Guest post from Direct Selling Symposium partner, compensation plan expert Dan Jensen. Dan is one of the most sought-after compensation plan specialists in the direct selling industry. Having worked with hundreds of successful MLM, Party Plan and direct selling companies over the last 30 years, his breadth of experience provides immense value to direct sales companies needing a better compensation plan strategy.
What Turns a Compensation Plan into a Great Compensation Plan?
A great compensation plan will be attractive to both the distributor and the direct selling company (DSC) who implements it. From the DSC standpoint, it will promote preferred internal company behavior, such as retailing, recruitment, retention, training and sponsorship. From the distributor standpoint, it will be reasonable, simple to follow and stable.
The ability of the distributors to sell product to retail end user customers is directly related to the health of the DSC. Pricing policies need to promote a healthy retail channel by having a substantial difference between wholesale and retail pricing, usually about a 33% markup, allowing the distributor to profit, and maintain their excitement in the business. This also requires the retail price of the product to be reasonable to the end customer, before any sort of discounting. Confusing the wholesale and retail prices will add to distributor frustration over time, and hinder the healthy growth of the DSC.
Incentives are based on group volume, not individual performance can enhance recruiting. Recognition and rewards should be given equal weight for new recruits. They need to be achievable, and frequent in order to keep interest while their profits are ramping up. This will also have a direct effect on retention, since most recruits are lost within the first 60 days. Promote milestone type contests, which allow everyone to get to that goal rather than only a select few from a top-seller type contest.
The next step in a great compensation plan needs to promote the infrastructure of the DSC. Once distributors begin to teach others how to succeed within the DSC structure, they need to be recognized and rewarded for this increase in efficiency. Incentivizing this manager behavior with volume and recruiting rewards based on the entire group, rather than individual goals.
Similar to promoting manager behavior, a DSC needs to encourage the growth of sales leaders. These are the people who will train, motivate and reward the managers. Becoming a sales leader should not be easy or available to people that cannot train other managers to succeed. Again, compensation should be focused on how effective they are at training great managers, recruiting, and retailing.
The distributor on the other hand has a different view of the compensation plan. They need to see that they are compensated reasonably to keep their interest. Most plans pay out between 30% and 50% to distributors through margin on product. Any less, and they will look elsewhere for a better opportunity.
Another key component needs to be simplicity. Keeping the plan simple will allow faster mental “buy in” to the idea of selling that particular product or service, and better retention of recruits once they have decided to join.
The final component should be the stability of the plan. Distributors will lose interest if the compensation plan changes each month as sales increase beyond expectations. Maintain a reasonable plan from the start, and only change compensation if the cost of the product or service increases. Having a reasonable and stable plan will likely not attract heavy hitter types, but then again, short-term gains are not what most DSC’s are looking for. Invariably, these heavy hitters never stay at any one company very long. Leave that turmoil to someone else.