A good compensation plan is one of the most important ingredients in the recipe for direct selling success, but what makes a compensation plan good?
What are the 12 key behaviors that all direct selling compensation plans should motivate and reward? These are very important. You can use the list provided in this article to view your compensation plan through the lens of an expert plan designer.
Your compensation plan should include qualifications to measure performance and compensation to reward meeting specific goals. Discover or review the most common components of each. All compensation plans have similarities but there are also fundamental differences.
Just like other things in life, it’s easy to make mistakes. Some kinds of mistakes have minor consequences. Compensation plan mistakes can have significant impacts on your company’s growth and health. Put your plan to the test by reading carefully the eight most common compensation plan design mistakes. At the end, you’ll find a short list of the conditions that indicate it may be time to repair or replace a compensation plan.
What Is a Good Compensation Plan?
A good compensation plan is one that financially and ethically fits your business while motivating and rewarding the 12 key behaviors you seek from your salesforce.
It should be designed with consideration of the products or services you are selling, the consumption patterns of the products or services, the margins for your products, your budget for field compensation, your overhead costs, and the targeted profitability of your company.
As compensation plans raise ethical issues, your compensation plan should also be designed with consideration for your tolerance of inactivity and the consequences of not staying ahead of others who were recruited directly or indirectly by a representative.
What Are the 12 Key Behaviors?
Compensation plans should encourage and reward specific behaviors. In all, there are 12 of them:
- Personally purchasing your products or services
- Selling to customers (nonparticipants of the income opportunity)
- Introducing the income opportunity to others (sponsoring/ recruiting)
- Building a team
- Training, supporting and nurturing others
- Becoming a leader
- Personally developing leaders
- Helping other leaders to develop leaders
- Meeting or exceeding minimum activity requirements
- Being promoted to a higher title or rank
- Meeting or exceeding title maintenance requirements
- Staying active and engaged in the business (retention)
In your compensation plan, each behavior should be rewarded by one or more types of compensation. Whenever possible, eliminate or minimize paying more than once for the same behavior.
Measuring and Rewarding Performance
Direct selling compensation plans are built with two sets of components. The first are qualification requirements and the second are compensation types.
Only qualified representatives should be eligible to earn compensation. The most common components for qualification requirements are listed below:
- Recognition titles
- Promotion and maintenance requirements for each title
- Personal sales volume
- Group, team or side sales volume
- Downline sales volume
- Counts of qualified personally enrolled or sponsored representatives
- Counts of qualified group or team members
For each title or position in your compensation plan, there should be a unique set of requirements. If you have positions in your plan that are too difficult to achieve relative to the previous position, you may have trouble retaining your best performers, many of whom will seek to advance themselves to increase their income.
Independent representatives may be paid:
- Retail profit on the personal sales of products or services to customers
- Commissions based on personal sales volume
- Bonuses based on the sales volumes of independent representatives’ directly or indirectly recruited representatives
- Bonuses based on other achievements, such as personal title promotion or the title promotions of others
- Fast-start bonuses on specific purchases or upon the personal sales volumes generated by new representatives within a specific period of time
- Pool shares, which are paid to qualified participants
Eight Common Situations to Avoid
Having designed and improved compensation plans for many years, I have observed that in order to be great, you should avoid the eight. Below are eight situations to be aware of:
- Too High Title Qualifications
In setting the requirements to promote to higher titles, sometimes companies don’t realize that the performance bars they are setting are way too difficult. Most often, when this happens, it is evident in the requirements to promote to the second title in your compensation plan.
- Too Low Title Qualifications
Less often, companies establish title promotion requirements that are too easy. They reward mediocre performance over a period of time instead of rewarding the building of strong teams.
- Insufficient Recognition
When goals are met, independent representatives should be recognized for their achievements. Most often, recognition includes advancement in title. From time to time, we see companies whose compensation plans have just a few titles or none at all.
- Overly Optimistic Expectations
Everyone loves optimistic people. Well, most everyone does! It’s good to be optimistic, but it’s so much better to be realistic when it comes to salesforce performance. If your plan is built assuming everyone who joins will be a star, your rosy expectations will disappoint you and your salesforce.
- Insufficient Rewards to Recruit Others
Direct selling companies depend on recruiting for growth. If your compensation plan doesn’t sufficiently motivate and reward recruiting, you won’t get the volume of recruiting that you need to grow your company. Don’t pay representatives for the mere act of recruiting. All bonuses should be based on sales volume.
- Insufficient Rewards to Teach Others
Recruiting is important, but so is supporting your team members. Paying only a few levels of bonuses is insufficient to encourage and reward the team-building behavior.
- Incomplete Plan Design
If your compensation plan is not motivating and rewarding the 12 key behaviors, it’s incomplete.
It is critical that your compensation plan be in compliance with state and federal law. If you are uncertain, have it reviewed.
Repair or Replace?
When companies are struggling, sometimes the cause for struggle is a compensation plan in need of repair or replacement. Such compensation plans may exhibit one or more of the following conditions:
- Insufficient recruiting
- Low secondary title advancements
- Unbalanced higher title advancements
- Insufficient leaders
- Lacking retail sales
- Not enough activity
Compensation plan design is complex. It truly is a merger of science and art.
How to Audit Your Commission Run
Commission run auditing is a process of many steps to validate that your salesforce is paid properly and accurately based on the rules of your compensation plan. Stated another way, acceptance of responsibility for accurate payments = commission run auditing!
Your commission runs should be audited to ensure the earnings calculations are correct. Don’t assume your people are being paid correctly. Rather, assume they’re not because errors are common.
Representatives who are paid incorrectly can conclude that their trust in you is misplaced. Your representatives might “go away” if you don’t pay them as you promised, when you promised.
Some companies change their compensation plans every few months. Others change them every few years. You might find it interesting to learn that companies on average change their compensation plans once yearly. While compensation plan changes increase the likelihood that new errors will be introduced, some discrepancies don’t show up right away. This means the need to audit your commission run every month—or every week, if yours is a weekly plan—is imperative.
Reasons for Errors
Understanding the reasons for errors is the first step in reducing them. Misunderstandings are the primary cause of errors. Misunderstandings may exist between you and your software provider, between individuals at your company, or between employees of your software company.
Software programming bugs—title promotion errors, demotion errors and calculations—are a distant second. To minimize errors, insist that the internal documentation of your compensation plan includes examples of title promotions and upline payouts on a single transaction.
To help eliminate misunderstandings, ensure all communication on your compensation plan is in writing. Follow up every verbal discussion with a written list of decisions made. Also, have more than one person at your company review your compensation plan documentation for clarity and accuracy.
Request that your software company or your internal software developers, as applicable, prepare a “commission signoff document” in their own words to explain their understanding of your compensation plan. Insist that the signoff document include several examples of each type of commission and bonus that can be earned. Every exception should have its own example.
Who Should Audit Your Commission Runs?
Should it be your software provider?
- Yes, when they deliver the initial compensation plan to you.
- Yes, when they deliver changes in the plan to you.
- Yes, when you ask them to perform this function as a response to an outstanding problem or concern.
- No, at any other time.
Should it be your company?
- Yes, every month (or week, if yours is a weekly plan).
As you can see, commission run auditing should be performed by both you and your software provider. The following items are essential in order to do a thorough job at commission plan auditing:
- Full understanding of your compensation plan
- Knowledge of the tools available to audit the plan
- A testing mentality to exercise it fully
How Do You Audit Commission Runs?
We recommend that commission plan auditors develop a test plan that contains a checklist of items to test. Your checklist may include:
- Promotions to each title
- Demotions to lower titles
- “Missed” promotions by a dollar in volume or a leg count of one, for example
- Payment of each type of commission
Each time, your live commission run should be fully audited. In a test environment under your control, test the original commission run and any subsequent commission plan changes.
Reports Required for Good Auditing
I have had the good fortune and opportunity to have audited the compensation plans of many direct selling companies using different multilevel software applications, each of which provides its own reports for auditing purposes.
To all companies, I recommend the following reports be used in the auditing process:
- Total of sales volumes by order type for each commission period
- Genealogy reports that show the sales organization in lineage order, using both “placement” and “enrollment” sponsor relationships, preferably with titles, paid-as titles, counts, volumes, and so forth, listed next to each person on the report
- Detailed earnings statement per distributor with each commission and bonus earned listed separately
- Reports of counts, volumes and other measurements taken for each distributor that were used to calculate his or her title and paid-as title
- Transaction logs of each commission and bonus paid per order
President Ronald Reagan once said, “Trust but verify.” And I agree. Commission run auditing absolutely requires verification each and every time.
Jay Leisner is the President of Sylvina Consulting. For 26 years, Jay has improved network marketing and party plan direct selling companies. Compensation plan design and evaluation are two of his specialties. For a confidential consultation, call Jay at 503.244.8787 or email firstname.lastname@example.org.