4 Types of MLM Compensation Plans

Compensation plans can be confusing if you are unfamiliar with multi-level marketing. Every company has a slightly different twist on how it pays its reps. Your sponsor and other reps will probably tell you that their compensation plan is the best there is and that their company is the one creating the most success in the industry. But remember, there are no shortcuts to wealth, even in network marketing. If a plan promises big bucks early on, you’ll need to stand back and sort out the hype from the facts.

The Four Basic MLM Compensation Plans

A compensation plan, or pay plan, is the structure that a company puts into place to reward and recognize distributors who create sales for the company. Plans vary with every company and may have different requirements in order for you to earn your commissions and an achievement title. A company will usually include bonuses that encourage reps to become higher achievers, but there are typical components that make a compensation plan fair and reasonable to all. When it comes to your plan, look at the advantages for newcomers as well as how much work it will take to really start making the big dollars.

Most multi-level marketing companies base their compensation plans on one of four pay plan structures: 

  • Unilevel 
  • Stairstep breakaway 
  • Matrix 
  • Binary

Typically, companies don’t use these plans in their original form. Most plans combine aspects of two or more plans to make them more appealing to newcomers and experienced reps alike. Aside from the way a company will structure its payout, you’ll need to determine whether the plan implemented by your company is one you are able to operate under. This isn’t an easy thing to do, even for the most accomplished networkers. 

The truth is, there are pros and cons to every plan. It’s difficult to tell which factors will help or hinder your business building. You’ll find a lot of information in company materials and on the Internet, but don’t get bogged down attempting to learn everything about a plan before you get started. You can be successful in any plan as long as you realize that the most important thing you need to do to make money is to create sales volume through new and continued product orders. Let’s go through the basic plans so you can get an understanding of how each one is structured.

1. Unilevel Plan

A unilevel plan is the most common and the simplest of plans. You can sponsor as many frontline people as you want, going as wide in the plan as you choose. Generally, all volume in a unilevel plan up to a certain level is what you get paid on. Unilevel plans will often include “compression,” which means that empty spots in the organization where reps may not be building or orders are automatically filled with the next active rep below them. This can potentially help you qualify for higher commissions if your plan allows for it.

One common shortcoming to this plan is that it usually limits how deep you can build your team. If the plan pays down eight generations, the orders from those in the ninth do not form part of your commission. If a solid leader happens to come in below those levels, you could potentially miss out on the sales volume they create. Morinda (Tahitian Noni), Xango, and Unicity are some companies that use a form of the unilevel plan.

2. Stairstep Breakaway Plan

The stairstep breakaway plan is the oldest type of compensation plan, and it’s rarely used by new companies. In this type of plan, as your reps move higher in the structure, they eventually break away from you and work directly for the company.

To compensate for this, the company pays you a monthly bonus as long as the breakaway rep fulfills his volume requirements. In almost all of these plans, the accumulation of breakaway reps is a crucial part of gaining rank advancements. 

You can sponsor as wide as you want in a stairstep plan and are usually paid on the whole volume in your organization no matter how deep you build, as long as the group has not broken away. Amway, Nu Skin, and Herbalife are companies that use a form of the stairstep breakaway plan.

Below is an example of how the stairstep plan usually works: 

  • Level 5 is the new recruit, who makes a 20% commission based on sales of the product. 
  • Level 4 is the distributor, who makes a 25% commission on every sale turned in. This will include the sales of the Level 5 recruit. 
  • Level 3 is the manager, who makes a 30% commission on every sale. 
  • Level 2 is the supervisor, who makes a 35% commission on every sale. 
  • Level 1 is the director, who makes a 40% commission on every sale. 

Within the team, each level has a specific level of recruits to sponsor before they are promoted to the next level. Let’s say when the recruit is promoted to Level 4, the distributor that sponsored them is paid a one-time bonus of $100. When the distributor moves to the manager, the manager that sponsored them receives $300. When the manager promotes a distributor, the manager receives a bonus of $550. When the supervisor promotes a manager, the supervisor receives $1600. When the director promotes a supervisor, the director receives $4500 and more if the new director reaches a certain level of sales and recruits. 

Once promoted to director, the person is in charge of the teams underneath them that were recruited by them and their team. The previous director no longer receives compensation from the sales volume of this team but did receive a nice bonus upon the promotion. 

3. Matrix Plan

The matrix plan is characterized by its limited width and depth. Matrix plans are often three levels wide and six levels deep, meaning you can have three team members on your first level, and everyone that follows is placed into a matrix six levels deep. 

One of the most appealing features of this plan is the benefit of spillover when team members sponsored by a leader above you are placed into your team. If these new reps prove to be successful, you will benefit from their success with an increase in your commission. The spillover factor, however, has not always proved positive. 

Some team members may sit back and, rather than work to build a team themselves, expect reps to be placed in their groups from business builders above them. Ingreso Cybernetico, Skinny Body Care, and Melaleuca are companies that use a form of the matrix plan.

4. The Binary Plan 

The binary plan features a limited frontline of two reps. Everyone else you sponsor will fall in either of these two legs in the next available open position. This plan also often creates spillover and generates greater teamwork as members are more easily grouped in the same leg.

While it is often easier to feel a sense of momentum and rapid growth in a binary, the perceived need to be in a “power leg,” where a heavy hitter is placing new reps in the tree to the benefit of all in the line, is often cited as one of the reasons people are wary of the binary plan. Not being in this power leg could play a role in your eventual success, although you should never count on spillover or your upline building your business for your success. Isagenix In- international, USANA, and Team Beachbody all use a form of the binary plan.

Evaluating Your Compensation Plan

No matter what business a company is in, it needs some money to pay its executives, buy or produce the product, pay bills generated by the home office, run marketing programs, and develop new products. Companies frequently put about 50 percent of their profits into operating costs and reinvest in the company’s growth. (This number may vary, as long as it’s not less than 30 percent or more than 70 percent.)

To figure out if your company pays a reasonable amount to its reps, tally up exactly how much could possibly be taken from one sale. Figure everyone’s cut all the way down the line. If the company is giving more than 70 percent of every sale to its reps, that’s good news for today, but could signal trouble in the future, because the company won’t have the money to support expansion. If it gives less than 30 percent to its reps, you have to question where the rest of that money is going.

Fairness to All Reps 

A program should offer everyone the opportunity to succeed, no matter where they enter the downline. Step back and ask yourself how much you reasonably could sell in a month. Now divide that in half. (No matter how conservative we are, we have a tendency to be too optimistic about the sales, especially in the beginning.) What is your compensation for that half starting today? Does it seem fair for the amount of work you will be putting in? 

Many companies give you a guaranteed percentage on sales that can be as high as 40 percent. This means that you receive $4 out of every $10 you make on a sale. It also means that an item that lists for $10 in your catalog really only costs you $6 if you buy it for personal use. This is especially important if you are working for a company that has a number of products you personally use. You may just find that you save enough on your own purchases to justify being a distributor. 

You are the only person who can judge fairness for the amount of work. If you really like to meet people and sell products and you hate your current job, making the equivalent of $6 an hour isn’t too bad. If you’re looking at this opportunity as a way to become financially independent, you will want to set your sights a little higher. Ideally, you should expect to get at least $30 an hour for the time you put into the business right from the start. That means if you spend two hours at a sales party, your commission for the sales at that event should be at least $60.

The Downline Bonus 

Most companies offer some type of incentive to recruit downline members, although this can vary widely based on the company’s marketing plan. Does the compensation plan seem fair? Obviously, it takes more work to recruit someone than it does to make a sale. Do you get a bonus for all your hard work?

Some companies choose to give a non-monetary reward for recruiting new reps. The reward usually gets bigger with every distributor you recruit and often can be accumulated, like points, over the course of one or more years. For example, one company gives 100 points for every rep you have recruited. They issue a catalog of luxury products such as computers, televisions, trips, and jewelry. The points can be saved up and used to “buy” those items.

Motivation Potential 

The program should be motivating at all levels. Anyone entering at any point in the network should be encouraged to work hard. The standard compensation plan will be motivating if you see it as fair. However, you also want to look for extra motivation. Does the company offer an annual or quarterly contest where top producers can earn trips, cars, or other luxury items? Are there bonuses when you reach certain levels? 

Take into account the amount of work you need to do to reach the next level of compensation. Are the steps short enough that it’s easily reachable, at least in the beginning? Ask your potential sponsor how long it took her to attain the various levels in the program. 

Also, look for daily motivators that aren’t part of the formal compensation plan. The company should respect its reps and stay in contact with them, telling them of anything good or bad happening to the company. 

Look for little things such as a newsletter for reps, an annual gathering for all reps, regional parties, and even motivational tactics such as letters from the home office when you do well or a supply of “You Can Do It” stickers to place on your bathroom mirrors. All of these belong to the non-monetary compensation category and are definitely important to your morale and long-term commitment.

Reasonable Expectations 

The program shouldn’t expect too much in terms of sales. Many compa- nies encourage sales by setting the initial compensation very high, from 25–40 percent of the sale. This lets you see success right away. Other companies don’t pay much of anything until your sales reach a certain level, such as $1,000 a month. That can be motivating, but also unrealistic and discouraging. Imagine putting in a great deal of work to learn the product and sales strategies only to get a few pennies from every sale. 

Sure, the company tells you that you can make big money after you hit various goals, but if you really can’t reach these goals for several years, something is wrong with the goals. Ask the company how many of their new reps reach that goal within three months. Also, ask how many quit before they ever reach it. Ask your sponsor how long it took him and how much work it took. The answers should give you a good indication of how reasonable the company’s expectations are.

Volume Requirements 

Some organizations require that you (and your downline) purchase a certain amount of product every month. If you fail to meet that limit, you are penalized or even dropped from the ranks, often without being reimbursed for items that you might have purchased. The volume requirement should be reasonable for you to make in a bad month. 

Many companies set it at the amount a good, loyal customer might buy in a month. For example, if you sell nutritional supplements and the company has discovered that its best customers spend $100 a month, it’s not unreasonable for them to set that as your volume requirement because you should be able to spend that for your personal use.

Advantages for Newcomers 

Some organizations offer advantages for the new distributors, giving them a few months of extra bonus money or bonuses for their first few downline members. Some will even “seed” your prospect list by giving you a few customers from the person at the top of your upline. The idea is to have you see success right away so you are motivated to reach that level through hard work. There aren’t too many disadvantages to such an option, except that you have to remember it will go away.

The Realistic Middle Level

We’d all like to become millionaires, but what will you realistically make in the program? Find out what the typical distributor is making. How big is the typical downline? If you work a forty-hour week, how much can you expect to be made after a year? Be wary because most companies and sponsors like to tout the best examples. 

Remember to look realistically at your own situation—your sales knowledge and experience as well as the product’s saturation in your geographic area—to determine how well you might do. Then determine if you can live with that. After all, not everyone can become a millionaire, even if we work hard at it. Can you accept making a more realistic middle level of income?

What Is the Top? 

Is there a cap on the program? It may seem far-fetched today, but if the program lets your distributors break away after they reach a certain level, you could see your retirement income fall away just because you found some great distributors. 

Other programs stop giving you commission at a relatively early level in the downline, such as the fourth generation. Still, others begin compensating you with company stock instead of money long before you reach the million-dollar mark. Don’t always trust the company’s sales sheet. Ask to talk to people who have made it big. Are there many of them, and are there new ones added to the group every year?

Final Words

There is no perfect or right plan for everyone. Make sure you consider the best network marketing compensation plans that some of the notable MLM companies offer when researching them. Consider the rules of each plan and see if it suits your financial needs in the long run. By doing so, you will be able to locate the right network provider for your needs.

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