Principles of a Successful Compensation Plan | Law Offices of Nehra and Waak

by Dan Jensen, Jenkon International, Inc.

Introduction

A compensation plan that fails to motivate the company’s representatives will stagnate that company faster than any other factor. While there may be many other factors that contribute to the success or failure of a direct selling company, the compensation plan is probably the biggest. I have often been asked, “What is the best compensation plan available today?” Unfortunately, there is no one right answer to this question. There are, however, proven principles of success that are common to virtually all successful plans.

The Golden Rules you should always follow:
Always provide incentive dollars for a specific desired behavior. Don’t waste your incentive dollars on behaviors that provide little value to you or the representative. Question each type of compensation and verify that it will provide the expected return on investment.
Leverage the principle of relationships. Most people recruit others they already know because they want to work with them. Be sure your plan builds on these relationships. A plan where a new recruit is trained or mentored by a person other than the sponsor usually results in poor recruitment and weak relationships.

Recognition is as important as compensation. Remember, “Representatives will work for money but they’ll kill for a cause.” – Jim Adams

The five objectives of a successful compensation plan

1.Sell Product to end consumers
Retailing products to the end consumer is key to moving products. Corporate failure is inevitable as people stop buying product that they do not or cannot sell.
Have a motivating retail/wholesale profit – a minimum of 25% discount below retail or 33% markup over wholesale is common. This retail profit is the basis on which people are motivated to sell (retail) products. Other motivations are often artificial and will not withstand the test of time.
Set a realistic retail price otherwise people won’t be able to sell the product to the end consumer.
Don’t sell products whose wholesale price is really the market retail value and then add an artificial retail price on top.
Require heavy emphasis on retailing from field leaders, training and marketing materials. Retailing products based on the hope of future rewards will never result in the movement of product to retail consumers. If a representative is selling product by promoting a dream that the buyer will earn future commissions when the buyer, in turn, sells the product to another buyer, you will eventually be sitting on a “time bomb” of unhappy representatives who have a lot of inventory sitting in their garages. Proper retailing moves only the amount of product from representatives to the end user that is justified by natural consumption of the product.

2.Build organizations (recruit)
Done by placing incentives on group volume building. Recruits must see that it is easier to build their businesses by having others help do the selling in addition to their own selling.
Recognition and reward should be built into the plan, especially for the new recruit. Most recruits are lost in the first 60 days because they lose the confidence that they will succeed in the long term.
Rewarding new recruits early on helps to keep their interest and excitement levels high.
Lack of rewards for new recruits often results in sales leaders promoting ‘buy in’ organization building.
They pitch people that a ‘buy in’ is an investment in their future. While the new recruit has enough ‘equity’ (inventory) to keep them in the business longer, they often quickly become disillusioned and are quick to complain to regulatory officers that ‘they were taken’. Regulators are always on the watch for ‘investment schemes’ of this nature.
Reward people early by building a series of goals and rewards. As they reach each goal, new recruits are quickly recognized and compensated. This helps build the confidence that they can actually achieve their future dreams.
Early rewards build the initial skills required to become managers. Lack of early incentives builds ineffective field managers who do not have the skill to sell or recruit based on product viability.

3.Build Managers (people who train others to sell and recruit)
Follow Step 2, above (Build Organization). Otherwise the field force will have many ineffective managers who do little to earn their compensation.
Managers are built by learning the basic skills of success as representatives through product retailing and recruiting. Once a representative learns these skills, they become a manager when they teach others (those they recruit) to do the same. Successful managers learn the power of duplication.
Incentives are placed on group activities (group volume and recruiting). Group Volume incentives usually reward both selling and recruiting.

4.Build Sales Leaders (people who train others to manage)
Incentives must exist to motivate and reward managers who build other managers. Avoid disincentives that penalize a manager when a new manager is created. Otherwise, a manager will work hard to suppress their own star performers from reaching their full potential for fear of losing significant compensation in the future.
Provide incentives that reward leaders for several ‘generations’ of downline managers so that these leaders will want to train their managers to build other managers as well.
Avoid making it too easy to become a sales leader. Representatives who don’t know how to build or train other managers to succeed should not be entitled to become sales leaders or the field organization will become superficial and weak. Remember that building strong sales leaders takes time, money, and effort. Invest in training them to become effective sales leaders, to build effective managers and to recruit product retailers and recruiters.
Provide incentives for your top performing sales leaders. Avoid having the plan quickly ‘Max out,’ otherwise top performers will wonder “what’s next” and you won’t have an answer.

5.Retention
Retain people by helping them receive significant reward for their time. You compete for their time and attention with many other opportunities and distractions. Make it worth while early on. As a representative works the business, they build an ‘equity investment’ in their downline organization and will continue to work the business if their downline continues to work the business. This is why a balanced emphasis on product retailing and recruiting is so important.
Representatives who build a downline are far more likely to continue to be active than those who do not build a downline are. If your product is consumable, consider using an “Auto Ship” program to build repeat business, both retail (preferred customers) and wholesale (to representatives).
Promote contests and competitions that can be won by everyone. Avoid ‘top ten’ contests where everybody loses except your top 10 performers.

Other principles of a successful compensation plan
Reasonable compensation percentages: Most compensation plans of today pay between 30% to 50% to field representatives. If a company promotes a plan paying only 25% or so, they will have a hard time recruiting and keeping representatives unless other factors offset this competitive weakness. These factors might include how well the public accepts the product (telephone service or other common consumables) or intangible incentives that motivate representatives. Real percentage pay out should fall between 35% and 42%, in my opinion. Higher percentages are possible with high product margins. Theoretical pay out (the percentage the plan would pay if all commissions were paid out in every case) should not be more than 8% above actual to avoid disappointing representatives expecting more.

Keep it simple: Many plans are designed by Multilevel Marketing (MLM) professionals for other MLM professionals. These plans often assume most people already understand the terms and principles of MLM or can at least learn them quickly. Time has shown that this is definitely not the case. While experience is essential when designing compensation plans, one must never forget that ordinary people are the ones who must be motivated by the plan. If a new recruit isn’t motivated early, he or she will quickly fall away. The more complex a plan becomes, the fewer people that plan will motivate. The plan needs to affect the heart of a representative first, before it can affect their pocketbook.

Avoid novelty or “fad” plans: Changing a compensation plan is costly in terms of lost momentum and representative commitment. When a representative recruits another person, the compensation plan is often a significant part of the selling process. To change it later is, in essence, admitting that the original plan was not very good after all. Some people may perceive the change as a “bait and switch” tactic. By staying within more traditional plans, plans that have proven themselves over the years, a new MLM company can still be innovative but know that the plan has staying power. It’s often joked that compensation plans are like men’s ties; when one plan goes out of fashion, you can count on it coming back a few years later. Stick to more traditional plans that won’t need to be changed as new fads come and go.

Don’t put too much credence in the impact of your compensation plan: Many entrepreneurs are convinced that they have the best possible compensation plan imaginable. When asked what product or service they will sell, they sometimes respond, “We’re still looking for the right product.” Obviously, these well intentioned people have focused on only one issue of starting their business by thinking that the compensation plan is the only key to their future success. Many companies have gained great success despite poorly designed compensation plans!

Don’t change the plan very often: Companies that experiment with their compensation plan are asking for frustrated representatives to join other more stable opportunities. Even good change can be traumatic. Be very reluctant to change the plan. Be careful when recruiting “heavy hitters”: These very successful Multilevel Marketing professionals can bring tremendous short term success to a company but can also be a major cause for failure when they grow bored with your company and join another, often taking thousands of their downline with them. Wise companies always build slowly for the first few years until they have the critical mass to handle changes in business volumes. Don’t design your compensation plan to focus on attracting these heavy hitters.