The business rules of all multilevel compensation plans are built using components. These components include titles, title requirements, and eligible compensation types.
For many years, Stair-Step compensation was commonly used in compensation plans, but times have changed. In this post, I will define and assess the relevance today of Stair-Step compensation.
What Is Stair-Step Compensation?
Stair-Step Compensation is a form of differential bonus.
The maximum percentage one can earn is set based on one’s paid-as title or upon one’s group volume for the month.
Upon the volume of each order, a personal sales commission is earned either by the representative who placed the order or by the representative attached to the customer who placed the order, if the order was placed by a customer. Then, going upline from this representative, Stair-Step compensation is calculated as the maximum percentage the upline representative could be paid minus the percentages already paid out on the order. The amount paid is the difference.
This continues until all of the stair-step compensation has been paid out. After that, upline representatives are compensated differently.
Below is an example of Stair-Step compensation:
The beauty of Stair-Step bonuses from the direct selling company’s perspective is that no matter what happens, the maximum paid out in total stair-step compensation on an order is equal to the highest maximum percentage a representative could earn.
From the field’s perspective, Stair-Step compensation works best when your maximum percentage is much higher than the maximum percentage of all of your downline representatives. When the maximum percentage that your downline representatives earn grows closer to your maximum percentage, however, your share of Stair-Step compensation gets smaller.
One of the downsides to stair-step compensation is what happens when an upline representative’s paid-as title is equal to or lower than the paid-as title of a downline representative. When this occurs, the upline representative earns nothing in stair step compensation.
Examine the chart above. A Manager’s maximum Stair-Step percentage is 30%. If a Manager has a downline representative with a paid-as title of Manager, for example, upon the orders on which the downline Manager earns stair step compensation, the upline Manager will earn no Stair-Step compensation because both Managers are at the same step.
What Has Changed?
Stair-Step compensation is like a race. When you are not able to stay ahead of someone below you, you lose. While in the past this result was considered acceptable, today most people consider penalties like this to be inauthentic, unacceptable, and politically incorrect. Do you believe volunteers should be punished compensation-wise when a downline representative grows her business faster than an upline representative?
Stair-Step compensation rewards the recruiting behavior better for representatives who are at higher steps. Lower titled representatives are compensated poorly relative to higher titled representatives because their maximum stair step percentage is lower. Do you think this is a good idea?
If your company wishes to encourage early recruiting, Stair-Step compensation is a direct assault to your goal. Stair-Step compensation does not help to build a recruiting culture. Instead, it has the opposite effect. It delays recruiting. Who wants delayed recruiting?
Decades ago, when Stair-Step compensation was first introduced, higher titled distributors in network marketing companies carried an inventory that they supplied to lower titled representatives. Back then, there was a need for direct selling companies to provide higher titled representatives with as much money as possible, partly to compensate them for the business risk they took on when they leased space to house their inventory.
The world has changed. Distributors no longer carry inventory. That business risk is gone and so is the need for Stair-Step compensation.