Compensation Plan Basics
Getting to Know Compensation Plan Basics
If you are looking at a Network Marketing opportunity you are going to be very interested in the compensation plan of that opportunity. Your interest level will be high as the compensation plan is how you are going to get paid! As a responsible entrepreneur, you will want to make sure that you understand how you are going to get paid and that is the purpose of the information contained on this page.
The information will break down the terms and phrases that you will come across when looking at a compensation plan. If you are new to the network marketing industry, this information will allow you to see past the industry jargon and understand what your bottom line will be . . . how you will get paid. If you are a seasoned veteran of the industry, this information is for you to share with your new prospects to leverage your time.
4 Basic Compensation Plans
When looking at Network Marketing companies you will be told they have the newest, latest and most lucrative compensation plan in the industry. While there are some plans that are better than others, all variations aside, it boils down to 4 Basic Types of Compensation Plans. They are as follows:
- Binary Compensation Plan
- Matrix Compensation Plan
- Stair-Step Compensation Plan (which can contain a Break-away portion)
- Unilevel Compensation Plan
Understanding these 4 basic compensation plans will allow you to see what is the best compensation plan for you.
How to Understand Compensation Plans
It may be hard to believe that for all the plans that exist in the Network Marketing industry, you can bring them all back to the 4 basic structures listed above. Where you have to put your attention is how will the compensation plan that you are looking at paying you, and that is where understanding what you are looking at becomes most important.
While the compensation plan is how you are ultimately going to get paid by the network marketing company you are going to join, it should not be the only reason why you join the company. It cannot be stressed enough that when you are evaluating a network marketing company, the compensation plan is only one aspect of the opportunity. You need to keep the “big picture” in the site and that includes, leadership and support, products, company track record, etc. It has to be the total package and be right for you.
To understand any compensation plan clearly, you will need to understand the jargon that is used when explaining them. While terms may vary slightly, the basic principles of what and how these industry terms are used are very similar. Our goal is simple. Our goal is to explain in easy to understand language the industry terms. Terms such as a sponsor, distributors/associates, business center, organization width and depth, organization levels, organization legs, upline, downline, crossline, business volume, commissions and bonuses. Confused yet? Don’t be, let’s get started with explaining all these terms.
This is the individual who introduced you to the network marketing company that you joined or are looking to join. They were the ones that initially asked you if you were interested in starting your own business, gave you information to review, explained the business opportunity to you and registered you with the network marketing company.
Your sponsor may be an individual who started with the company or may even be a person who started just a few days earlier than you. One thing to watch for here is how was the business information presented to you. Did your sponsor have to give you the whole presentation or was there a system used to share the information about the company, such that anyone could do it?
The person who is your sponsor will become the individual that you will work with daily. While you are responsible for your action and commitment to your business, your sponsor is responsible for you to ensure you know all the systems and training that you have available to you. They should be willing to work with you on a one-on-one basis until you have the experience you need to do it on your own.
Distributors and Associates
After you have done your due diligence about your potential Network Marketing company, and you agree to get started, this is what you will be called with regard to the contract. The term distributor, or associates, or members are all used interchangeably. You will see the term that is used by your Network Marketing company based on the contract that you signed, whether that is the old fashioned way or digitally when you got started.
When you start your Network Marketing business, you will be in business for yourself. When you get started the position that you will create will be part of the entire distributor base. For most companies, they will call this position that you hold your Business Center. This is your business and once you meet the qualifications of the compensation plan, you will start to get paid through your Business Center.
Your Business Center, as can be seen by the image above, will include you and all the distributors/associates that are in your organization. The larger the number of distributors/associates that you have in your organization, the more volume your Business Center will generate, and therefore the more money you will make based on the compensation plan.
Your upline is just what the name indicates. The distributors/associates that started before your and have been sponsored above you in the total distributor/associate organization. Your support, guidance and mentorship should come from your upline. It obviously benefits them to see you succeed as they too will get paid on the volume that your organization generates.
Also in some compensation plans, such as the Binary Compensation Plan and Matrix Compensation Plan, you can personally benefit from your upline’s sponsoring. In both the Stair Step Compensation Plan and Unilevel Compensation Plan, the sponsoring efforts of your upline will most likely not benefit you financially.
Your downline distributors/associates refer to those distributors/associates that started after you and are in your organization. The could be sponsored into your organization by you, your upline or someone already in your organization. You are one of their upline distributors. You will benefit from your downline distributors as the volume that their Business Centers generate will, depending on the compensation plan, be included in your Business Center’s volume, and thus contribute to your pay.
You will be encouraged to support your downline distributors to the best of your abilities. If you are new to the Network Marketing industry, you may not be able to support them immediately and that is understandable. This is where having proper support and systems in place will allow you to develop as a leader so that you, in turn, can develop more leaders in your organization.
Crossline distributors/associates is the relationship that is formed between distributors/associates that have no financial influence on each other through the compensation plan. They are not a part of either distributor/associate’s organization.
However having crossline relationships with other distributors/associates is very important as you build your own organization. There may be times when support is needed in a face-to-face manner, and having these crossline relationships can significantly benefit your organization. Especially when you organization is first starting out. You can also gain great amounts of synergy from working with other groups within your Network Marketing company. Ask your upline how this has benefited them and their organization.
Width and Depth of Organization
The width and depth are some of the major characteristics that distinguishes the different compensation plans from each other.
The width refers to the maximum number of distributors/associates that you can personally sponsor directly below you. This is also known as your “frontline” distributors/associates.
The depth of the compensation plan refers to the number of levels deep that you will earn a commission on. The Network Marketing company will need to ensure that the money being generated is balanced. That is the distributors/associates are paid fairly while at the same time the company itself generates revenue and a profit for stainability.
An example of width and depth is shown below. This example is one of a Matrix Compensation Plan and you can clearly see the width and depth.
Matrix Compensation Plans are commonly written as an equation. Our example here is a (3 X 2) Matrix. This means that this compensation plan has a width of 3 distributors/associates and 2 levels deep. In other words, you have a maximum of 3 frontline distributors/associates, and you will collect commissions on 2 levels deep into your organization.
n other compensation plans such as the Stair Step and Unilevel, you will have unlimited width, and fixed depth, whereas in the Binary Compensation plan you will have a fixed with 2, and unlimited depth.
The organization level refers to the location of the downline distributor/associate relative to you or your Business Center. In the image below, the downline distributors/associates circled would be considered 2nd level distributors/associates to this Business Center. They are called this as they sit two levels below the Business Center.
The level directly above the 2nd level distributors/associates is the 1st level or frontline distributors/associates for this Business Center.
For every 1st level (or frontline) distributor/associate you personally sponsor, they will form, with the exception of in a Binary Compensation Plan, a leg within your organization.
Looking at the image below you can see that there are 3 1st level (or frontline) distributors/associates. Therefore this Business Center has 3 legs. If this was a (4 X 6) Matrix Compensation Plan example, there would be 4 legs.
Each leg of your organization represents another Business Center with its own legs. Keeping with our example, this Business Center has 3 1st level (frontline) distributors/associates, which in turn each have their own 3 1st level (frontline), distributors/associates.
As this pattern repeats and the organization fills out, it is obvious that you want to support your 1st level (frontline) distributors/associates so that they can start and fill their legs to their organizations as fast as possible.
The Network Marketing business model is used in many different industries. Regardless of the industry that it’s used in, the goal is to move and sell products or services, just like any other business that exists. The difference being that with each product or service that is sold, a portion of the revenue generated through the sale is paid back to the distributors/associates responsible for the sale.
Along with this most successful network marketing companies operate in more than one country, and thus have to deal with different currencies of each country. To eliminate the issues associated with currency exchange rates, network marketing companies will associate a point system, or business volume amount with each product. That way, when a product is sold, regardless of the country that it is sold in, it will generate a consistent amount of business volume.
The business volume is what the compensation plan will pay the distributors/associates on. This keeps everything fair and equitable amongst all distributors/associates regardless of the country they are in.
Calculating Business Volume and Commissions
The commission that you will earn from your Network Marketing company’s compensation plan is based on business volume generated in your organization. Therefore your goal is to build your organization a big as possible as fast as possible to generate as much business volume as possible for larger pay.
As there is a multitude of variations to how compensation plans pay the distributors/associates, we cannot go through all the variations. We can, however, outline some of the main items that are usually considered in compensation plans and what they take into account for calculating your business volume.
- Level Volume – This is the business volume generated and accumulated at a level of your organization.
- Leg Volume – This is the business volume generated and accumulated in a leg of your organization.
- Group Volume – This will be the amount of business volume generated and accumulated throughout your entire organization.
- Carry-over Volume – This is the amount of business volume that is not used in a pay period. This business volume is then “carried-over” to the next pay period, where it is combined with new business volumes generated in your organization. Carryover business volume acts like a bank that allows you to keep business volume that you have not been paid on so that you do not lose commissions. Most companies have a carry-over policy in place, but be sure to ask what that policy is so you understand what you have to do to keep the carry-over volume.
Variable Level Commissions
This is usually the area that generates the most confusion for people looking at a compensation plan for the first time. It can be difficult to understand the levels and their respective percentages for commissions. Understanding the levels of commissions and how they change is usually required if you are looking at a Matrix, Stair Step or Unilevel Compensation Plan.
The image simply shows the same organization, in this case, a (3 X 2) Matrix, and on the left shows a variable pay rate, where on the right it is a consistent pay rate. You will have to refer to the compensation plan that you are looking at to see what type you will be working with.
Simply put, you will earn these percentages based on the business volume that is generated at these levels. Understanding what the percentages are for each level will determine which levels you will need to develop and work with most.
Ranks and Advancement
This is not something that every Network Marketing company and compensation plan has. There inclusion or exclusion does not make it a better or worse plan.
When working with a compensation plan that has Ranks and Advancements, you will need to understand what signifies these changes. They will always be based on your organization’s business volume, as well as numbers of distributors in your organization. Asking the questions will inform you, as well as create goals for you to achieve.
As the Ranks and Advancements are always tied to your organization’s business volume, as you progress through the ranks, you will also start to earn more money. The various Ranks and Advancements will come with increases to your commissions as well as leadership bonuses. Again ask about what the various Ranks and Advancements are and how they affect your pay.
Many Network Marketing companies will offer bonuses to entice new distributors/associates to join. The bonuses can be anything from cash amounts to vehicles to trips. Be aware of what the bonuses are for your potential network marketing company, and also be informed as to what is required to achieve them. A lucrative bonus should not be in place to make up for a sub-standard compensation plan.
They will always be based on some form of organization performance and sometimes they are out of reach of most distributors/associates. That is not to say that bonuses are only an illusion, they are just an area that you need to understand and not base your decision to start with a network marketing company on the types of bonuses you can receive.
What is the Best Compensation Plan?
That covers the basics of what a Network Marketing company’s compensation plan is all about. You should now be able to decipher the jargon that you will see when investigating a Network Marketing company’s compensation plan. If however, you have further questions, questions regarding compensation plan basics or another topic that we have not covered, please ask us. You can contact us through our Contact Us section.
There is, of course, the question that we receive many times when talking about Network Marketing compensation plans and that is what is the Best Compensation Plan? To answer that question, we have put together 7 Factors to Consider for the Best Compensation Plan that you should look at when considering a compensation plan.