Another Look at Commissions on Sales Aids

What follow are my personal observations on the subject of commissions on sales aids. This article should not be construed as the rendering of legal advice. Companies and distributors needing specific counsel in this area should retain an attorney skilled in direct selling law.

In an analysis of the laws of the 45 states that prohibit the operation of pyramids and endless chains, the word “primarily” shows up in 17. The context is always the same. The venture must “primarily” be about selling products and services to consumers, rather than bringing in more income opportunity seekers. The laws that do not contain the word “primarily” also convey the same meaning.

First, the design of the program must address the hurdle of the cost of entry, since there can be NO cost of entry, and NO required product or service personal purchase as a condition of participating in the income opportunity. There is one nationally recognized exception. A requirement to purchase a non-commissionable sales or starter kit, or pay a sign-up or administration fee, is permitted expressly in these statutes, or by custom and usage in the states without express language. In addition to the non-commissionable nature of this payment, the pricing structure of the kit or fee should be at “cost recovery,” and not a profit center for the company. Next, the regulators look at what the business is “primarily” in existence for. It MUST be about selling products or services to consumers. It CANNOT be to reward people for recruiting, nor can it be to reward people, if the recruited people buy training and sales aids.

The conventional wisdom followed by the vast majority of companies is to pay no commissions on sales aids. What follows is the reason “why”: Although no specific state or federal law prohibits paying commissions on sales aids, if the company gives independent contractor representatives an incentive to recruit more representatives, and that incentive is greater than the incentive to sell products and services to consumers, that is exactly what those representatives will do.

The few companies paying some form of commissions on sales aids, and who in my view are not at risk, have that portion of their business a VERY SMALL portion of their total business. I believe 15 percent or less is very small and defensible, as long as there are no other regulatory issues. Also, the commissionable sales aids are always optional, and never a requirement of participation in the income opportunity.

My personal recommendation has always been to not pay commissions at all on sales aids. The answer to this particular question is similar to the answer to so many questions about the structure and implementation of a legal direct selling company with a multi-level form of compensation. If the company is “primarily” about selling products and services to consumers, rather than recruiting more income opportunity seekers, the company most likely can withstand legal scrutiny.

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