2. The compensation plan

The compensation plan is second in priority because 90% of home business operators fail to make profits, despite their valiant efforts and hard work, and despite name-calling (typically “quitters” or “losers”) by some upline ‘leaders’ and company managers.

The simple reality of network marketing is that the vast majority of compensation plans are geared against the part-time distributor. They reward the company and the “heavy-hitters” (mega-recruiters with huge teams) at the expense of the part-timers.

Beware, too, of “breakage.” This is the money that rolls up to the company when distributors fail to qualify for bonus income due to

• high group volume qualifications or
• high downline rank requirements.

Breakage results in windfall profits to companies that can amount to as much as 50% of their net annual profits. This money rightfully belongs to the distributors in a fair and proper strategic alliance.

There are many types of compensation plan, and many combinations of plans. Some work better than others, but there are no perfect plans. Each has its own advantages and disadvantages, but there are some common red herrings and booby traps that you need to be aware of and watch out for.

The amount of money any company can pay in bonuses is limited because it's part of the product wholesale price

It doesn't matter how many levels deep your downline grows, there's only so much that the company can afford to pay to the network from the wholesale revenue it earns from product sales – or it goes broke!

Many people fall for emotional appeals along the lines that "with this plan you never lose your downline – and you get paid to infinity, with matching bonuses, etc etc etc". Think carefully and use logic when evaluating compensation plans. If any plan can afford to pay an unlimited number of levels, then those payouts will be pitifully small, and you'll need HUGE numbers of people in your team for you to earn worthwhile income. Do the math!

The reality of network marketing as a compensation system is very simple:

Income growth is created by width.
Income stability is created by depth.

So it's critically important to maintain a healthy balance between width and depth in your team.

Unfortunately, many compensation plans limit your width through the use of a matrix structure. In a very real sense, this suggests either ignorance on the part of management – or a plan designed to reward heavy hitters at the expense of part-timers. (The only way that heavy hitters can earn massive incomes on excessive depth is through breakage: income that rolls upline when part-timers fail to qualify for it because they can't meet the high group volume or high downline rank requirements.)

Here's another truth about network marketing compensation plans... the only way for YOU to earn more from a limited bonus pool is at the expense of either your downline or your upline. And that same truth applies to them as well... because you're also someone's upline or downline!

Here are some important factors about the compensation plan you should consider in making your decision…

• There are NO perfect compensation plans

They're all designed by human beings. They all have flaws and weaknesses, even the best plans. Yes, some are better than others, but it's a question of balance once again… there's no point having a perfect plan if the products are unsellable, or if the company's management team is incompetent. Understand that people succeed and fail in EVERY kind of compensation plan. But don't compromise – look for plans that have few inbuilt problems and that pay well and fairly.

• Can you make worthwhile reciprocal and residual income?

Is there a worthwhile retail mark-up and incentive to retail the products, so that you and your people can make immediate, reciprocal income?
 
And is there worthwhile residual income to be made on the sales results of your downline team so that you have long term financial security.

• Can your downline people make fast, worthwhile income?

If they can't, they won't stay. Your security will be non-existent.

• Will the company be able to stay profitable?

The company needs to stay profitable and have sufficient income to fund expansion, research and development, added incentives, etc.

• Is the plan fair to everyone?

Beware of plans that have high group volume qualifications – too often, they're an indication that the company's getting rich on unclaimed bonus income that rightfully belongs to the network.
 
And beware of plans that have huge “back end” payouts to mega-recruiters – it's usually at the expense of the part-timers. Look for balance, always.

• Is there a realistic monthly commitment?

If the monthly commitment is too low, you need too many people to make a reasonable income – and so do they. If the monthly commitment is $50, that's what most people will do.
 
On the other hand, if the monthly commitment is too high, people won't be able to afford to participate.
 
It's a question of balance yet again.

• Is the plan based in reality?

It's not enough that it works in theory. It has to work in real-life practice, too.

What should I look for in a reward plan?

For a start, discount all the miracle claims of instant, overnight riches for no effort. Be wary, too, of promoters who claim that they’ll build your downline for you. Why would they if they didn’t expect to make more money than you from their efforts? Why do they need you at all? Use common sense. If it sounds too good to be true, it probably is.

Look for these features in any reward plans you’re asked to consider. You’ll discover that they’re often interrelated and may overlap:

• Balance
• Fairness
• Reward in proportion to effort
• Sustainable levels of rewards
• Exponential growth factor
• Clear differentiation between reward and recognition

Balance

There should be a balance between your rewards for personal selling and sales made by your downline network.

There should be a balance between the horizontal and vertical aspects of your personal group. In other words, rewards generated by sales from your personally sponsored distributors (horizontal growth, or width) and those further downline should be balanced to encourage you to work with both. You should continue to sponsor personally into your front line, as well as working deeper downline. There should be no penalty or disincentive for either.

Of course, some plans — such as binary and other matrix plans — simply don’t allow you to build wide by their very nature. You have to build depth.

Fairness

The plan should not reward “heavy hitters” (super recruiters with mega networks) at the expense of those distributors just starting out in business or still growing. Too often, in plans that pay large overrides on many levels, the product price has to be set very high to be able to pay those higher rewards. This can result in loss of leverage, because retail prices become too high for anyone to sell. So distributors end up having to recruit their customers to buy at wholesale.

Other types of plans reward people simply for persisting — for not quitting. Whether or not distributors sponsor others, build a customer base or increase their volume over time, some plans still increase the level of reward when your cumulative purchases, over a set period of time, reach higher qualification levels. Sort of like being in the public service… stick around long enough and you’ll reach the top, regardless of merit! In reality, it’s a reward for not building your business.

The only way you can reward people for not building sales volume, either through selling more to customers or sponsoring more productive downline distributors, is by robbing their upline leaders! (Think carefully about this. When mediocrity can rob initiative, it can become a serious disincentive to achievement and growth.)

Reward in proportion to effort

There should be very clear connection between reward and effort, especially in the early stages of a business. Not only must justice be done, it must be seen to be done.
As you grow in your business, your rewards will be connected more for finding people, training, supporting and encouraging them to grow and develop as part of your downline network. But the connection will still exist between reward and effort.

Sustainable levels of rewards

Companies must be able to cover costs like research and development, plant and equipment, support services and resources (including reliable, fast data processing), logistical support, adequate stocks of products and packaging and much more.

There’s no point in a company paying out such a high percentage of the product price that it threatens the very existence of the company. If the company collapses, nobody earns anything, and the entire industry suffers, not just those left with products and literature, kits, etc they can’t use any more.

Exponential growth factor

Once your business reaches its point of critical mass, when leverage takes effect through increased knowledge and skill on your own part, and duplication through sponsoring and training others to do the same, the rewards should grow exponentially as your volume grows.

In other words, this is a business where you get paid a little for a lot of initial effort (learning, practising, growing), then you get paid a lot more for no more effort once your network becomes self-perpetuating.

Clear differentiation between reward and recognition

Too many plans confuse these important, complementary aspects of compensation.

Rewards should only be given for results. The only result in MLM is sales volume, whether through retail sales or wholesale consumption. This is the only point at which money comes into the system to pay your rewards. (It’s illegal to be rewarded simply for recruiting others.)

On the other hand, results are the product of directed, productive activity. But until such time as activity is transformed into results, there should be no reward just for activity. Activity should be recognised through non-monetary means, such as certificates, pins, badges, listing in company magazines, taking the stage at meetings and so on.

For many people, recognition can be as important (sometimes more important) as monetary rewards.

Some plans confuse the two and reward activity. Cumulative plans often make this fundamental mistake.

Sponsoring is NOT a result. It’s an activity. It should be recognised, NOT rewarded. The rewards — in the form of higher bonuses — will come when your sponsored distributors begin producing sales volume.

In the section of The MLM Appraisal Kit on "Present Trends" you’ll discover an important insight that will help you in your evaluation of reward plans — especially those created in recent years. Be sure not to miss it.