by Dan Jensen, Chairman, Jenkon International, Inc.

Breakage is defined as the commissions left unpaid each month compared to the theoretical maximum of the plan. If a compensation plan pays a maximum of 45% but the actual pay-out is 35% each month, then the breakage would be 10%. On the surface, one might suggest that breakage is unfair, unethical, or at the very least, misleading, considering a plan that represents itself as paying 45% but actually pays 35%. Upon further study, however, a plan which uses breakage wisely will reward the producers much more generously than one without Breakage. It allows a company that can only afford 35% for commissions expense to pay perhaps 45% or more to the distributors doing the greatest amount of work. Breakage can be a strong competitive advantage if it is used correctly and for the right reasons.

Objectives for breakage in a plan
Every piece of a good compensation plan has a specific purpose or desired result. With breakage, we want to:

The benefits of properly using breakage

 

There are many ways to implement breakage and methods vary according to the type of plan used.

Strategies for the wise use of breakage

Don’t set performance thresholds (GV, PV, etc.) too low. Breakage is only available when there is a gap between poor performance and desired performance. If you need to set low levels of performance, than offer graduated compensation opportunities for those who are willing to work harder. Low performance requirements produce low performance.

Redirect the breakage into new incentives when possible. Increasing the 5th generation bonus from 5% to 6% may make a few leaders happier, but they may not do anything different to obtain bigger checks for doing the same old things (no wonder they are happier!). Putting another 1%, however, into a new 6th generation bonus (assuming the old plan paid only 5 generations) which is contingent on adding another 3 personally sponsored breakaway leaders will stimulate leaders to recruit and build more front line breakaways than before.

If your plan uses titles or ranks like stair-step breakaway plans do, then always use “paid as” titles. Let distributors keep the highest title they achieve, but always “pay them as” the title they actually qualify for each month. To continue paying them based on performance that occurred months ago is wasting incentive dollars which could be applied to the better producers. It also reduces breakage opportunities.

For group volume incentives (front end stair-step), consider rewarding the breakaway manager based on his actual group volume instead of his title. For example, if a plan calls for a breakaway manager receiving a maximum 25% on his group, consider adding a minimum volume level to receive the full 25%. If he falls below the minimum, then he would earn less, perhaps much less, than 25%. The difference between actual and maximum would be retained as breakage and added to other incentives in the plan.

Never roll up volume from an unqualified breakaway to his upline. Rolling up commissions (called compression) is often desired, but avoid rolling up volume which would add to the group volume of upline managers. This results in creating phantom qualification volume for upline managers not related to any real performance and often rewards the poor performer who receives a nice check and wonders what he did to earn it. The net effect is to eliminate breakage and waste your incentive dollar.

Distinguish between active and qualified when qualification levels are defined. Active usually refers to personal performance often measured in Personal Volume (PV). Qualified often goes beyond active adding group volume or sponsoring requirements. Breakage rules can be defined differently for active and qualified. For example, the company might keep as breakage some commissions for unqualified distributors who fail to meet their group volume requirements, but roll up commissions (no breakage) for those distributors who are not active.

Grandfathering: A common technique when a company changes their compensation plan is to grandfather existing leaders and distributors into former (often lower) levels of performance requirements to “soften the blow” of the new plan. While this may be essential to winning their support for a much needed plan change, it is often unwise to offer these special arrangements for long periods of time. Wise companies often make grandfathering a temporary or transitionary arrangement. Grandfathering often reduces the breakage the company would otherwise receive due to poor performance. The net effect is that the producers are compensated less while the poor producers are compensated more.

Other sources of breakage

 

Finding breakage opportunities in your plan
To determine where your breakage opportunities are, follow these steps:

 

 

 

Once you know where you already have breakage, you can also spot areas where you don’t. Look at these areas and determine if you want to have more breakage and modify the plan accordingly.

Conclusion

Breakage can be a significant competitive advantage if you use it wisely and a terrific tool to reward the producing distributors more than you could otherwise afford. All plans have some breakage opportunities which can be tapped to make the plan an even more powerful motivator. As in most things, moderation is more prudent than extremes when applying the principles of breakage to your own plan.

About the Author:
Dan Jensen is founder and Chairman of Jenkon International, Inc., a computer software firm specializing in the Direct Selling / Network Marketing industry. Founded in 1978 and having served over 600 industry clients, Jenkon has acquired an unequaled level of experience and knowledge about what makes companies successful in the industry. Many of Jenkon’s clients have risen to become industry leaders such as Nu Skin International, NSA, Cell Tech (Blue-Green Algae), Usana, Cabouchon, Melaleuca, and many others. Many industry leaders have come to Jenkon to utilize their advanced software technology including Shaklee, Avon, Stanley Home Products, and Nature’s Sunshine Products. Most of Jenkon’s clients start very small utilizing Jenkon’s Summit V business management software system in their office. Summit V software puts the tools to deliver total customer satisfaction into the hands of even the smallest network marketing or direct selling company. From accurate and timely commission checks to order processing to managing downlines numbering in the hundreds of thousands, Summit V has proven itself to be a formidable weapon in the competitive marketplace of direct selling. For many, it has become the key to their success. Jenkon, based in Vancouver, Washington, employs 60 people in the USA with another six in its UK office near Birmingham, England. For more information, contact Jenkon at 360-256-4400 or Fax 360-256-9623.

All contents © Copyright Jenkon International, Inc. 1996. All rights reserved. Permission is granted to reproduce this article, AS LONG AS the biographical section above is included with the article.