Simple compensation plans have only one virtue and that is, they are easy to explain. Everything else about them isn’t good.
Have you ever wondered, then, why do people design simple compensation plans? The reasons might surprise you.
To hear more on this topic, watch our informational video below.
Design Without Awareness Of The 12 Behaviors
One of the reasons people design simple compensation plans is that they are unaware of the 12 essential behaviors that all multilevel compensation plans should motivate and reward.
Simple compensation plans cannot encourage and compensate independent representatives of direct selling companies for the activities we want them to perform.
A Legal Perspective
At one of our Direct Selling Edge Conferences, I was asked if simple compensation plans were safer.
Given the regulatory action against Vemma and Herbalife in the last few years, I understood why I was asked this question, so I responded first to this concern.
I explained that one of the objections raised by uninformed regulators and critics of direct selling has been the complexity of multilevel compensation plans. Some of them believe incorrectly that a complex compensation plan is a symptom of a criminal enterprise.
This conclusion is as absurd as saying that suits are a marker for illegal activities because white collar criminals wear them.
As long as your compensation plan in practice does not violate federal, state, and local laws, it can be as complex as is necessary. Remember, the purpose of compensation plans is to motivate and reward the 12 essential behaviors we all want from a direct selling sales force.
A Business Perspective
If you own or are employed by a network marketing or party plan company, two of your primary goals should be to attract and retain your independent sales representatives.
Simple multilevel compensation plans don’t accomplish these goals.
To find out what’s wrong with simple compensation plans, watch my 5-minute video The Answer: Why Simple Compensation Plans Don’t Work.
Can We Start With A Simple Compensation Plan?
Some companies think about starting with a simple compensation plan, with the idea to change their plan later. This is not a good idea. At a minimum, it will reduce your rate of growth significantly, but even worse it may be a cause of business failure.
Most companies cannot afford a “do over.” For financial reasons, they need to get it right the first time.
I don’t recommend that you begin your direct selling company with a simple compensation plan and then change your plan later. Here’s why…
- 50% of the people who consider joining your direct selling company will have had previous experiences as independent reps of other direct selling companies, and about half of them will want to see your compensation plan before joining.
- For those who have been successful with other companies, when they see your plan is not a good one, they will decide not to join your company.
- Also, if your compensation plan does not pay leaders well, they will decide not to join.
- They won’t ask you to change your plan or tell you why they won’t be participating. This will just pass on your opportunity and go somewhere else.
- Do you want leaders to not join your company when your company is young?
- Can your business afford to have them join other companies and not yours?
- For those who do join your company who begin to build organizations, do you want them to leave (and to tell others to leave with them) when they realize the compensation plan will not pay them deeply enough?
- Do you want people to be able to earn full-time incomes through your income opportunity? With simple plans, it’s too hard or impossible.
- Changing a compensation plan later can be difficult, but not impossible, to do. Don’t launch your company with one plan that you know will be replaced soon. Only change your compensation plan if you learn later that it’s necessary.
Unsafe Compensation Plans
Simple compensation plans are not safer for the survival of your business. The word I would use to describe them is “unsafe.”
Simple MLM compensation plans are attractive because they are easy to explain.
Unfortunately, simple compensation plans don’t motivate all of the behaviors that we want from a direct selling sales force.
For example, a compensation plan that provides one level of compensation on the sales volume of others doesn’t motivate representatives to teach people how to recruit others. And teaching people how to recruit others is a vital behavior we need to build a multilevel sales force.
We also want to motivate and reward the development of new leaders by current leaders, regardless of where the new leaders are in the downline of the existing leader. Compensating representatives on the volume of others one, two or three levels down doesn’t do the job.
While it is true that the average representative never recruits anyone, the recruiting rate is important. The percentage of representatives who recruit at least one person is between 20% and 25% in most party plan companies and between 30% and 40% in most network marketing companies. If your starter kit cost is low, you will see you a lower rate of recruiting, because more people will join just for product discounts.
Most representatives of party plan companies earn the majority of their income from personal sales, but the top earners receive most of their income not from personal sales, but instead from bonuses earned upon the sales volume of others. As a sales force matures, the bulk of the volume generated moves down the tree. In other words, for representatives who recruit others, over time they see their bonuses being earned from volume generated from deeper in their organizations. To be able to provide full-time income to those representatives who seek it, compensation plans need to pay upline representatives on more than just a few levels of volume.
If you look carefully at the compensation plans of successful direct selling companies, you will find that none of them have a single level, two level, or three level compensation plans. In fact, none of them have simple compensation plans. To sum up, while simple compensation plans are attractive to many, the reality is that they don’t work to build a multilevel sales force.
One of our frequently requested services is compensation plan design. If you’d like help with yours, we’re here for you!
To be successful long-term, all direct selling companies need to have dynamic compensation plans that aren’t simple.
If you need help with any aspect of your compensation plan, contact us at 503.244.8787. We are happy to help you on your journey.