The Compensation Plan or Pay plan

Compensation plans are ultimately the way in which you get paid in a network marketing business and therefore it is important that you understand how they work.

Maraming types ng compensation plan in MLM industry. Pero pag uusapan lang natin ay ang most popular types of plans.

1) The Stairstep

* Purely for illustration purposes only, not an actual plan.

The Stairstep or step and ladder plan ay popular sa mga traditional MLM. Everyone has probably been exposed to this plan at some time in their MLM career. It is a simple plan that has requirements that you must meet to get up the “Stairs of Success”. Every step is a promotion usually based on achieving a certain volume and each promotion or rank gives you a larger cut.

Demotion in stairstep plans ensure a distributor’s group commits to a certain volume every month. The plan generally guarantees a certain level of income for the particular rank achieved. Demotion in this plan means that you must maintain a certain volume every month (or quarter or fiscal year) in order to maintain that rank or you will lose the income of that level. Let us say for example, Anthony achieves a sales volume of P200,000 in his entire team (for a certain time frame) and that promotes him from Leader to Champion, certain companies require him to keep up that same sales volume or during the next cycle he will be demoted back to a Leader. In certain plans, there is no demotion in rank, so the group sales are accumulated for reaching the next level.

Maintenance in this plan plays a key factor in how building a solid group will look. If there are low repeat sales for the product being marketed, expect the minimum entry fee to be higher than the average MLM. This is because low repeat sales means less maintenance hence the majority of the income comes from recruiting new blood. If nobody does maintenance in a Stairstep plan, having a high rank doesn’t earn you money so don’t be a fool if someone tells you that the ‘minimum’ income for a ‘grand emperor’ is P100,000 a month – it all depends on the volume generated. On the contrary, plans with maintenance involved do guarantee an income or else you will not achieve that rank.

This plan is one of the oldest and longest plans around. The advantage of climbing the ladder gives major incentives for distributors to work harder and fight for the goal. The larger your group the more levels you can earn override commissions on even up to infinity levels as long as your downline is of a lower rank than you. There is also a fair system involved. Lets say if your downline works harder than you and sponsors more people, he can actually have a rank higher than you and that is when breakaway in certain plans come into play (discussed in the breakaway plan below).

The disadvantage however, is once a downline reaches a certain rank (lets say you need 3 directly sponsored Leaders to qualify as a Champion), one of them becomes a Leader while you focus on making the remaining 2 groups to Leaders, the first Leader might be neglected in the process. The other disadvantage is if the downline is too far deep in the organization (lets say your downline’s downline all the way down 10 generations), some distributors may neglect helping them because the monetary incentive is too small.   

2) The Unilevel

The Unilevel is a simple “Number of levels” that the company will pay you, and usually there is no promotion or rank. You make money by getting a certain override off of the volume, and usually there is a requirement of volume to qualify for a check. The advantage here is you don’t have work your butt off during certain seasons to fight for that rank. You can sponsor as many people as you can and your income comes from a large volume of people in your organization. For example, you can personally sponsor 5 people, and these 5 will look for 5. after 4 generations you will have 5 to the power of 4 in your organization (780 people) and the calculation of your sales volume will give you a straight forward income. If you've been in this industry, or are investigating, you must realize that the “5 who sponsor 5” is a myth that never happens. This is just an example of how you will be presented this particular plan. The disadvantage to this pay plan, is there is no incentive for developing many different groups (called legs). In spite of conditions in a plan imposed by the company (that you have to sponsor a minimum number of legs) some unilevel people tend to let the ‘strong’ downlines do all the work by waiting for their downlines to sponsor MORE people than themselves, which is a poor reflection of leadership. In the Unilevel, there is no demotion (the only demotion is leaving the company) and maintenance plays a key part in the long term income.  

3) The Binary

The Binary is an interesting design for a Comp Plan. It usually has 2 “legs” that you can have “Business centers” in, and you have a volume requirement to get paid on each leg. Most binary plans have what is called “balancing” -- you must balance the volume from each both A and B group to make sure you maximize your commissions. Some plans may use a 1/3 – 2/3 balance instead, in which you must have 1/3 of your volume in one leg, and 2/3 in the other leg in order to complete a payment cycle. In the illustration above, the A group is the strong leg (or the giant leg) while the B group is called the weak leg (or the profit leg). A has more people than B (assume they all produce the same volume per person). B needs to find 2 more people in order for U to ‘balance’ hence maximizing U’s income.

The main advantage of this plan is spill over. Allow me to illustrate

U sponsors 2 friends. In a binary, the company limits each distributor to have a MAXIMUM of 2 people. A and B were previously recruited by U. U needs to ‘balance’ his group by helping B find 2 people. But let us assume that B is not actively building the business at the moment, so what does U do? He finds and sponsors 2 people HIMSELF and places both of them under B and they become B1 and B2. This is called SPILLOVER. The advantage of spill over is that when everyone works as a team, the tree will fill very fast as all uplines and downlines work together to balance each other’s networks. It is also immune to the problems in unilevel or stairstep plans with downlines being too deep in the organization. A binary can be balanced depending on which side the downline is in and not how deep. The disadvantage however, is that this plan is particularly attractive to lazy people who don’t do any work and expect free handouts from their uplines. Imagine what will happen if everyone waits for their upline to place people under them? It doesn’t develop strength. The other disadvantage to these plans is achieving balance. In most cases there is a strong or outside leg that your sponsor will build. Everybody on that leg is encouraged to build that leg straight down. Then it is up to everyone to build their “inside” leg. This makes it extremely difficult to achieve balance if you are not a recruiting master, and most plans don't pay until you reach balance. 

4) The Breakaway

This plan has been said to have become somewhat unpopular in the industry, as you could lose the business you build, once it gets to a certain level of success, and it “breaks away” to no longer be a part of what you get paid on. It usually appears in stairstep plans. Let's use the example above in the stairstep illustration.

If I am a Champion and my downline builds his organization faster than me, and qualifies as an Emperor before me, 2 things might happen.

Depending on the company’s pay structure, I will not be eligible to receive overriding commissions from my downline Emperor’s group. Hence the ‘breakaway’ his bonuses will be ‘passed up’ to MY upline Emperor or Grand Emperor. In some cases, the ENTIRE group breaks away and join MY upline so even if I do qualify as an Emperor later on, I will not receive bonuses from his group!

Today, more and more companies are acknowledging the breakaway problem and have started rewarding leadership development bonuses (such as a fixed bonus percentage over the entire group even those that have broken away). This system has still worked out well in the past though, because it gets people working harder to prevent the breakaway from happening.

In MLM (just like in life), companies reward PEOPLE who work hard to build their groups. If a downline works harder than his upline, he should get paid more – hence it is more fair to them. So in this case if an upline doesn’t work hard enough, he shouldn’t blame the company if the downline breaks away. 

5) The Matrix

The matrix or sometimes called a FORCED MATRIX is like a pre-order tree. A computer driven plan puts people into your group by into the next available slot regardless of who sponsored them. These plans usually have a certain width and depth to them, such as a 2 by 2, 3 by 9 or a 5 by 25 matrix. This means that when you have 3 people on your front line, regardless of whether you personally sponsored them, or they come from spillover, the next person to join the organization will go on your second level. These plans work well if there are a lot of people that are recruited and WORKING TOGETHER TO FILL THE MATRIX. When you recruit someone, the computer searches down for the next open slot, and positions them there. There are some plans that allow you to override the commission of those that you personally sponsor even though they are not positioned directly under you within the tree.

How the computer works is like this:

If A sponsors a new friend, he will go into the next available spot in A's group, which will be the third spot under B. The next spot would then be under C and so on through the group. If D doesn't do any recruiting, then he'll have to wait for A to fill in his matrix. These plans sometimes pay only when an entire level is filled up, or sometimes a fixed amount per distributor by level. Once again, the advantages here is that if every single distributor in the tree all work together to fill the matrix the duplication result is fantastic! Imagine if everyone finds 3 and everyone else does the same thing, the matrix will be filled very fast. This means that even if you don’t look for ANYONE to join the company, you will get paid when the tree reaches a certain level. Which brings up the biggest and most obvious disadvantage. If everybody waits for everyone to fill the tree they will be disappointed. This kind of thinking is EXTREMELY WRONG and will ruin the company. Furthermore, unless there is a cut off system in the marketing plan, (for example, after the sixth level the person at the highest position will have to reinvest again at the bottom of the tree), the guy who ‘came first’ will get all the commissions and not do anything. By placing a cut off point, everyone who reinvests again will fill the tree faster as the deeper you go down the tree, the more people are needed to fill each level.

6) The Australian Two Up (some company modify this to 3 up, 4 up, etc.)

This is a marketing plan that is very unique. Basically, the two people you recruit are “given” or “passed up” to your upline sponsor and the rest of the recruits are yours. Here is an illustration:

Assume that each person you recruit, you are eligible to earn P100. U sponsors Q1, Q2, A and B. You earn ONLY on A and B but not on Q1 and Q2 as those sales go to your UPLINE SPONSOR. Q1 and Q2 are called your qualifying sales. Basically by finding Q1 and Q2, you have qualified to earn from A and B and subsequently C, D, E and as many as you would like.

Similarly,

A recruits A1, A2 and Z. The sales of A1 and A2 go up to U and the sale of Z goes to A. As long as U keeps Q1 and Q2 going, he is eligible to earn as wide as he wants and as deep as he wants! (A1 and A2 are now part of U’s group. This will multiply by 2 each time it goes deeper enabling him to earn income up to Infinity levels!)  

The biggest disadvantage of this plan is that sometimes people are selfish and will only leave U with ‘weak’ distributors (for example, Q1 and Q2 are slow learners) while capitalizing on the stronger ones in A and B (leaving the strong ones for themselves). Some might even purchase dummy accounts (known as ‘cats and dogs’ or ‘potatoes’). This leaves their upline with non-moving legs and creates a hollow organization. Some companies deal with this problem by giving bonuses or special overriding mechanisms where you get special bonuses for building them, or even removing the ‘qualified’ status should Q1 or Q2 drops out.

Another disadvantage to this plan is the product generally isn't a physical product at all and usually very high priced. This makes it difficult to build a very large organization as the pricing is out of reach of many people, plus they have to sell two before they even start to see any commissions. Some localities have even declared any sort of Two-Up plan illegal, so be aware and find out the regulations regarding the plan being offered.

7) The Hybrid

A hybrid is a combination of any of the above plans. An example would be a Forced Matrix with Unilevel benefits (ensuring that those who actually WORK to fill the tree get paid even more), or an Australian Two Up with matrix (to offset the disadvantages of distributors being pass up).

Many companies are combining the advantages of many plans to help distributors maximize their income.

REALITY CHECK: Regardless of how good any plan may sound, NONE OF THESE PLANS WILL MAKE YOU MONEY IF YOU DON’T SPONSOR ANYONE AND DEVELOP THEM. Only YOU can make the plan work. Without you, the plan is dead. DO NOT get too complicated about Compensation plans. Keep it simple while explaining to your prospects and make sure you understand that you CAN MAKE MONEY with it if you work your plan.

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