Chapter One: How is network marketing different from other methods of distribution
Over the years, commission plans have changed drastically. By and large, these changes have come about because of technology. Because few companies had computers thirty years ago, plans had to be simple enough that distributors could calculate commissions by hand. Once computers took over this task, commission plans became more complex.
With one exception, the basic types of commissions that companies pay have remained the same. There are only two types of multi-level commissions: level commissions and differential commissions. These types can pay a commission to multiple distributors on the same dollar of sales under a defined set of rules. The other two types of commissions are single-level commissions, which, as its name denotes, means that the entire commission amount goes to a single person, and pool commissions, in which an amount of money is put into a pool and divided up among those who qualify. I was startled to realize that there were only four types of commissions! After all, my company has programmed hundreds of different commission plans, and no two are exactly the same. It seems strange. But it gets stranger. The vast majority of network marketing commissions are paid as either level commissions or differential commissions. Pool and single-level commissions are typically used as “finishing touch” commissions. There are some exceptions, but they generally account for a small percentage of the overall payout of a company.
Most modern commission plans contain a combination of multiple commission types. They’re set up this way because under normal conditions no single commission type can simultaneously target earnings to the salesperson and also spread commissions out among several sales leaders and dream-builders. For each commission type, I’ll discuss how it functions, what the pros and cons are, and what distributor activities it rewards. My goal is to give an objective description of each commission type in terms of how it affects the distributors and the companies. It’s not my goal to sell you on one type or another. As you read the following sections about the different commission types, you’ll notice that I give a general overview and then go into more detail about each type.
Overview: The level commission is the most common type of commission found in network marketing. Of all the companies I’ve worked with over the last twenty years, virtually every one of them, except binaries, had at least one level commission in their plan. The term “multi-level marketing” probably originated from this type of commission.
A level commission is a spread-the-wealth tool. Its goal is to ensure that distributors are always paid on their downline. It also tends to have a very smooth, stable line of earnings growth; in other words, it grows slowly and steadily over time. As its name denotes, this commission pays the distributor a percentage on a certain number of levels of his or her downline.
There are many variations of this commission. Some of those variations are called unilevel, generation, and matching commissions. These are just a few of the many usages of this most common commission type.
Usage: The strength of the level commission is that it builds long-term financial stability. The drawback is that it doesn’t allow a company to target commissions to any specific type of distributor.
As a result, the role of level commissions in paying salespeople is fairly limited. In order to be part of a successful commission strategy for salespeople, it needs to be used in conjunction with other commission types.
The fact that it can create very stable earnings has meant that a level commission paid on group volume, often referred to as a generation commission, is the de facto standard for paying sales management commissions. Many other methods have been tried and only a couple have the potential to work as well as a generation commission
The Details: A level commission is defined as one that pays a fixed percentage on a fixed number of levels of a distributor’s genealogy. A distributor who qualifies for a level commission is paid on the volume that occurs within the defined number of levels. There’s typically no limit to the amount of volume a distributor can receive commission on, nor are commissions blocked if someone in that person’s downline achieves a higher rank. (Level commissions are referred to as “non-blocking commissions.” We’ll talk about blocking commissions in the section on differential commissions.)
A level commission is defined as one that pays a fixed percentage on a fixed number of levels of a distributor’s genealogy.
Almost any level commission offered by any company has a chart that looks like the one in Figure 5. What does it mean? Look at the column labeled “1-Star.” The chart tells you that a distributor who has achieved the rank of 1-Star is qualified to receive five percent commissions on sales generated on the first three levels of distributors. The 1-Star will be paid that commission, regardless of the ranks achieved by any downline distributors.
Now look at the second column. The chart tells you that distributors who achieve the rank of 2-Star earn five percent commissions on sales generated on four levels of sponsorship. The third column tells you that distributors who achieve the rank of 3-Star earn five percent commissions on five levels of sponsorship.
As you can see from the graph in Figure 6, a company can control the angle of the earnings line by the percentage paid on sales volume. If the percentage is higher, the earnings of the distributors will grow more quickly. However, the steeper the line and the faster the earnings growth, the sooner the line flattens out as sales volume moves out of the distributor’s payline. The first line would have ten
percent down three levels and the second line would have five percent down six levels. They both have thirty percent payout, but the second goes deeper into the downline. The earnings grow more slowly, but for a longer period of time. The reason the line flattens out is that sales volume moves out of the distributor’s payline more quickly in the ten percent example.
Sometimes these percentages are paid on personal volume. In that case, they’re typically called unilevel commissions. In other cases, the percentages are paid on group volume. In those cases, they’re typically called generation or leader commissions. Let’s look at each of these sub-types.
In a unilevel plan, distributors receive defined percentages on the personal volume of their downlines. The requirements that distributors must meet to receive these commissions are usually relatively minimal.
This easy requirement is one of the advantages of this type of commission. Once a sponsor signs up a distributor, as long as the sponsor stays active, he or she receives commissions on any product the distributor sells. People like this plan because it’s so easy. The weakness of the plan is that distributors may have the perception that they don’t have to continue to build their organizations in order to receive commissions-therefore, what incentive do they have to continue to work? One way companies encourage distributors to continue to build their organizations is by adding additional ranks that require a distributor to build an organization in order to receive the benefit of getting paid deeper. Figure 7 shows an example of this kind of plan.
Generation or Leader Commissions. This is the second type of level commission. A graph of a generation commission looks virtually identical to the one we used earlier to illustrate a level commission.
The big difference, however, between a generation commission and a unilevel commission is that generation commissions pay distributors on group volume rather than on the personal volume of their downline. This means that salespeople, sales leaders, and dream-builders can all qualify to receive a generation commission if they qualify. These commissions have more difficult qualifications, usually including a personal sales volume requirement and a group sales volume requirement. Generation commissions are designed to pull up into a distributor’s payline the people who are doing big business. With a well-designed generation commission, distributors receive payouts on a certain number of levels of hubs of activity; each level of activity is typically called a “generation.”
Companies create a hub of activity in two ways. First, they create fairly challenging requirements for a distributor to become a leader and to continue to be paid as a leader. Second, most companies use compression to reach down and pay distributors on these hubs of activity.
A company can use this type of commission to pay the sales management. It’s the commission type that allows distributors to be well compensated after they’ve built large organizations. Historically, dream-builders who earn the “big bucks” earn the vast majority of that money with a generation commission.
Pros and Cons: The major strengths of the level commission are: The level commission is the easiest commission type to understand. Over the years it has been used by hundreds of companies, employing many iterations, and its behaviors are well known.
It can be designed to create the stable earnings base, which is critical for a successful commission plan. Once this stable earnings base is in place, then other commission types can be used to target other important aspects of a commission plan.
It’s a non-blocking commission, which means that a distributor is always paid on the first several levels of his or her distributors’ organizations. It isn’t blocked when someone in the sponsoring distributor’s downline reaches the same rank. See the discussion of differential commissions for more on blocking.
A couple of challenges are inherent with level commissions:
There is typically no specific incentive for a distributor to go out and do the next $100 worth of volume today, because his earnings are going to grow at a steady rate no matter when he builds sales volume; whereas, some other commissions can be designed to create a sense of urgency for increasing group volume. No sense of urgency is built in to the level commission.
With level commissions you often see stacking. (In just a second, I’ll talk about stacking.)
Another problem results from the gaps in the payout caused by inactivity. For example, if a distributor receives five percent down three levels, and distributors on two of those levels are no longer active, then the distributor gets frustrated and wants the company to terminate the two inactive levels to allow active distributors who are deeper in the organization to move up to a level where the distributor can get paid on them. This puts companies in a tough spot. Should they terminate inactive distributors quickly to maximize commissions, or should they work to reactivate distributors for the long-term good of the company? Up until about 1985, these were the only two choices. Modern level commissions can compensate for the problem of inactivity by using a system called compression. (I talk about compression in detail at the end of this section)
Stacking. Now we come to the problem of stacking, the bane of level commissions. The concept is easy. For example, a distributor realizes that instead of receiving five percent on the sales of his first level, he can receive ten percent by sponsoring his wife as his first level and placing the rest of his organization under her.
Then he realizes that he could make fifteen percent by sponsoring his mother under his wife, and so on. A second method is for four friends to get together and sponsor person B under person A, C under B, and D under C. Then all four of them sponsor all of their prospects under person D, splitting the three-level commissions.
What’s wrong with that? The reason a company sets up a level commission is to reward the upline for building the organization. Stacking defeats this objective. If everyone stacked, no one would receive any downline commissions! If stacking becomes rampant, the net effect is the same as simply paying a one-level commission with no downline commissions.
It’s interesting to talk to people who stack and point out to them that if their downline stacks, then they won’t make any money. Almost universally, they’ll tell you that they don’t allow people in their downlines to stack! If a company wants to have a level commission and have it work the way it’s designed, the company must find a way to eliminate stacking.
There are three ways for companies to deal with stacking:
1. The most successful method is to make it unprofitable by creating rules that make it unprofitable. (I discuss rules in detail in Chapter Five.) For example, you can make a rule that specifies that in order to receive commissions, distributors must have $1,000 of volume in the downline and no more than half of that amount can come from any one downline leg. Now, in order to stack four people, the distributor has to put a second leg under each of them that generates $500 of volume. It’s possible, but expensive.
2. The second method is enforcement. The company watches to see if anyone is stacking and punishes those who are. (Trust me-the upline will inform the company if someone is stacking.) The problem with this method is that a company never wants to put itself in the position of having to punish its distributors; it’s bad for relations. Besides, sometimes it’s perfectly legitimate for a distributor to sponsor his wife, but the anti-stacking police can’t always determine whether what has happened is stacking or legitimate business.
3. Ask distributors not to stack. I’ve never seen it work, but several times when I’ve told companies that their commission plans are susceptible to stacking, they don’t want to follow either of the procedures above, so they just make this request.
Compression. Compression is probably the greatest innovation to come along in the world of level commissions. Around since about 1985, it has become so prevalent that it’s rare to see a level commission that doesn’t include compression.
Compression is a technique that keeps inactive or non-qualified distributors from occupying a payout level in a level commission plan. For example, if I sponsor Fred and he doesn’t qualify to earn a level commission, I receive commissions on his first-level distributors as though I’d personally sponsored them.
Furthermore, if one of these first-level distributors isn’t qualified, that person’s first-level distributors are also treated as my first level. This goes on until a qualified distributor appears in the organization to occupy the first level. Then the process is repeated until we find a qualified distributor to occupy the second level, and so forth.
Compression solves a couple of problems. It puts more money into the hands of the distributors, and it encourages distributors to work with their downlines, even those many levels of sponsorship down the genealogy.
Another benefit is that distributors are paid around their inactive or non-qualifying downline distributors, but compression leaves these inactive distributors in place and gives them time to build their organizations. This approach doesn’t hurt the upline. Before compression, it was common for companies to take away a distributor’s rank or terminate the distributorship entirely if he or she was inactive for even a month or two. Obviously, this approach was discouraging to distributors struggling to build an organization. Now, most companies allow distributors several non-qualifying months without taking away their rank or terminating them. The company doesn’t pay them for this rank, but it doesn’t embarrass them by taking away the rank. Companies with this type of system refer to pin rank, the rank the distributor has achieved, and paid rank, the rank at which the distributor is qualified to be paid for the current month.
The last problem compression solves is the problem of breakage. Let me explain that concept. If a company doesn’t compress out non-qualified distributors, the unqualified distributors accumulate commissions. But since they don’t qualify, the company keeps the commission money. Breakage is the difference between what a company’s commission plan can pay and what it actually does pay. Most plans have some breakage, but the problem with allowing this particular type of breakage is that if a company is having a period of declining sales, then this type of breakage increases as a percentage of sales. When this happens, distributor checks go down even faster than sales do, and that is something no company wants.
This is the point where I usually point out the disadvantages of a feature, but I can’t think of any disadvantages of compression.
Dynamic compression is an interesting variation on compression. Standard compression, as I mentioned, typically still doesn’t pay out all of the commission money. Remember the chart showing payout on a typical level commission plan? Dynamic compression comes into play only for a distributor who qualifies as a 1-Star and has fourth- and fifth-level distributors. One challenge of dynamic compression is that the term “dynamic compression” can have several meanings. Every time I use it, people think of different things. It’s not well understood.
In one company that implemented dynamic compression, the company executives thought it meant one thing, the field thought another thing, and the programmers thought another thing. It was in effect for over a year before the company executives realized that the programmers hadn’t programmed it as they understood it, and the brochure described something entirely different. So one problem with dynamic compression is that the way I describe it in this book doesn’t match what a lot of people think. However, this is how I understand it. Simply stated, dynamic compression pays out all levels of a level commission. So in our example, it would attempt to always pay commission on levels four and five.
The rules of standard compression say that a distributor is compressed out if the distributor is inactive or non-qualified. A distributor who is active and qualified, but doesn’t qualify for fourth- or fifth-level commissions, won’t receive the commission for those levels; it becomes breakage. Is this good or bad? Once again, the answer depends on what you’re trying to accomplish. Dynamic compression compresses out not only those who are inactive or non-qualified; it also compresses out people who don’t qualify for a specific level of commission. In this case, it would compress out the unqualified distributors on those levels they don’t qualify for, and pay the fourth- and fifth-level commissions to their upline.
The advantage of dynamic compression is that it lets a company pay a leader even deeper into the downline. The disadvantage of dynamic compression is that if it’s difficult to qualify for a level, then distributors may be paid down many levels because few people in their downline are qualified. The result is that a company pays out a lot of money. Another problem occurs when one day someone on such a distributor’s first level does qualify. All of that income then moves to the distributor’s first level, causing a sudden and drastic downturn in earnings for that person.
Rather than using dynamic compression, a company may try other ways to use the breakage to motivate desired behavior. It’s possible, for example, to take the income the company doesn’t pay out on the unpaid levels and put it into pools and other incentives. However, having said that, I must point out that many distributors like the fact that there are no unpaid levels.
Just remember that dynamic compression is not the only way to ensure full payout, and full payout is not necessarily the correct approach.
Rollup. Rollup, as I define it, isn’t used much any more, but all of these techniques come back around, so I’ll mention it here. Rollup is a technique used instead of compression to create full payout. Under this method, rather than keeping the breakage created by unqualified distributors, the commission program calculates what unqualified distributors would earn if they were qualified. Then, instead of paying them, the commissions are paid to the first upline qualified distributor, or, in the language of the industry, we “roll up” the commissions to the first qualified distributor.
There is confusion between compression and rollup, and many people say rollup when they’re actually thinking about what I call compression.
Why isn’t rollup used much any more? This system rewards a sponsor who has unqualified distributors on his or her first level. Furthermore, the upline has no incentive to encourage unqualified distributors in the downline to qualify. If a sponsor’s downline starts to qualify, he or she no longer receives those rolled-up commissions; instead, the sponsor receives only a percentage of the sales volume. Since that change always means a drastically reduced income for the sponsor, he or she is unlikely to encourage it. In short, rollup seems to be a bad way of ensuring a full payout.
Another problem is that rollup effectively rewards stacking. As we said before, the most effective anti-stacking mechanism is to make it difficult enough to qualify for commissions that people are discouraged from stacking. But with rollup, even if the stacked distributors don’t qualify, the distributor who did the stacking gets the rolled-up commissions anyway. Some disincentive!
Summary: Level commissions have been the mainstay of commission plans for the last twenty-five years and all indications are that they will remain so for the foreseeable future. They provide the backbone of stability that any commission plan needs to be successful.
Overview: The differential commission is a tool to target earnings. This graph shows the difference in earnings, to an individual distributor, between a unilevel commission and a differential commission. Both commissions have an overall payout of twenty percent. You will notice that, in this example, at first the payout on the differential commission is less than that on the unilevel. Then the differential quickly grows to around $500 a month.
This kind of commission targets a specific activity. In this example, it targets salespeople to get them quickly to the $500-a-month mark. Other plans may target building group volume or building downline activity. As you can see, the major benefit of a differential commission is that it allows the company to target a specific activity and rewards the distributors who do it. The earnings accumulate to the distributors who are doing those specific things rewarded by the commission. Whereas a level commission is designed to spread the wealth, a differential commission is designed to maximize commissions to those who are doing what the plan is designed to reward.
The two names typically used to describe differential commissions within commission plans are stairstep and overlapping infinity commissions.
Usage: Because the differential commission can reward specific activities and tends to target earnings to specific distributors, it has been successfully used as a salesperson commission.
However, these same characteristics tend to make it generally unsuitable for sales management commissions where it’s important to spread earnings between several sales leaders and dream-builders. Some companies have used an overlapping infinity commission, which is a differential commission, as part of the sales management commission package and have had success as long as it’s only a part of the overall commission package.
The Details: The concept of a differential commission plan seems simple, but it’s difficult to explain. A company decides on the total percentage it wants to pay-for example, twenty percent- and then decides what percentage each rank should receive.
For our example, let’s say that a 1-Star receives five percent, a 2-Star receives ten percent, a 3-Star receives fifteen percent, and a 4-Star receives twenty percent. Starting with the person who sold the product and moving up through that person’s upline, the seller is paid his or her percentage. If that distributor doesn’t receive the full percentage because he or she isn’t at the highest rank, then the payout moves up to that person’s sponsor.
This commission pays the difference between the percentage the distributor qualifies for and the percentage the sponsor qualifies for. This is where the term “differential commission” comes from. Therefore, if the sponsor is at the same or a lower rank as the downline person, the sponsor doesn’t receive anything on that transaction. If at a higher rank, that person receives the percentage he or she is eligible for, less what has already been paid to the downline on that transaction. (In other words, a person gets the difference between what he or she qualifies for and what has already been paid). The calculation keeps going upline until the total percentage assigned to this commission type is paid; in this example, twenty percent will be paid out. This commission type always pays the full percentage assigned to this commission, and never more, and typically never less.
Stairstep form of differential. For many years, the most popular form of this commission type has been the stairstep commission. Stairstep is the commission plan that’s designed to pay the salespeople for the time they must spend to take care of their consumers. Here’s how it works: When someone is newlysponsored, he or she typically doesn’t get any portion of the stairstep commission (again, we’ll use twenty percent as our example).
If I sponsor Kerri and I’m at the twenty percent rank, then I receive a twenty percent commission on every order that Kerri places as a consumer. If Kerri stays a consumer forever, then I always receive twenty percent. However, If Kerri decides to get serious about the business, as she builds her business, she’ll advance in rank and start to take some of the twenty percent. As she takes on responsibility and makes more sales, she gets a higher percentage, and I get a lower percentage.
If the plan is properly designed, I’m fine with that-because even though I get a lower percentage, the increase in volume means that I actually make more money. (For example, instead of making twenty percent on $100 per month, or $20, as her business grows, I might make ten percent of $500 per month, or $50.)
Stepped infinity form of the differential.The second major variation of the differential commission is the stepped infinity commission. The stepped infinity takes its name because it’s possible for distributors to be paid on their entire organization. However, it’s important to realize that someone in the downline who is eligible for the same percentage of this commission does block that portion of the commission from that point on down. So it’s important to understand that in this context “infinity” means you might earn all the way to the bottom of your organization (in other words, “to infinity”), but that you also may be blocked by someone in your downline.
So if I have $2,000,000 of organization volume, do I make six percent on all of it? Maybe, if there’s no one under me with at least $500,000.
So what’s the difference between stairstep and stepped infinity? Nothing, really, except how much downline volume it takes to qualify and the percentage paid for each. Stairstep is for people just getting into the business and is an excellent way of compensating salespeople for keeping their consumers happy. It’s the core commission for the product evangelists and the salespeople who are just starting out.
Stepped infinity, on the other hand, is at the opposite end of the spectrum. It’s only paid to the highest of the high dream-builders. Companies often use it as the motivator for top dream-builders to continue working after they’ve reached the top of the commission plan.
Pros and Cons: The differential commission has several strong points:
It’s a good way of making sure that the salesperson gets enough commission to continue to work with consumers and new distributors.
It’s self-adjusting in that, if consumers and new distributors become more involved, the commissions automatically start to migrate to them. This allows the cream to rise to the top. The distributors are in charge of their own destinies. They know in advance what’s required, and they always get the reward if they perform the predefined tasks. This plan also rewards those who build an organization that has a good balance between width and depth. It does so by making sure that if they have the width, they will always be in a percentage higher than the individual downline organizations.
Differential commissions are not susceptible to stacking, meaning that even if an organization stacks, it usually doesn’t take commissions away from the upline.
The weakness of differential commissions are:
You cannot build an entire commission plan around a differential commission. Companies need other commission types to build a stable earnings base.
It’s the most difficult to understand of all the commission types. Even though it’s been in use for many years by some of the most successful companies, very few people can accurately calculate a differential commission.
Differential commissions are a blocking commission. In many cases, at some point, both you and your first levels are at the same commission percentage. When this occurs, you’re “blocked” from commissions. You don’t make anything on that leg of your downline. Once you and your first level both reach the top percentage of the differential commission, the blocking becomes permanent. Blocking is the reason that differential commissions need to be combined with other commission types to create balanced commission plans.
Promotion methods. There are several variations for promotion in a plan that uses differential commissions. As distributors advance to higher ranks, they earn a higher percentage. A company has to decide exactly when to make the rank advancement effective. There are three methods:
1. Break on the Fly. The distributor moves to the new percentage as soon as the qualifications are met, right in the middle of an order if necessary.
2. Qualify/Effective Month. The distributor is paid the full month at whatever percentage he or she started with, even if he or she advances mid-month.
3. Retroactive. The distributor is paid the full month at the new rank percentage, even if he or she advances mid-month.
Another method used with some differential commissions is to start over at the lowest rank every month until a distributor reaches a certain rank, and then their qualification becomes permanent.
Each of these variations has its own advantages. That discussion is beyond the scope of this book, but a company does need to consider them when defining a commission plan.
Summary: The differential has proven to be a valuable component for a long-term stable and successful network marketing business. It falls in and out of favor as the years pass, but has weathered the test of time and has proven to be a winner.
Overview: I walked around and argued with myself for a long time as to whether this is actually a type of differential commission or its own type. I argued both the pros and cons with my wife, and she remained silent. Finally, she told me that if I ever brought it up again, I would be sorry for a very long time! Actually, she never said that. After eighteen years of being married to me, she’s learned how to ignore me when she needs to.
I decided that single-level rated its own type because the behavior is significantly different from that of differential commissions, and it’s clearly not a multi-level commission. So, what is a single-level commission, and what is it used for?
Single-level commissions pay the entire commission to one distributor. Typically, the commission is paid on group volume, and the percentage of the single-level commission varies depending on factors such as the distributor’s rank and group volume.
Single-level commissions are often called “qualified sales leader” commissions.
Usage: Single-level commissions are often used as salesperson commissions, because the commission is paid to one person, and is often a variable percentage. It’s easy to target this commission to a distributor who meets very specific qualifications. This is the most targeted of all commissions; it pays one distributor and one distributor only.
This means that it’s almost wholly unsuited to paying sales leaders, and is seldom used for anything except paying a distributor on their group volume.
The Details: Single-level commissions are similar to differential commissions in that they’re typically put in place to reward specific activities. However, there are several differences:
- On or Off: Since only one person earns the entire commission, it’s like an on/off switch. The distributor works hard to qualify, but until he does, he doesn’t make any money. Once the distributor does qualify, he makes the entire commission amount. If someone in his downline qualifies, that person takes away the entire commission on that leg all at once. Now the first distributor is earning nothing again. In contrast, a differential commission is more like a volume control knob. As a distributor starts to qualify, she starts to earn part of the commission, and slowly takes part of the commission from her upline. When someone in her downline starts to qualify, it slowly takes the commission from her and pays it to that downline distributor.
- Variable Earnings: This type of commission often has a range of percentages that the distributor can earn, based on some qualification. For example, a 3-Star may earn between ten and fifteen percent, depending on his or her group volume for a given month. Whatever percentage is not paid out is typically retained by the company.
Pros and Cons: The benefits of a single-level commission are:
The variable commission percentage gives companies an easy way to create an extra reward for its top salespeople by paying them a higher commission percentage on their group volume without significantly raising the company’s overall commission payout.
The single-level commission used in conjunction with a level commission has some of the characteristics of the differential commission; however, it’s easier to understand. That can be an advantage in some situations.
The company can create very specific rewards for very specific group volume activity.
The disadvantages of a single-level payout are:
All commissions go to a single distributor. If a company also wants to reward a product evangelist, it must create another commission type, such as the level commission. It can hurt morale when a distributor is at the top percent of the variable percent payout and someone in the downline breaks away. The breakaway distributor not only reduces the sales volume the distributor is paid on, but also the percentage earned on the remaining sales volume as well.
It’s the least able of all the commission types to stand on its own, so companies that use single-level commissions typically combine it with at least two other commission types.
Summary: Over the years, I’ve seen quite a few plans that included this type of commission. Companies wishing to build a nice reward for achieving a certain rank included a single-level commission that paid on the distributor’s entire downline down to the next person of that rank. You can see that a commission attached to a high rank could end up as a pretty substantial portion of a distributor’s check. When properly designed, a single-level commission can be a very effective part of a commission plan.
Overview: A pool commission is excellent for targeting a very, very specific behavior. Here is an example of a pool commission:
A company has a million dollars in sales volume and it sets up a “one percent, equal shares pool commission” that targets 3-Stars who generate $2,000 in personal sales volume. One percent of sales volume is $10,000, thus establishing the size of the pool. Now, in our example, we will assume that fifty people qualify for the pool. Dividing $10,000 by fifty means checks of $200 per person. You can see that this makes an immediate impact because it raises a person’s earnings by ten percent of his or her personal volume.
The advantages of a pool commission are that it’s immediate and that it targets a very specific behavior. If a company is trying to encourage a certain behavior in its distributors, a pool commission can really make a difference. The flip side is that if the company becomes wildly successful and the qualifications have not been well designed, suddenly five hundred people qualify for the pool, and it’s now worth only $20. It no longer has value. Pool commissions, then, can be a double-edged sword because the pool can devalue quickly. Yet they can be good for short-term or for targeted incentives as long as the incentive is high. Pool commissions are the most flexible of all commissions
Usage: Because of that flexibility, companies can use pool commissions to enhance both sales commissions and sales management commissions, although it’s almost never the primary commission in either case. Why, then, do companies use pools? The answer is quite simple. Look at our previous example. Suppose the company wants to increase by $200 the earnings of its 3-Stars who generate $2,000 per month of group volume, but want to make sure that it doesn’t cost the company more than one percent. Of course, a company’s decision-makers can check the numbers and look at history, but when they put a new commission in place, they never know how many more people will qualify, so instead they use a pool commission. A pool commission is a good way to keep the commission payout in line, but create some innovative commissions.
The Details: A pool commission has two parts. One is the amount of the pool. The company usually designates some percentage of sales. Most pools are a couple of percent of sales or less. The other part is determining the qualification rules for participating in the pool: for example, anyone who achieves $500 in personal sales in a given month, or anyone who has $1,000,000 of downline sales volume.
Companies typically use pool commissions for one of three reasons.
1. To give an added incentive to reach an intermediate rank in the commission plan. For example, if a company wants to encourage distributors to achieve the rank of 3-Star and to earn at least $400 per month, a pool commission is designed to pay $100 to all qualified 3-Stars helps to ensure that the earnings goals are met and gives an added incentive to achieve the rank.
2. To add additional earning capabilities to a plan in which dream-builders will hit an earnings ceiling. For example, a company might divide one percent of sales among all the 9-Star distributors in a proportional-shares pool based on each 9-Star’s organizational sales volume. This pool can encourage the dream-builders to continue to build their organization even though most of their downline growth may be beyond their payline.
3. To fund incentives like car programs and other targeted or special purpose incentives.
There are two major variations of pools. In the equal-shares pool, everyone who qualifies gets an equal share of the pool. In the proportional-shares pool, everyone who qualifies earns the same proportion that their downline contributed to the overall contribution to the pool.
As an example of these two types, let’s say that anyone who does at least $500 in personal sales in a given month qualifies for a one percent pool. Now that you know who can qualify for the pool and how much the payout is, the only thing left to decide is how to divide the money. If it’s a proportional-shares pool according to how much qualifying volume a distributor had in relation to the others in the pool, a distributor with $500 in qualifying volume would receive half as much as a distributor with $1,000 in qualifying volume. If it’s an equal-shares pool, if 100 people qualify and there was $10,000 in the pool, then each would get $100.
Which is best? That depends on what a company is trying to accomplish. If they’re trying to motivate people to reach new heights, the proportional-shares formula is the best. But if, for example, the company wants to ensure that all qualified 3-Star distributors make at least $400 per month, then the equal-shares pool is the best.
The strength of a pool commission lies in its versatility and in its ability to target a specific group. In other words, a company can create a pool commission to target any group in the company. If a company wants to encourage recruiting, it can define a proportional-shares pool that includes anyone who sponsors more than three new people who have $100 in sales volume. Or if the company is worried that its top distributors are capping out in their earnings too fast, it can set up a pool based on organizational volume in which only distributors with more than $1,000,000 in downline sales can participate.
Pros and Cons: Let’s review some of the pros of a pool commission:
It’s an excellent way of rewarding very specific activities with very limited payout.
It can fill in some of the “flat spots” in a commission plan.
A pool is a good way of encouraging distributors to continue to build even after reaching the top rank.
What are some of the disadvantages of a pool commission?
If the pool isn’t properly designed, shares of the pool can devalue as the company grows.
Pools can be so targeted that companies have to make sure that they’re targeting the right activities.
It seems that every company that uses pool commissions either loves them or hates them. No one seems to be in the middle. This is an indication of the importance of “doing them right.” The other important issue to remember about the pool commission is not to center too much of a company’s commissions around pools. Use them only as finishing-touch commissions.
In this chapter, I’ve laid the basic building blocks of the many hundreds of variations, mutations, iterations, and mutilations of commission plans. I’ve seen all of them built using these few commission types as building blocks.
Each commission type accomplishes a specific goal. When used in combination, these commission types can serve to reward the specific activities a company is trying to encourage. Here is a brief summary of the specific payout characteristics of each commission type:
1. Level commission: Always spreads the earnings among several distributors. This commission type spreads earnings out more than any other commission type. However, it doesn’t target earnings to specific distri