By Mark Rawlins on Aug 24, 2018 12:17:04 PM
Compensating direct sales distributors is complicated work. When you design your compensation plan, you should go with something tried and true. The three most common compensation plan types in the MLM industry are unilevel, binary, and breakaway. Each plan has been in use for a long time at many companies, so there’s plenty of data and conventional wisdom about each. Compensation experts know how they work and how to make them work.
Some say that one type of plan is more complex than another. At one point, this might have been true, but not anymore.
The complexity of the dominant compensation plan types is often a motive for the invention of new types. Innovators start out with the battle cry, “my plan is simple,” but inevitably, to make the new plan work, they have to make concessions. Over time, weaknesses in each simple plan force adaptation in the form of add-on commissions. Each time you add a secondary or tertiary commission to a plan it becomes more complex.
The breakaway was too complicated, so we invented the unilevel. The unilevel became too complicated so we invented the binary. I’m inclined to believe that whatever new plan is invented next will become more complex as time goes by. Paying distributors for their efforts is complicated. Today, all three plans are equally complex, and radically different from the way they started out.
Let’s review these three types of commission plans.
The group—not the individual—is the basic unit of a breakaway organization. A distributor’s position as either a member or the leader of a group is determined based on whether she has achieved the breakaway rank. At this rank, a distributor “breaks away” from their upline, becomes a sales leader, and builds their own sales team.
The breakaway focuses on compensating two distributor types: salespeople (paid a differential bonus), and sales leaders (paid a generation bonus). This is the strength of the breakaway—it naturally rewards the salesperson and the sales leader according to their efforts. (All other plans create add-on commissions for the salesperson.) Let’s look at how these two commissions work.
Differential bonuses work by paying a distributor the percentage they qualify for minus the percentage of the commission that was already paid to others in the tree. So, if I qualify for 10% of a $100 order and no one beneath me qualifies for a percentage of the same commission on that order, I get $10. If I qualify for that same 10% on another $100 order, but someone beneath me qualified for 5% of the commission, I receive $5. If the total differential commission is 25% and I qualify for 25%, then no one above me in the tree will receive any of the commission.
A salesperson advances through the ranks to qualify for higher percentages of the differential bonus. Once a distributor reaches the breakaway rank, he’s at the top of the differential so he qualifies for the entire differential bonus. This is what it means to break away! Breakaways cut their uplines off from the differential commissions generated beneath them. The breakaway and his team become a separate unit. A distributor at the breakaway rank is a top-level salesperson; to advance further and earn larger checks, he or she must become a sales leader.
The breakaway compensation plan uses a different commission to reward upline breakaways on the volume of downline breakaways. If a distributor fosters the growth of a downline breakaway, she’s doing what she’s meant to and her organization is growing so her compensation must grow as well.
The compensation plan rewards breakaways for the volume generated under other breakaways in their downlines with a generation bonus. This is usually a level bonus. A level bonus is similar to a differential bonus in that distributors qualify for a percentage, but different in that they’re paid the entire percentage that they qualify for. The generation bonus in a breakaway plan pays distributors a percentage of the group volume of each breakaway below them.
Distributors at unilevel companies have unlimited space on their first level and unlimited legs branching off beneath them. The modern unilevel typically has multiple commission types, but the baseline commission is a unilevel commission which every active and qualified distributor gets. The unilevel commission pays a set percentage on the personal volume of downline distributors. The number of paying levels a distributor gets depends on their rank, but the percentage they’re paid is the same on each level.
The unilevel commission pays well, for distributors who have built substantial organizations; it does not pay new distributors enough to keep them engaged. If a unilevel pays 5% and distributor A only has one level beneath her, she must generate $10,000 of volume in that first level to make $500. That’s a lot of sales without much of a reward.
To pay salespeople enough to justify their efforts, unilevels supplement their baseline commission with other bonuses—the most common is a fast start bonus. Unilevels also often incorporate bonuses that pay top-level distributors—usually a pool bonus that pays equal shares.
Unlike those at unilevel companies, distributors at companies with binary plans only have two downline “legs” and they receive a standard 10% on one of those two legs. When a distributor’s first two downline positions are filled, his subsequent recruits go into the downlines of the people below him. Distributors build both legs but they are paid only on the leg with the least volume—called the weak leg or pay leg.
This is called a pay leg commission. The commission itself is a percentage of the entirety of your pay leg—all the way to the bottom of the tree. And no matter how many levels down a sale happens, the pay percentage is the same. The correct build strategy for distributors is to keep both legs balanced. The upline will help build the downline—putting recruits in the strong leg (or reference leg)—because they get value out of recruits regardless of how far down the tree they are.
The pay percentage is usually the same for each binary company, and each company has a cap on commissionable dollars. The function of the cap in a binary is to prevent payouts from becoming unsustainable. Without a cap, companies might pay more than 100% of revenue in a pay period.
Like unilevels, binaries usually employ a fast start bonus to compensate sales people and a pool bonus to compensate top-level distributors.
These are the basic facts about the three types of compensation plans. The breakaway plan has well defined distributor roles and two primary bonuses. With the unilevel plan, everyone is the same as everyone else. There are ranks, but the unilevel plan pays everyone the same bonuses. The same is true of binary plans, but ranks are almost meaningless; the focus is for distributors to try to balance volume between both legs of the organization. Each plan type can pay well—there is no perfect or ideal compensation plan.