Does your compensation plan reward the right behaviors?
IF YOU’VE ever seen the 2011 film Moneyball, you can recall the premise: Billy Beane, general manager of the Oakland A’s (portrayed by actor Brad Pitt), sets out to rebuild his failing team. His strategy: turning to hard numbers to identify the diamonds in the rough who will become his new players. With the help of a number-cruncher fresh out of the Ivy League, Beane assembles a team that, ultimately, starts giving the competition a run for their money. Baseball is all about tradition, so relying on big data was a marked departure from norms in the sport. Specifically, Beane andhis young sidekick were using statistical analysis to determine which players were on base most often.
Mark Rawlins, Founder and CEO of InfoTrax has found important parallels between this famous baseball movie and direct selling, specifically in the area of sales force compensation. “Direct sales companies don’t need to be focused on finding home run hitters,” he says. “Rather, they should be focused on getting more players (distributors and customers, that is) on base. This is rather intuitive: The more people you can get on base, the greater the odds of a win.”
Throughout our industry’s history, direct selling companies have invested countless hours analyzing how to best compensate their respective independent sales force members. The objective has been to offer rich and competitive compensation plans that attract and retain distributors–without jeopardizing corporate profitability, of course. That’s a rather shortsighted view, however. If the goal is to get more people on base as Rawlins infers, compensation plans should instead be aimed at driving the kind of behaviors that lead to success. In other words, we’ve got to examine how we’re rewarding distributors, moving beyond the simple analysis of how much we’re rewarding them.
A little myth-busting may be in order before we proceed. There is no perfect compensation plan; nor is there a one-size-fits-all solution for every company. Rawlins has spent much of his career managing and advising direct sales companies on this very topic. Rawlins will be the first to tell you that what works for one company may not work for another. “Companies are in different growth phases, sell different products, have different selling methods and different cultures, values and visions–and that’s just for starters,” he says. Distributors start a direct sales business for a multitude of reasons, not all of them involving money. And they’re motivated by different incentives Rawlins says.
“If you’re giving some thought to tweaking your compensation plan, and/or if you’re questioning if you’re adequately rewarding the behaviors that will bring more prospects to your business opportunity and keep them there, your value proposition is a good place to start.”
“Direct sales companies don’t need to be focused on finding home run hitters. Rather, they should be focused on getting more distributors and customers on base. The more people you can get on base, the greater the odds of a win.”
—Mark Rawlins, Founder & CEO, InfoTrax
It All Starts With Two Questions
Dan Jensen, founder of Dan Jensen Consulting, has counseled direct sales companies on compensation, incentive and business plans, along with recognition strategy, technology and business best practices. Any company grappling with how to get more people on base, he says, would be well served to return to the two universal questions every potential independent distributor considers. First, is the opportunity worth it? And, second, can I do it? Direct selling companies are usually good at answering the first question through rewards, recognition and motivation. The second question has to do with skill and competency. Any prospect is determining if she’s competent in such skills as selling products, talking to people about a business opportunity, building a team and inspiring others. “Companies have to “balance the motivational part of the business with the competency part of the business,” says Jensen. “Failure to do both will most certainly result in stagnation or worse.”
The First 90 Days
“No compensation plan by itself is responsible for the success of any company,” Jensen says. “A compensation plan by itself, without competency, won’t work.” Therefore, training has to align with the rewards and recognition system. And the first 90 days of a distributor’s business are key. It’s during that period that “you’re looking to teach people to hit singles so eventually they hit doubles and triples,” Jensen says. “You can score lots of home runs that way.”
To help new business owners gain traction in those first 90 days, Jensen recommends three rank advances within three months. That means that the design of your plan must create the first three ranks with a “fairly low bar of performance. You hope they recruit one or two people in the first 90 days and find customers, and the recognition of the rank advancement keeps them in the game and wanting more.” Compensation plans that work well and support growth often include narrow gaps between titles. “You don’t want to have to jump over the Grand Canyon to get to the next level.” And, of course, the rewards should be incremental with each new title. A new distributor should be able to look to the next level and believe that it’s not only attainable but that it’s worth it. Jensen adds that it’s entirely possible for direct selling companies to get 20 percent of new recruits doing a fast start in the first 90 days – if their systems are aligned.
Even when we remove those who start a direct selling business solely for the discount, within any company’s sales force is a large percentage of new distributors who don’t recruit anyone within their first 90 days. Companies who can whittle that percentage down will start hitting more homers. That “analysis paralysis” likely is due to lack of confidence. Many new distributors start a direct sales business “like they’re taking a test drive,” Jensen says. Therefore, it’s vital for them to receive not just the rewards and recognition, but also the training so that the answers to “Can I do it” and “Is it worth it?” are both a resounding yes.
“ No compensation plan by itself is responsible for the success of any company. A compensation plan by itself, without competency, won’t work.” —Dan Jensen, Founder and CEO , Dan Jensen Consulting
The Shift To A New Reality
Direct selling companies are experimenting with various tweaks to their compensation plans in order to reflect a new reality: the hybridization between online companies with affiliate programs and direct selling, says Alan Luce, senior managing principal at Strategic Choice Partners, a consulting firm specializing in direct sales business development. Today, he says, more distributors are interested in running their business online for part-time income than running their business face to face or one-to many in a party setting. While direct selling has always been built on part-time sellers, “today it’s more built on part-time sellers than ever before.”
There’s no one formula companies have settled on to accommodate this shift, but in general, successful direct sellers are designing flatter compensation plans of two to three levels deep. “With more part-time sellers than ever, companies are increasingly introducing referral based customer loyalty programs,” says Kevin Crandall, Vice President of Sales, Shaklee. “The idea is to create raving fans and then gauge their interest in the opportunity.”
“With more part time sellers than ever, companies are increasingly introducing referral based customer loyalty program. The idea is to create raving fans and then gauge their interest in the opportunity.” —Kevin Crandall, Vice President of Sales, Shaklee
With this shift to online, part-time direct sales, it’s quite possible that a distributor never leaves her house to conduct her business. She may have a strong customer base, including several in the preferred customer program who receive rewards from bringing her referrals. She might do an occasional one-to-one sale online and hold a Facebook party every now and then. Accordingly, “because you have a flatter, more part-time first level of seller, that means you have to change the qualifications for business leaders,” Luce says. For example, let’s say your minimum production for becoming a business leader is $3,000 in production. You might have two customers or 10. As long as you reach $3,000, you’re a business leader.
“A couple of other tactics direct sellers can use to attract people is via a sampling program to build distributor confidence through small wins, which can help companies identify when a distributor is becoming disengaged and preparing to leave,” says Crandall.
Create the “golden handcuffs.” When direct sellers can generate predictable and reliable income of about $300 to $400 per month— enough to make a car payment or a sizeable chunk of a payment—“then you create a dependency income, and that dependency causes retention,” Jensen says. “You can’t keep people with Starbucks money, but with Disneyland money, you can.”
New companies need time to determine if their compensation plans are working, Rawlins says. The first two to five years “says nothing about how effective your comp plan actually is.” Dream builders may be telling prospects, “ ‘If you do this you’ll make $500 a month or $5,000 a month,’ and there’s no evidence one way or another. It takes time or people who believe to realize it’s not true if it’s not true, and then it takes time for that to gain critical mass. At some point, it doesn’t work anymore. One of worst traps I see companies get themselves into is they start out and grow like wildfire. They don’t realize that you’re running on pure adrenaline
at that point.”
As direct selling companies continue to grow and evolve and the industry becomes more competitive, organizations are left with the challenge of how to deliver the most attractive compensation plan for both distributors and the corporate bottom line. The best plan is the one that reflects who you are and where you want to be as an organization—and one that incentivizes your distributors to achieve long-term, sustainable success with integrity.
Key Performances Inidicators
IF THE GOAL IS to get more people on base, what should your Key Performance Indicators, or KPIs, be? In other words, what are the measures that will tell you if you’re meeting your objectives (or not)?
1. Ensuring That 50 Percent Or More Of Your Distributors Are Achieving Quick Start
is one of the most critical KPIs to watch, Luce says. “Study after study has shown that people who achieve success during their first 30 days stay in business twice as long and sell four times as much over the course of their business.”
2. Are Your Sales Force Members Recruiting At Least 2 Percent Each Month?
For example, if your sales force is comprised of 100,000 members in a given month, you should be seeing approximately 2,000 new recruits that month. “If you drop below that, you’ll start to contract as a company,” Rawlins says.
3. Take A Look At Your Salespeople—
those Rawlins defines as earning between $300 and $500 per month, mostly from their recruiting efforts. Do they stay, and if so, how long do they stay? If you have rapid turnover in this group, it’s difficult to maintain your growth as a company. “If for $300 to $500 they’re not staying,” Rawlins says, “it means they’re spending too many hours to make that $300 to $500.” He refers to this as the “McDonald’s rule.” If a distributor is spending more time to make $300 to $500 than she would to work at McDonald’s part-time for the same money, she’s not likely to remain a distributor.
4. Jensen Recommends A Minimum Target Dollar-per-Hour Propositions Of Two and a Half To Three Times The Minimum Wage.
So if the minimum wage is $10 an hour, a direct sales business becomes an attractive proposition at a minimum $25 to $30 an hour. Why does our industry have to prove itself at a higher hourly rate? A typical part-time job offers structure, a schedule, a defined environment and, most crucial, predictable income. A direct selling business offers tremendous flexibility, but the income is entirely self-directed and not always predictable depending upon one’s success in any given month. Therefore, “we have to be significantly more than minimum wage to win that battle.” Jensen adds that there’s an “exponential” drop in sales force retention once you dip below the $25 to $30 threshold and a spike when it meets or exceeds $50 per hour.
5. How Many Months Do Customers Stay Active, On Average?
For every company, it’s slightly different, depending on the products or services your representatives sell.
6. If Person A and Person B In Your Sales Force Each Recruit 10 People, How Many Of Those People Are Still Active One Year Later?
If the numbers for Person A and Person B are significantly different, “work yourself upline until you find out the cause. Is it just these two people, or this organization, or this dream builder? Dream builders teach their downlines different strategies for signing people up, and you want to know which ones are effective and which aren’t and where it started,” Rawlins says.
7. Month To Month Change In the Number Of Paid Leaders–
those who not only carry the title but are also paid as leaders. “When that number goes up, sales go up and vice versa,” Luce says. “It’s the canary in the mine.”
8. Number Of New Recruits per Leader Each Month.
If leaders aren’t recruiting on a regular basis to accommodate natural turnover in the business, eventually sales production will drop.
9. Cash To Field.
Former Co-CEO of Primerica John Addison says one of the most important KPIs a company needs to track is the total cash being paid out to the field each month.
7 Types Of Distributors
To Determines what drives behavior, we first have to categorize distributors using some of the data readily available to us. Based on the company’s extensive background in compensation plan design, Rawlins identifies seven primary types of distributors:
Customers: Sometimes dubbed “personal use consultants,” customers sign up to be able to buy products they love at wholesale. They never recruit any team members.
Social Enrollers: These are the same people who grab you at the coffee machine and won’t let you leave until they tell you the entire plot of the movie they saw. But they don’t want the responsibility of being a distributor. Social enrollers, who also enjoy the product discount, can be very effective at driving people to the company. However, they don’t want the blame if they fail.
Emerging Sales Leaders: Quite simply, emerging sales leaders are salespeople who are now teaching others how to be salespeople.
Sales Leaders: These superstars have successfully replicated the process of building salespeople down multiple levels.
Dream Builders: They’ve reached the top-most levels of your sales organization and possess the ability to motivate and inspire from the stage.
Lottery Winners: Lottery winners signed up one or two team members who became very successful. Due to the manner in which their compensation plan is structured, they’re compensated handsomely and can be quite opinionated about whether the organization should make any changes to the plan.
Retirees: This group has achieved the dream of residual income.
Rawlins has seen companies pay as much as 25 percent or more of their total compensation to lottery winners and retirees. But who’s really moving the needle? It’s the emerging sales leaders, sales leaders and dream builders.