The Compensation Plan
Compensation plans are ultimately the way in which you get paid in a
network marketing business and therefore it is important that you
understand how they work. In this chapter we will teach you how to
understand a network marketing pay plan and in particular discuss the 4
basic compensation structures listed below. This chapter will also
evaluate the benefits and limitations of each of the common pay plan
structures and help you to indentify the best compensation plan.
The 4 basic compensation plan structures include:
How to Understand a Compensation Plan
Despite the fact that every network marketing company’s compensation
plan is different, most plans are based around one of the 4 basic
structures. The main difference between the pay plans using the same
structure is that they vary in the commissions paid and in additional
bonuses.
Although some network marketing companies claim to have a better
compensation plan, we strongly encourage you not to join a network
marketing company purely based on what their compensation plan has to
offer. Instead, focus on the complete package which includes the
products, the practicality of the business opportunity and the fairness
of the compensation plan.
On this page we will teach you how to understand a compensation plan.
Given that every compensation plan is different, some of the
terminology may be different to the plans you have previously looked at.
Also, please bare in mind that not all the information on this page
will be relevant to every plan.
To understand any compensation plan in its entirety, you need to
first understand some basic concepts and jargon that is commonly used by
people in the network marketing industry. Such terms might include
sponsor, business centre, width, depth, levels, legs, upline, downline,
crossline, point value, volume, commission, bonuses and organisation.
These terms may look a little intimidating at first, but don’t be
discouraged, we’ll talk you through them and then towards the end
evaluate the different plans available.
Sponsor
The sponsor is the person responsible for introducing and signing you up
with their network marketing company. Your sponsor is also the person
responsible for making sure that you receive adequate training and
support to help you succeed.
Distributor and Associates
You become a distributor once you sign the paperwork and join the
network marketing company. Some companies may refer to their
distributors as associates. These terms will be used interchangeably
throughout this website.
Business Centre
When you first join a network marketing company you are given a business
centre which then entitles you to get paid a commission in reward for
the work your organisation achieves. The organisation refers to both
yourself and all the members (distributors) that you and your team have
sponsored. Think of your organisation like a big department store where
all the shops inside are independently owned and operated. Although you
are not the boss of each shop, as they are independently owned, you do
earn a profit from their work. Likewise, in network marketing the more
work your organisation does the more you get paid inturn. The diagram
below illustrates both a business centre and your organisation.
Upline and Downline
Two of the most common terms used in network marketing are upline and downline.
Upline refers to all the individual distributors sponsored
directly above you. Although upline distributors should provide training
and support to the members of their organisation and help them become
successful, their individual sponsoring efforts will
normally have little or no impact on your commission cheque.
Downline refers to the individuals who have joined your
organisation and are positioned below you in the compensation structure.
Although you are encouraged to support your downline distributors,
essentially each member of your downline owns and operates their
organisation independently.
Width and Depth
One of the main differences between the numerous compensation plan structures is the width and depth of the plan.
Width refers to the maximum number of distributors that you can have
placed immediately under you in the compensation structure commonly
known as your “frontline”.
Depth refers to the number of levels deep in which you can earn a
commission for their efforts. Naturally there is only so many times in
which you can split a dollar, therefore a commission based on the work
of the distributors in your downline can only go so deep.
In the forced matrix structure the width and depth of the plan is
normally written as a simple equation (width x depth). For example, the
diagram below suggests this plan that has a width of 3 distributors (ie
each business centre can sponsor a maximum of 3 frontline distributors)
and is 2 levels deep, so therefore it would be written as a 3x2 plan.
In some compensation structures it is possible to have infinite width
(Unilevel and Stair Step Breakaway plans), where others may have
unlimited depth (Binary plan). Each plan will be discussed in more
detail through the links listed at the bottom of this page.
Level
Level refers to the position of a distributor in a downline relative to
an upline distributor. As demonstrated in the diagram below those
highlighted would be referred to as 2nd level distributors as they sit 2
levels below your business centre in the compensation structure.
Naturally those frontline distributors who are positioned directly below
you could also be referred to as 1st level distributors.
Crossline
Crossline refers to the relationship between two or more distributors
who work for the same company, but whose efforts do not influence one
another’s commissions as they are not part of each others organisation.
For example, all distributors on the same level would be cross line from
one another.
Legs
Every frontline or first level distributor that you sponsor into your
organisation forms a new leg. For example, in the diagram below there
are 3 frontline distributors and therefore 3 legs (2 outside legs and a
middle leg). If it was a 4 x 6 plan there would be 4 legs (2 outside
legs and two middle legs). In some plans where there are a large number
of frontline distributors these legs are often numbered from left to
right 1st leg, 2nd leg, 3rd leg,…etc.
Another way to look at the legs of your business is that each leg
represents a new organisation that is owned and operated by your
frontline distributors. By helping your frontline distributors build
their “organisation”, this helps you to build one of your legs and
therefore can help strengthen your organisation.
Point Value
Regardless of what kind of industry you work in, the main goal of that
industry is to sell a product or service. The network marketing industry
is no different. For every product sold in network marketing, a
predetermined amount of the profit is paid to the team of distributors
who were responsible for the sale.
Given that there are a number of network marketing companies that
operate in a number of different countries around the world the easiest
and most fair way to pay distributors commission is to use a point
system. Each product has an assigned point value and your commission is
determined by the volume of points that flow through your organisation.
This way it doesn’t matter where you operate your business from (e.g.
America, Australia, Japan etc.) you are entitled to the same commission
as your fellow colleagues on the other side of the world.
It is important to understand that although higher priced products
normally offer a higher point value as a reward, this is not always the
case. The other advantage of the point system is that because different
products have different point values, if a company is trying to promote a
particular product, they can allocate it with a higher point value as
an incentive for distributors to sell that particular product. The table
below summarises an example of point values.
Product
|
Price
|
Point valve
|
| X | $20.00 | 15 |
| Y | $10.00 | 10 |
| Z | $25.00 | 16 |
Calculating Point Volumes and Commissions
The commission you earn in a network marketing business is directly
related to the total volume of points that flows through your
organisation. Therefore your goal is to build your business so that you
have a greater volume of points flowing through your organisation,
thereby earning a higher commission cheque.
Each compensation plan structure calculates total volume in a
slightly different way, however they normally take into account some,
maybe all of the following volumes:
- Level volume - the amount of points each level of your business has accumulated in that pay period.
- Leg volume – the amount of points each leg of your business has accumulated in that pay period.
- Group volume - the amount of points that has accumulated through your entire organisation in that pay period.
- Carry over volume – the amount of points not paid
a commission in your last pay period that are then carried over and
entitled to earn a commission in your next pay period. Carry over volume
basically allows any unpaid points to carry over to the following pay
period so that you don’t lose any commission.
Variable Level Commissions
This is where compensation plans begin to confuse people looking at the
business for the first time. In particular, the Stair-Step Breakaway,
UniLevel and the Forced Matrix Plans normally offer a variable
commission rate for each level of distributors within your organisation.
For example, in the diagram below the left hand side demonstrates how
the commission rate might vary on points accumulated on each level.
In the above example, if you were to have the variable commission
rate you would receive 10% commission based on the first level volume,
15% commission based on the second level volume and another 5%
commission based on volume in the third level.
Alternatively, if the compensation plan offers a consistent
commission rate (featured on the right) then you would earn the same
commission percentage for each level. For example, in the above diagram
you would earn a 10% commission from all 3 levels. One of the main
advantages of the Binary System is that it normally uses a consistent
commission rate, making it easier for people to understand.
Rank Advancements
As discussed previously, when you first join a network marketing
business you become either a distributor or an associate depending on
the company. As your organisation grows and you reach a certain level of
volume flowing through your organisation (or a certain number of levels
deep), the company allows you to rank advance - meaning that you gain a
new title and earn recognition from your peers.
To highlight the kind of rank advances that distributors might
achieve we have listed below some of the rank achievements that are
commonly known across the industry. Although you may start out as a
distributor, as your organisation grows you may become a Director or
potentially a Diamond Director.
Common rank advancements include:
- Leader
- Director
- Bronze Director
- Silver Director
- Gold Director
- Ruby Director
- Emerald Director
- Diamond Director
Rank advancements not only help to recognise the leaders within the
industry, but often normally have a bonus that comes with achieving that
level. For example, regardless of what network marketing company you
worked for, if you were to meet a Diamond Director from a different
company you would immediately recognise that this person is a very
successful network marketer and that you could learn a great deal from
their advice.
Bonuses
Many network marketing companies offer bonuses as part of their
compensation plan as a way of attracting people to join their business
model. These bonuses are normally in the form of a bigger pay cheque,
however in recent years there have been a number of new companies that
are now offering car and travel bonuses. It is important to understand
that normally these bonuses only come to those who achieve a certain
level of success, hence there is normally a fair amount of groundwork
involved before you are entitled to earn such bonuses.
What is the Best Plan?
Every compensation plan has both benefits and drawbacks, some of which
are discussed in the links on this page. When it comes to recommending
the best plan it really depends on what previous experience you have had
in the industry. Given our experience in the industry with a number of
different compensation plans we tend to lean towards the fairer of the
compensation plans.
A good point to remember when it comes to joining a network marketing
company, what the compensation plan has to offer is only part of the
equation. When evaluating network marketing companies we suggest you
look at the entire package which includes the products, the comapany,
leadership of the company and practicality of the business model.
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