, it’s not going to happen. To achieve this goal, your compensation plan would be so bad, nobody would join your company. Well, that’s not an option, right? We can’t have the compensation plan impede why people would join your company. We want your plan to be an additional reason to join your company, not a reason not to join your company.
So anyway, once we establish the budget, which is how much we are going to spend, then we start the actual design of the plan. Okay, then we look at the different styles of plans. Did you know there are five types of compensation plans, there’s unilevel, generation breakaway, unigen, binary and matrix? Those are the five types of compensation plans. So we need to decide what style of plan to adopt. Most plans are hybrid, which simply means a mixture. So the first decision is, what is the primary basis of the plan, and then we can use elements of the other plans.
Then we look at the 12 behaviors. I ask the question, “Which of these 12 behaviors do you want to motivate and reward?” Do you know what the right answer is? All of them! I start with that because if someone says to me, well, why don’t we just motivate and reward half of them, I say, okay, so you want to have half a plan? One that’s not that good? So the right answer is 12. Then if I say, okay, what’s more important to you, that the plan is simple, or that it motivate and reward the 12 behaviors?
I am very clear. I have a high tolerance for complexity. I don’t care about how simple it is. Every compensation plan can be explained well. There isn’t a problem with explaining a complex plan. It just needs to be explained in pieces with the right examples and the right terms and the right sequence. So, any plan can be explained. Does it mean you can’t explain it on a half a piece of paper? Yes. I like to say, if you can explain your plan on half a piece of paper, you don’t have a complete plan unless the writing is very, very small.
Next, we look at what you’re selling. What products are you selling? What do they sell them for? How much money per hour is someone going to make selling the products? So as an example, if I was selling high-end vacuum cleaners, and I knew that it took five presentations to sell a vacuum cleaner, and each presentation was an hour-long, that means the average effort to conclude a sale is five hours. What does someone need to make when they sell a vacuum cleaner? Well, the answer is a lot of money – they spent five hours. On the other hand, if you had a product that sold for $10, and I ask you, how many presentations do you need to sell it? If the answer was everybody buys it and you can make $2 every time you sold one if it’s very fast, it will be worth the effort. So we need to look at what you are selling, how much effort it takes and what is the dollar per hour proposition on the sales activity.
When it comes to the compensation plan, we’re paying two groups of people. The person that does the selling and their upline. The less money we have to pay the person doing the selling, the more we can pay the upline. So our goal isn’t to pay the person selling the product as much as possible, it’s to pay them as little as possible. What’s the minimum amount we can pay the salesperson and have it be okay?
So I want them to make at least $25 to $30 an hour for their time in the sales process. I want it high enough to where their spouse, their significant other or their friend, doesn’t say, why don’t you just go work at McDonald’s, it’s not worth doing that business. I want the money to be good enough to where the person says, yep when I do this business I can earn $25 to $30 an hour or more. We have to look at the company and the product to be able to answer that question. At first, we focus on selling behavior. This is one of the things I tell my clients. The most important thing that you should know if you want to have a company that lasts, you must do this one thing. Do you want to know what it is?
Have a product that people want. One that they will use.
Oh, you’re so close, you get an A-. Can I give you the answer? The answer is having a product that people will buy even when they’re not earning any money!
I am going to say that again. Have a product that people will buy, even when they’re not earning any money. So, if you look at all of the whales, all of the billion-dollar-plus companies, one of the things they have in common in addition to the fact that none of them has a simple compensation plan, is the following fact… The number of people that join a business, fully intending to be a functioning, profitable, successful direct selling representative who build a sales organization is high, but 75 to 80% of these people will never recruit anyone. I’ll say that again, three-quarters of the people that join your company, on average, will never recruit anyone. We could get into the why, but “the why” doesn’t matter at this point. It’s just reality.
The successful companies, the ones that have stayed in business and will continue to stay in business, meet what I call the “failed distributor save” proposition. People join as a distributor, representative or as a consultant, fully intending to do the business. They don’t do the business but by gosh, they love the products. So they stay and they start acting like a customer. They hang around and they love the company even though they failed as a representative. They like what the company stands for, they like the company’s products, and they will buy the company’s products, even when they’re not making any money.
That, my friend, is the secret to survival in this business. If your product is one that people will buy only if they’re earning money through the compensation plan, you are dying either fast or slow. You must have products that people will buy, even if they’re not making any money. The interesting thing is if you did a survey, Richard, and you could do this among your clients or a group of any direct selling companies, and you grabbed 100 of them and you said, do they pass the test? Do they have products that people will buy, even if they’re not making any money? Most of the companies would fail the test.
Yeah, the product that they’re selling is either undesirable or priced too high. No one wants it or no one wants it at that price. You look at a company like Amway, their products are not cheap, but their products are excellent, and as a result, you can’t meet the more vociferous bunch of people when it comes to the products. They just love it. You get an Amway person in the corner and you ask him about his products, he’s going to chew your ear off for an hour telling you how wonderful they are.
And that doesn’t mean that the product is cheap. Like you just said, it’s not the cheapest product. Is it the most expensive product? No. It’s not the cheapest, it’s not the most expensive, but the perception among the users is it has the value you’re paying for it. Amway is more than just its products, it stands for something.
So anyway, getting back to this process of designing a plan. We decide in pieces essentially, all designed to motivate and reward these specific behaviors and their decisions along the way. You know, guys, do you want it pink or do you want it purple? Do you want it green or do you want it red? There are different ways of motivating and rewarding behavior and the client is heavily involved all the way through, so that when we’re done, it’s very much like a custom-built house. You have an architect that’s working with you that’s designed many houses, but you’re providing the answers and he says to you, do you want an octagonal bathroom or rectangular bathroom? You say I want one rectangular one, and he says good choice. So in our situation, we don’t provide poor choices to people. I like to say whatever choices I give you, they’re good choices, you just get to choose.
I just wanted to touch on something that you said earlier about the product. One of the other things I find is that even the companies who have great products, don’t spend the necessary time to teach the people why their products are great. So they’ve got these fantastic products and then there’s no training connected to it and as a result, their prospects walk away not realizing that. Their products are amazing and if they only knew what they could do, they would be in love with them. So training, it seems to me, is a big part of that whole process.
Yes, it also begs the question, “What are you more focused on, the product or the income opportunity?” Companies sometimes will make a mistake and they’ll think okay, it needs to be 90% income opportunity and 10% product. In the old days, going back 20 years, the advice was that it should be 50% product-focused and 50% opportunity-focused. What I would tell you today is, I think it needs to be 60% product-focused, and 40% opportunity. I think we need to spend more time talking about the products.
The reason for that is, remember, we are trying to appeal to two types of people, representatives, and customers. Not everyone is interested in the income opportunity, and not every representative is even interested in the income opportunity. So, I think being product-focused is extremely important and explaining what the differences are like you said, you can have good products but if the sales force doesn’t know what to say, what makes them good? You should be able to answer these questions, “What are your most popular products? What makes these products different from others?” Every representative should know the answers.
Let’s say I am a representative for a company and they have 20 products, and I’m talking to a customer and the customer is trying to decide what to buy. If I say to the customer, “Our top three products are a, b, and c”, for half the people I’m talking to, I’ve just helped them to make a decision. I’ve told them what the most popular products are. Half of the people will let others decide on what they’re going to buy.
It’s funny, you know. You think, don’t you have a brain? Shouldn’t you decide on your own what you want? The answer is no, half the people out there can’t decide. So if they know these are the top products, they will buy them.
The other thing is upselling. If you know that 80% of the people who buy product A also buy product B, tell your sales force that they can upsell them. Hey you, did you know that 80% of the people who buy this also buy Product B? Oh, maybe I’ll take one.
Exactly. And, if you’ve got a product that people want, as you said before, that people would buy even if there wasn’t compensation involved, then you’ve got a winning formula because the sales will happen regardless.
Right! What it also means is, I could lead with the opportunity or lead with the product. So in talking with someone, I could say… What are you more interested in… a good product for hair care or a part-time or full-time income opportunity? Or, are you interested in both? If they say I’m fine money-wise, tell me about the product. Fine, I’ll shift gears, let’s talk about the product. I won’t talk to you about the opportunity anymore because you’ve told me you don’t want me to, but if the business is so opportunity-focused, then you have a problem.
One of the mistakes that companies make is they say, go out and make your list of 100 people you know and then go prospect those hundred people. The reality is, only about 5% of them will be interested in your income opportunity. If you want to get 95% rejections, go do that. On the other hand, if you said okay, make your list of 100 people and now approach them and tell them I’ve just joined this new company and they’ve got some great products. Are you willing to try one or two and let me know what you think? Depending upon your friends, you might get 20% to 50% of the people to be willing to try a product as opposed to 5% just being interested in the income opportunity. You’re wasting your list to be talking to them about the opportunity. You should be talking to your list of 100 about the products.
And there are people we call them “jumpers”. They jump from one company to another. I mean, I’ve met people who’ve been in 20 companies. They jumped from one to another to another. I have a friend who is a direct selling attorney and sometimes he refers to companies and he says that they have a payment plan in search of a product.
Their representatives are like that, too. They’re focused on the income opportunity. They don’t care what the product is, and that’s okay. By the way, it’s not bad to have representatives who don’t care about what the product is. You just don’t want the majority of your representatives to be like that. What you want is for most of your representatives to be product evangelists. Yeah, we’ll take some of those who don’t care, that’s fine because we can’t weed them out. What you don’t want is an entire sales force full of those people, because those people are jumpers, which means when they’re done with you, they’re going to jump.
Other areas drive the business. We’ve seen that a percentage of people fire on all cylinders when there’s an incentive involved. You know, you do a travel incentive or some sort of competition, and those people just go completely ballistic. I presume that’s a big part of how you plan your compensation plan and how you get your team fired up.
Yeah, so there’s a purpose for contests and incentives, and there’s a purpose of the compensation plan. We need to be very clear that companies that have a very poor compensation plan tend to run more promotions, more contests, more incentives more frequently than companies that have a good compensation plan that motivates and rewards the 12 behaviors. The reason they do that is that the compensation plan itself doesn’t motivate and reward the recruiting and selling behaviors strongly enough, so they have to spike the punch bowl. They have to add additional things to the mix to make it more attractive, and basically, they become addicted to it. They make the sales force addicted to it because they’re looking to see what you are going to do extra for me this month, to motivate me to you know, to do specific things. When a compensation plan is designed properly, you have less of a need for such frequent contests and incentives. Contests and incentives have very specific purposes, but they’re not intended to be the meal. Let me explain the difference between a contest and an incentive.
People talk about the words contest and incentive together like salt and pepper. They are not the same and they both serve different purposes. A contest is a competition, it means only the top people are going to win. Most contests are based on the top 10, the top five, the top 20, the top something. So the question is, what do you have to do to win? The answer is, that you don’t know. You have to be the best. So in the end, the winners are determined, not at the beginning. You don’t know what you need to do to win, so if you had a top 10 contest, how do numbers 11, 12, 13 and 14 feel? They’re pretty good performers, they’re no slouches. They’re good, but you’ve slapped them. You said, sorry, not good enough. So we want to make sure when we run contests, we run them very infrequently.
Most promotional programs should not be contests, but rather incentives. An incentive says that when you do this, you will get that. How many winners can you have an incentive for? The answer is unlimited. We determine at the very beginning, how many winners you can have in a contest.
Incentives are much better than contests because they don’t penalize the people who just missed it. I mean, you want different people winning incentives, you want more winners, really, as a company, right? So, let’s say you had 10,000 representatives, and we said, well, how many of those 10,000 do you want to win or earn the rewards of a contest or an incentive? The answer should be as many as possible. There are two ways to make that happen and that is, change the rules. Sometimes the rules are really easy, sometimes they’re hard, sometimes they measure just recruiting, sometimes they measure recruiting and selling, sometimes they measure personal development, sometimes they measure team development, and sometimes they measure both.
Interestingly, you can’t motivate 12 behaviors in an incentive or a contest, it would be too complicated. What I am going to say might seem counterintuitive, but the compensation plan should be complicated. It should be complex, it should motivate and reward all of the 12 behaviors because we want all of these behaviors every month. But, when it comes to designing a contest or an incentive, we can’t have it be so complicated. We pick two or three behaviors and focus just on those. Why? Because the contest is only running for a short period of time.
In the contest, we don’t need to focus on everything all at once, that’s what the compensation plan does. So, companies sometimes get it wrong. They have a really simple compensation plan and a very complicated incentive program. That’s backward. We want these 12 behaviors being done by the field each and every month and paid for through the compensation plan. The contests and incentives are designed for very specific types of purposes outside of the plan.
Your company is in trouble if the majority of people recruit during a recruiting incentive. Let’s say that during the year you bring on 2,000 new representatives, but 1,500 of them were brought on in months when you ran up a recruiting incentive. That’s a problem. That says your compensation plan isn’t carrying the load.
I agree with you 100%. What I find is that your team hangs back waiting for the next incentive, for the next competition before they go and do anything. They know the company is going to launch another competition, so they hold everything back to get a head start on the competition, and that is also counterproductive, right?
Yes and the same thing happens when companies put kits on sales. You’ve probably seen that before, where they’ll say this month, the kit is half price. What does that do? It makes it a lot easier to recruit people because the cost is half as much, but at the same time, the people who come into the business aren’t as good performers and they don’t have as much skin in the game because they joined for less money. After all, you told them it was a good deal. So what happens the next month after the kits go back to regular price?
What we want is to be consistent. We don’t want to have months where the number of new people coming in is 10 times what it was the previous month. That’s bad, really bad from a motivation perspective, and bad for what happens afterward. When companies do these things, it’s because the compensation plan isn’t doing the job. I like to say sometimes companies use contests and incentives as band-aids. Sometimes they get so addicted to it, it’s like, what are we going to do this month to motivate recruiting?
Oh, I just shudder when I hear that because that tells me you’ve got a problem and that problem is your compensation plan isn’t doing the job. By the way, the best way to determine whether or not a compensation plan is doing the job or not is to do what I call a compensation plan evaluation, which is essentially a review of the results of your plan by looking at statistical information and identifying where your plan is working, where it is not working, and then working to correct the problems.
I like to say, data tells stories if you just look, know what data to look at, and how to analyze it. If you can do that, you can determine what’s working and what’s not. Fortunately, I’ve been working with these types of companies and compensation plans for 33 years. First I programmed them, then I tested them, then I designed them so I went through the entire life cycle. I can identify what’s working and what’s not and present the results to clients in living color, so they can see and understand what’s wrong. Before you can fix something, you have to understand two things. Number one is what’s wrong and number two is that you want to do something about it.
Well, Jay, thank you very much for spending this time with me, it was very informative.
It was a pleasure.
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