For this question, we consulted with the leading compensation plan designer who has worked with more than 600 compensation plans over the course of more than 25 years.
Designing an effective compensation plan is often quite complex. It must sustain growth over many years, work well in both times of high growth and times of flat sales (the real test), and motivate people to do the right things to build successful field businesses. A plan that builds the right levels of competence at the right times of a career from new recruit to top-dog leader takes great care and attention to detail. A plan that rewards the right behaviors in the right balance takes a thorough understanding of the timeless principles that have been proven by other successful compensation plans, a grasp of the techniques that are most effective, and experience to know what does not work well.
A plan that is worthy of the passion and excitement of each sales representative is very difficult to design. Unfortunately, most companies eventually find major flaws in their original plan designs as their sales force develops into leaders and some start earning significant incomes. Not one company has yet been found who would say that they would not change anything in their compensation plan. Instead, most companies would change many things in their plan but are so entrenched in their current approach that the thought of changing something makes them run for cover and break out in cold sweat!
The money a company spends to compensate its sales force will most likely be its largest expense category month after month, year after year. It is common to pay out 50% or more of each retail dollar to one or more of the sales force. Spending the time and money early to get the plan “right” the first time will help business grow and assure that the money spent on compensation will provide a rich reward for top performance from the sales force, year after year. It will, indeed, be the best investment a company can make as it prepares for launch. In reality, it truly is a make-or-break proposition.
How does one go about designing a compensation plan?
The purpose of this website and the LaunchSmart™ system and tools is to help clients to grasp some of the fundamental principles involved. It is a principle based approach. There are far more principles and concepts involved than those that can be included without additional training and development. However, we remain committed to giving as much information as possible in this venue.
Compensation plans often follow trends and fads. These have always been short lived. When one company is doing well others are often quick to follow their lead and copy their compensation plan. For many who take this approach it has proven fatal. The proven approach to compensation plan design is not to follow fashion or trend, but instead, to base the plan on proven principles that do not change.
In the following paragraphs, Dan Jensen explains some of these principles and includes a few techniques based on articles he has published over the years. If you are not confident enough to attempt to do it yourself, you will come to understand the thought processes that this team goes through go through when designing a plan and the principles on which the plan designs are based.
MLM Compensation Plan and Party Plan Compensation Plan Design Principles
The compensation plans that create the best results follow similar principles of success in direct selling. This is true whether they are MLM Compensation Plans or Party Plan Compensation Plans. A few of these timeless principles include:
- Balance the key sales force behaviors using your compensation plan
- Have a strong emphasis on selling to customers (retailing)
- Build strong managers
- Build strong leaders
- Build a “retention culture”
If a company gets these principles right, despite a few mistakes in other areas they will still move upward. These are the proven principles and natural laws at work.
Balance the key sales force behaviors
The money spent on sales force compensation represents the company’s single largest expense. The return on investment for this large expenditure must be measured in terms of behaviors. What behaviors do you get back for the money you spend on commissions? What are the behaviors that you need to build the business? Dan Jensen teaches these as the Five Golden Behaviors:
- Building Managers
- Building Leaders
Building a Strong Retailing Ethic
Of all of the Five Golden Behaviors, this may have the greatest impact on your success for several reasons:
- Retention of new recruits: Industry wide, most attrition occurs during the first sixty to ninety days of a new recruit. Why? Most find that their participation in the business opportunity simply is not worth their time. They don’t earn enough in their first few weeks to justify their time involved. In addition, we find that that about 70% of new recruits do not sponsor even one person in their first ninety days! Very few sponsor two or more. What this means is this… Your compensation strategy must provide a way for your new recruits to make at least $25 to $35 per hour in their first ninety days without a downline. If you don’t, you’ll struggle to keep the majority of your new recruits. What would you do if you put 40 hours into your new business as a new recruit and received only a $16.83 downline commission check in your first month?
- DSA statistics suggest that 54% of all new recruits were customers before they decided to become distributors. If you develop a strong retailing ethic, you not only build sales but you also create a huge pool of great recruiting prospects with your customers.
- Companies that build a strong retailing ethic find they can enroll many new customers for every new distributor.
To build a strong retailing ethic, consider these suggestions for MLM and Party Plan environments:
- Build a culture that respects the difference between a retail customer and a distributor. Retail customers generate retail commissions; this is essential to retaining new recruits and helping them achieve the magic $25 to $35 per hour target.
- Don’t make it too easy to join as a distributor or you will cut off the profits your distributors make from retail sales. If you were a distributor selling to a new customer and they learned that they could buy the product at wholesale if they only sign a form and pay $10, what would they do? They’d gladly pay the $10 to save even more on their price. Who loses? The distributor loses their retail profits and never achieves the $25 per hour target. Eventually your company loses as you see your new recruits leaving through a revolving door. Companies that build successful retailing cultures quickly learn that they must have a small ‘barrier to entry’ to differentiate between a customer who just wants to buy product and a distributor who wants to build a business. They learn that they must aggressively protect the distributor retail profit.
- If you are a party plan company, be careful not to encourage consultants to aggressively recruit their hostesses unless the hostess really wants to build a business. Some hostesses can do more for building sales as a repeat hostess than they would as a consultant.
- Have an acceptable retail pricing model. Don’t price your products so high that customers get sticker shock. Make it easy for your reps to sell at retail.
- Party plan companies should focus on strong booking success in every party. Indeed, the success of a party should be measured more on the bookings than on the sales volume. A party with low sales volume but with lots of bookings is a great success. Parties without bookings mean that the seller is out of business.
Companies that fail to build a strong retail culture become wholesale buying clubs. This is called the ‘internal consumption model’ of direct selling. There have been a few successes of this model over the years, but even fewer that have endured the test of time. If you want strong growth over the long term, build a strong retailing ethic.
Build Strong Managers
A manager usually has a group of six to twenty active sales reps whom they train and motivate. Managers are experts at selling and recruiting and the company depends on them to teach others to do the same. The ultimate goal of a manager is to help others in their group or team to become strong Managers.
Without managers, each recruit is left to figure out by themselves how to succeed in the business and, as a result, most fail. Managers make it happen. They lead by example.
Without this mentoring behavior by good managers, we often see a culture develop recruiting bodies as fast as they can and moving on to the next new recruiting opportunity. This puts the company on a dangerous path of very high attrition with business builders often finding that no matter how many they recruit, eventually they can’t keep up with those leaving the opportunity. In time, such a culture develops an accelerating revolving door losing as many recruits as those who are joining. Successful managers believe that every new recruit in their group is precious and deserves the help they need to succeed in the business. Good managers are your future leaders.
To build managers, your compensation plan must have the right incentives for distributors so they will want to be managers. Their income must be well worth the challenge and time commitment. The plan must compensate well for managing.
Building Strong Leaders
Your success will be no greater than your success in building a group of strong leaders in the field. Leaders provide the strength that sustains and builds the business over time. If you want to make it in the long term, and make it big, there’s no other way. But how do you develop a large force of strong sales leaders?
- To develop strong leaders, you must develop strong managers. All good leaders were strong managers, first.
- Second, the compensation plan must reward leaders for leadership behavior. What is leadership behavior? The development of new managers and leaders below them and helping them, in turn, to develop other managers and leaders. For a leader to grow their business, they must develop strong managers and leaders and nurture the process continually. They must often work deeper in their downline often outside their own group and do this together with other downline managers and leaders. Great leaders hunt for their downline rising stars and mentor them into tomorrow’s great leaders. This is how leaders build successful downline organizations. There’s no other way. Long term growth that exceeds your rate of attrition comes from developing people into better managers and leaders.
How can a compensation plan reward leadership behavior? By rewarding the development of managers and leaders from deep within their downlines. If a leader sees little reward for developing tomorrow’s leader in their downline, they won’t bother. Instead, they will work shallow (a manager behavior). If there are strong rewards for developing managers and leaders from deep within their downline, your strong leaders will do so. They always follow the money. They always look to leverage themselves to get the most return on the time they spend with others. If your plan rewards this behavior, you will see a constant stream of new leaders rising to the surface and your business will enjoy long-term health and growth.
Build a Strong Retention Culture
No amount of recruiting will compensate for poor retention. No matter how many are recruited, you can lose just as many as you recruit. The key to growth is retention and it’s often the most elusive. Successful companies quickly learn that retention must become part of their “culture” of success.
New recruits need $25 to $35 per hour to make it worth their time and keep them in the business. Most attrition occurs very early in the life of a new recruit (60-90 days). But how do we keep recruits who have weathered the storms of their first ninety days? How do we keep leaders and managers (those building a business) from eventually jumping ship?
Here are some powerful, proven tips you’ll want your compensation plan to address to keep your people working hard month after month:
- Use “golden handcuffs” to keep them engaged in the business. Would you walk away from a $300 per month income stream? Your compensation plan needs to help people develop a recurring income stream as quickly as possible of at least $300 per month. This is done by rewarding the right behaviors as early in their career as possible. An example of what not to do would be to provide meager commission percentages to new people until they develop a large team. In short, get early money into the hands of your young sales reps as quickly as possible. You’ll keep them longer.
- Use both a stick and a carrot. When a person fails to meet their minimum requirements, don’t continue paying them as if they had. Use a “paid-as title” as well as recognition or “badge” title. In short, they have two titles. Pay them well as they perform, but match their earnings to the true level of their performance each month.
- Handsomely reward strong managers for their team building results. As they work with their team members, retention will increase.
- If you reward managers more for their personal sales than for their team building, you’ll see them sell more but fall down in their team building. This will cause an increased attrition rate. Your compensation plan needs to carefully balance incentives between personal sales commissions and team building commissions.
- Use recognition at every opportunity to affirm the right behaviors that build successful teams and downline organizations.
Apart from MLM compensation and incentives strategies, and party plan compensation and incentive strategies, companies that successfully retain their managers and leaders find ways to earn the trust of their people. A company that has a great compensation plan but proves to be untrustworthy to their field will find their people leaving out the back door. Mistrust trumps a good compensation plan. In the end, it all boils down to “trust.” You have to show them that you can be trusted with their precious customers and downline recruits.
Training – often the missing ingredient
Successful companies quickly learn that they need both motivation (compensation plan and incentives programs) as well as training programs to build lasting success. Motivation without ability doesn’t work. Be sure your compensation plan has a strong and effective training program that is in perfect alignment with its principles and techniques for building success. You could have the best compensation plan in the world but fail miserably because you don’t train your people how to use it to their advantage.
Follow these timeless principles:
- Balance the key sales force behaviors using your compensation plan
- Always have a strong retailing emphasis
- Build strong managers
- Build strong leaders
- Build a “retention culture”
- Train, train, train
Then, watch your bottom line grow.