How much can we afford to spend on commissions?

Growth and momentum are driven by the right behaviors done consistently by motivated builders. Incentive dollars should always be targeted to the behaviors that produce the desired results. When a compensation plan is designed to reward the most valuable and productive behaviors while leveraging relationships, it combines with a company’s recognition and incentive system to form the momentum and magic of growth.

A compensation plan that fails to motivate distributors can quickly stall the best company. Many factors contribute to the success or failure of direct selling companies, and the compensation plan is one of the biggest. Many ask us, “what’s the best compensation plan out there?” The answer: the best compensation plan out there is the one that exactly reinforces the behaviors you must elicit from your field sales reps in order to be successful.

Compensation plan design expert Dan Jensen has proven that “The Five Golden Behaviors” drive every successful compensation system for any new MLM as well as for an existing empire. These behaviors are Retailing, Recruiting, Building Managers, Building Leaders and Retention. Striking the proper balance for the incentives that drive these behaviors should drive your compensation plan design efforts.

There are some that think that the compensation plan is the end-all reason behind another company’s success. In reality, the compensation strategy plays a major part in the success of a company, but not the only part. What other elements of the business model contribute greatly to the success of a company?

  • Training which builds competence in the field
  • A strong and unified management team
  • A focus on mission, vision, and values that attracts the passion of others
  • A visionary person with whom the field can connect and relate
  • Great products offered at competitive prices
  • Excellent service provided to the sales force and customers
  • Excellent and consistent communications with the field
  • Effective tools such as kits, forms, instructional materials, etc.
  • Simple systems that your sales force use to do their business such as web tools, a web order entry system, reports, etc.
  • Retention best practices studied and implemented from the start

Dan Jensen teaches a key discipline for evaluating your plan to determine the behaviors that it will support. Mastery of this discipline empowers you to consider all the “what if” scenarios of plan design, both when launching your MLM company or Party Plan company as well as throughout the life of the company when analyzing all of the opportunities and chances for growth and evolution of the compensation plan.

This key discipline is to analyze your new MLM plan for the behaviors it supports. Take each type of commission at the lowest granular level of detail and ask yourself, “if this was the only type of commission the plan paid, what would it make me do?” For example, if your plan pays out 6% for four levels of sponsors, isolate the level one commission in your mind (a commission on those who are personally recruited). Look at it as if it was the only commission paid in the plan. What would a level one commission make you do if it was the only type of commission paid? A level one commission engenders two behaviors: recruiting and teaching to sell. It would seem to promote recruiting new people and teaching them to sell so the sponsor could get paid on their sales. It would not create managers or leaders. It does not make the sponsor sell more product (retail profits from personal sales do that). A level one commission simply generates recruiting and ‘teaching to sell’ behavior (which is what a manager must learn to do).

What if the plan only paid 6% on level two (no level one, three, or four commission is paid)? What would that make you do? It would encourage a person to sponsor a couple of people on the first level and then teach them to recruit others. It would make the sponsor also teach them how to get others to sell so the sponsor could make a commission when they did. Go through this mental exercise of isolating each type of commission in your plan and note for each commission type which of the Five Golden Behaviors it creates and which behaviors it fails to create. There is a powerful downloadable tool at www.jenetek.com called the new MLM Plan Behavior Analysis Worksheet that has a template for this type of analytical exercise. When you have looked at each type of commission, also look at the big picture to see how well your plan addresses all of the Five Golden Behaviors. Is it well balanced? Does it spend most of its money on recruiting and very little on building managers and leaders (out of balance)?

Party Plan Compensation and Hostess Reward Programs

According to Dan Jensen (dan_jensen@launchsmart.com), the real key to success in the Party Plan Compensation design is to understand what he calls the “Dollar-per-Hour Proposition.” It’s the secret to unlocking the door to sustainable growth. This is not only true of the Party Plan Company, but it also holds up in the MLM company analysis.

What would your business look like in one year if every one of your party plan sales consultants were to spend 30 minutes more each week on the business? What if they spent an hour more each week? This opportunity can be found in this simple principle… you must provide a compelling reason for each consultant, both new and experienced, to spend a little more of their time in the business each day and each week. You are competing for their time. Your greatest competitor is not another direct selling company. It’s time. Their time. Why should they spend their time on their business rather than on other things they love to do? If you don’t give them a compelling reason, they won’t. It’s that simple.

New recruits especially fall victim to this in a new MLM. The attrition rate for new distributors during their first year is very high. Both the DSA and an independent research group called the Wirthlin group have posted research establishing that an average of 80% of new recruits fall away within their first twelve months. The majority leave during their first ninety days. Yet, a few companies enjoy attrition rates less than 20%. How do they do it? How does a company keep 80% of their recruits during the first twelve months?

To answer this mystery, we must first recognize another uncomfortable truth: The vast majority of new recruits in their first ninety days do not sponsor even one person. Perhaps they are afraid. Perhaps they don’t feel they know enough yet to bring a new recruit into the business. Whatever their reason, for the most part, it doesn’t happen. That presents a big challenge. How can you give them a compelling reason to spend time on the business during their first “make-or-break” ninety days? Most don’t even have a downline from whom they can earn even a small commission? If they do sponsor one or two people, what will their first few commission checks be? Imagine the excitement when after weeks of working her business, Suzy opens her first commission check for $8.75! Not so much. Companies that rely solely on downline commissions to persuade their new recruits to spend time on the business inevitably see their attrition rate rocket to dizzying heights. So what’s the answer?

If you are competing for their time, the answer may be different for each individual. Experience suggests that those companies whose consultants earn about $25 per hour or more keep a much higher percentage of their sales people and realize consistent growth. Knowing that each consultant will be exposed to frequent rejection and negative comments from spouses and friends (honey, why don’t you get a real job?), we must offer more than other part-time options available.

The nature of direct selling is that it has no schedule, no structure, and usually no real supervision to help a person succeed. Most people feel very uncomfortable when put into an environment where there are no clear expectations, no scheduled working hours, and no boss to correct you when you make a mistake. Direct selling is a tough job, no matter how you slice it. If you don’t provide a compelling offer for their time, you will continue to see recruits leaving for other part-time options. A waitress at a restaurant, with tips, can earn $15 to $20 per hour. Your “compelling” offer must be better. Much better.

While sales consultants usually don’t calculate what their dollar-per-hour rate is, they feel it, they sense it, and they always know when they aren’t getting enough for their time. With such a high percentage of women, their husbands ask the same question, too… is it worth my time and hers to have her doing the business. How many women have left the business because their husbands wouldn’t give them the support they needed? How different the story would have been in many cases had she been earning $25 to $35 per hour? Many husbands become “believers” when their wives are consistently making $25 per hour or more. In some cases, in fact, they are pushing them out the door to do more!

Consider also how much passion a sales consultant will have to recruit their friends and neighbors if they are only making $10 per hour! “Sallie, come join under me and you, too, can earn $10 per hour like me!” Not very inspiring, is it? Imagine, however, if the sales representative is earning $35 per hour. “Sallie, I’m making loads of money in my business and it’s easy to learn how. Come and join my team!” What a difference it makes to know that your recruit will earn enough to make it worth their time and thank you for teaching her the business.

Calculating the Dollar-per-Hour Proposition

There are three major factors that affect your Dollar-per-Hour Proposition:

  1. Average time per presentation (one-on-one or party)
  2. Average sales volume per presentation
  3. Average costs to the consultant for each presentation

In a party-plan business, the following list illustrates how much time a sales consultant spends on a typical party. For example:

Minutes per Party
Hostess Coaching 15
Travel to and from the party 60
Set up 10
Tear down / Clean up 15
Actual presentation / demonstration 60
Socializing at the party 30
Taking guest orders 20
Enter the party order into computer 45
Order receiving and separation *
Delivery to hostess *
Hostess follow-up *
Customer Service / Problem Resolution 15

* Companies where the consultant receives the party order, separates it into individual guest orders, drives it to the hostess for delivery, and then drives home, can expect to add at least another two hours to the time each party takes for the consultant. Be careful what you expect your consultants to do after the party!

How Much Can You Pay Out in MLM Commissions or Party Plan Compensation?

Using a model created by Dan Jensen, the renowned compensation plan designer, you can get close to determining what your commission plan can pay out. Through the use of an informed model like the one found at http://www.jenetek.com/LearningCenter.htm or included in the LaunchSmart™ System, you can determine the relationship between markup from product cost to retail / wholesale, the amount of pre-tax profit to the company, and the amount that can be devoted to compensation and incentives for your new MLM.

The key is to understand the true long-term cost of the MLM compensation plan or Party Play hostess and consultant rewards plan before making a full commitment to the plan. Any estimate of the percent of sales should be projected to when the company is mature, usually 4 to 8 years from launch. The compensation plan for a direct selling company is mature when:

  • Volume is extended far enough out from the company (at the top of the pay structure) so that it pays commissions to all the distributors and consultants without any pay “dead-ending” into the company.
  • Top distributors achieve the highest titles or ranks to qualify for maximum payout.
  • The payout is stable for six months, with only a half percent variation after considering seasonal trends. New MLM With experience and a good analytical approach to projecting compensation payout, you can feel assured that your plan will withstand the rigors of growth.

Plan Payout Analysis

To determine the steps necessary for estimating payouts from your new MLM compensation plan, read on. Whether you are analyzing an entire compensation plan or running a “what if” analysis of changes or enhancements, this information can help.

Because every compensation plan is different, you must rely on fundamental payout assumptions and variables. We have found that the best approach begins with organizing the plan into three basic commission groupings: Retail Profit Commissions, Front-End & Team Bonuses, and Back-End Generation & Leadership.

Because compensation payout analysis is such a vital step in the creative process, we recommend that you become familiar with the following absolutes of a proper analysis:

  • You must understand your compensation plan in its entirety
  • Consider all the ways a person might exploit the plan in order to achieve its maximum payout whether it’s a new MLM or established
  • Consider behaviors in light of known production principles, such as the Perato principle and breakage
  • Accept that the plan will evolve as the company grows and its culture unfolds
  • Make sure that everything makes sense to you. (Magic is in marketing, not in the numbers.)

Plan Payout Checklist & Key Considerations

  • Have we identified the behaviors rewarded by various elements of the plan? For a new MLM? For an established company?
  • Have we allocated the payout to various plan elements based on informed estimates?
  • Have we estimated the percentages of plan participants who will perform at the various behavioral levels?
  • Do we understand the dollar-per-hour proposition for our plan as it relates to party plan companies?
  • Have we organized our plan into the three basic commission groupings for analysis:
    • Retail profit commissions
    • Front-End & Team Bonuses
    • Back-End Generation & Leadership
  • Have we determined whether our products / services require the use of points or commission volume
  • What is the dollar-per-hour proposition for the MLM model?
  • Have we had a fresh set of eyes examine the plan to see where the plan can be unexpectedly exploited?
  • Have we worked with our compensation design team to thoroughly analyze payout exposures?
  • Have we reconciled “face value” of the plan with anticipated payout?
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