Common Types of Compensation Plans

Common Types of Compensation Plans

Traditional Direct Selling Compensation Plans

This type of plan involves “face-to-face” sales by a company representative who sells directly to the consumer to earn commission on those sales. The number of sales managers is limited and the company often appoints them. Recruiting (sponsoring) is not aggressively pursued company’s representatives, with the exception of sales managers. Retail commissions are a large percentage of sales revenues and are repaid to the Representative/Agent or retained in cash payments.

Party Plan

This type of plan involves a “one-to-many” sales environment, with company representative arranging sales “parties,” typically through a hostess. Representatives earn commissions on the inventory sold directly to retail customers at the party. The sales management team is usually “shallow.” Representatives can often promote themselves to management by heavy recruiting and sales efforts. Higher levels of management are often appointed. The representative recruits other agents and hostesses who hold parties to recruit retail customers. Hostess receives purchase credit for efforts based upon the success their parties. Generally, there are several levels of management commissions but only a small percentage of total sales dollars is paid to management. High retail profits (35 to 50%) are common.

Network Marketing / Multilevel (MLM) Plans

Stair-Step / Breakaway

This type of plan is characterized as having representatives who are responsible for both personal and group sales volumes. Volume is created by recruiting and by retailing product. Various discounts or rebates may be paid to group leaders and a group leader can be any representative with one or more downline recruits. Once predefined personal and/or group volumes are achieved, a representative moves up a step. This continues until the representative becomes a manager and “breaks away” from their upline. From that point on, the new manager’s group is no longer considered part of his upline manager’s group – hence they are a “breakaway”. Managers receive commissions on group sales of their downline managers and recruits, which is often the majority of their earnings. This type of plan often pays unlimited commission amounts on a limited number of people in the downline group (size of the group). This is the most common type of Network Marketing plan.

Uni-Level

This type of plan is often considered the simplest of compensation plans. Uni-Level plans pay commissions primarily based on the number of levels a recipient is from the original representative who is purchasing the product. Commissions are not based on title or rank achieved. By qualifying with a minimum sales requirement, representatives earn unlimited commissions on a limited number of levels of downline recruited representatives. Typically, there is no sales management position to achieve.

Forced Matrix

This type of plan is similar to a Uni-Level plan, except there are also a limited number of representatives who can be placed on the first level. Recruits beyond the maximum number of first level positions allowed are automatically placed in other downline (lower level) positions. Matrix plans often have a maximum width and depth. When all positions in a representative’s downline matrix are filled (maximum width and depth is reached for all participants in a matrix), a new matrix may be started. Like Uni-Level plans, representatives in a matrix earn unlimited commissions on limited levels of volume with minimal sales quotas.

Australian or “2-up” Plan

This type of plan is based on large commissions paid on unlimited depth of a small amount of a representative’s total group. Large scale recruiting is necessary to drive this type of program. The representative gives up the first two of his/her recruits to their qualifying upline sponsor. This “pass up” may move through an infinite number of levels. Typically, sales management positions are minimal. Volumes accumulate through unlimited depth but limited width and earnings are often unlimited.

Binary

Requires representatives to constantly assess their personal recruiting and sales management team. Representatives will activate Income Centers (also called Business Centers), then recruit representatives into a center. Income Centers can be considered a single representative or business. Volume in each Income Center accumulates on one of two legs allowed per Income Center (a left and a right leg. Successful representatives in a Binary plan must constantly watch each of their downline leg’s volume to ensure that volume is accumulating evenly. This is because compensation is usually paid at fixed intervals on the accumulated volume of the smaller of the representative’s two legs. In addition, compensation is up usually only paid up to a predefined threshold set as the maximum payment that can be made during any given pay period. Volume accumulation starts again in the next payment period after maximum payment. Binary plans pay limited commission on unlimited levels of volume.