Evaluating Compensation Plans

As you evaluate a compensation plan, I believe there are certain things you should look for.  These include:

• Allow a new distributor to earn some start-up money quickly;
• Provide some transitional income to bridge people during the time they are gaining experience and developing their skill sets;
• Provide a platform to create passive income;
• Offer “sexy” perks like contests, trips, and bonus cars;
• Compensate top producers with incomes that keep them in the fold; and most importantly,
• Reward people for practicing the proper behavior.

Here’s why:

People today are broke! Savings are at an all-time low, while debt is at an all-time high. And people are impatient! The days when they would stick around while making $15 a month are over. Most will have to put the start-up investment on their credit card, and they will need to earn it back quickly.

For the same reason, they need transitional income. This doesn’t have to be huge. As long as they are earning something, say $300 or $500 a month, that will allow them to invest in the business by purchasing marketing materials, attending events, and getting their products paid for. This will keep them in the fold until they learn what they need to know to reach the high incomes and other perks.

The third reason is based on a personal bias of mine. I always look for what elements of the plan can provide true passive income. I don’t want to have to do things over and over each month. That’s why I don’t work at Pizza Hut any longer. I want to do the job once, do it right, and continue to get paid every month. And there are a lot of other people like me.

The reason for the perks is they make recruiting so much easier for the average distributor. But distributors don’t always realize this…

If you ask most people if they would rather get $3,000 or a free trip to Hawaii, they’ll opt for the cash. Then they’ll pay bills with the money, and it will be gone in 48 hours. But give them a trip to an exotic locale, and they will be snapping pix, taking videos, and reliving that trip for years. It creates a lifetime experience that is anchored with your company.

When I consult with companies on designing comp plans, I always include these types of goodies, because they have a very real effect of recruiting, improving retention, and contributing to distributor satisfaction.

When someone wins a cruise or other free trip, everyone they know hears about it. When you drive home in a new car and your neighbors find out you got it for free, they’re breathless to know how. So building these perks into the plan is one of the best investments a company can do.

Now that leaves us with two major issues that the comp plan must address. How it is balanced, in relation to paying people at the various levels, and rewarding them for taking the proper behavior. These two issues are interrelated.

First, we want the plan to give people incentives for doing the right thing. So it should not be skewed so all the money comes from bonuses provided by the volume produced by the initial enrollment orders. You want people working to produce volume all of the time. And it’s very important that the plan pays leaders for working down the organization in depth. This ensures that new distributors will get the support they need from experienced leaders.

The real nuance is providing the proper balance between the top and bottom of the pay plan. Some plans are “top heavy.”

An example might be plans for companies that have only one or two products but have a high dollar level (like ten or fifteen thousand dollars a month) that someone must maintain to receive overrides on their directors that break away. Due to the lower average volumes they actually achieve, 99 percent of the distributors will never consistently qualify.

In binary plans this may be evidenced by most of the commissions earned in the “running legs” by people that got placement deals, while most other people earn almost nothing.   In top-heavy plans most of the overrides roll up to a few poster boys and poster girls or are considered “breakage,” and the money washes up to the company.

This can produce high six-figure monthly incomes for these poster kids at the top of the plan. But for each of these big earners, there are tens of thousands of distributors not making a monthly check big enough to take their family to the movies. These big distributors can wave their mega checks around to hype growth initially, but ultimately most distributors will move on once they discover that they are not likely to earn any serious money. They will leave with a bad taste in their mouth and believe that MLM doesn’t work.

On the other hand, bottom-heavy plans will not work well long term either. These are plans where virtually anyone who joins can get high profits with minimal effort. They are designed in a way that over-rewards new people, with the hope that this will attract distributors from other companies to jump ship and come to the new company.

This excites people initially, but in the long term, the top leaders cannot make the incomes they deserve. You only have a finite amount of money to pay out. If you’re overpaying the people on the bottom, it’s coming out of the pockets of the people at the top. These people look at other plans and realize that with the exact same volume and same organization, they would make a lot more money in another company. This creates a leadership drain that ultimately prevents a company from succeeding.

To really balance a plan is a science. You want the beginning distributor to be able to start earning profit as quickly as possible, yet have the plan allow leaders to build up to and maintain big-dollar incomes. Depth should be paid in proportion to width.

If this plan is properly constructed, it contains all of the necessary elements to promote growth and pay people in proportion to the work they’ve actually done.    What do you guys think?  Any other thoughts on how to best evaluate comp plans?

-RG