The Compensation Plan
Compensation plans are ultimately the way in which you get paid in a network marketing business and therefore it is important that you understand how they work. In this chapter we will teach you how to understand a network marketing pay plan and in particular discuss the 4 basic compensation structures listed below. This chapter will also evaluate the benefits and limitations of each of the common pay plan structures and help you to indentify the best compensation plan.
The 4 basic compensation plan structures include:
How to Understand a Compensation Plan
Despite the fact that every network marketing companys compensation plan is different, most plans are based around one of the 4 basic structures. The main difference between the pay plans using the same structure is that they vary in the commissions paid and in additional bonuses.
Although some network marketing companies claim to have a better compensation plan, we strongly encourage you not to join a network marketing company purely based on what their compensation plan has to offer. Instead, focus on the complete package which includes the products, the practicality of the business opportunity and the fairness of the compensation plan.
On this page we will teach you how to understand a compensation plan. Given that every compensation plan is different, some of the terminology may be different to the plans you have previously looked at. Also, please bare in mind that not all the information on this page will be relevant to every plan.
To understand any compensation plan in its entirety, you need to first understand some basic concepts and jargon that is commonly used by people in the network marketing industry. Such terms might include sponsor, business centre, width, depth, levels, legs, upline, downline, crossline, point value, volume, commission, bonuses and organisation. These terms may look a little intimidating at first, but dont be discouraged, well talk you through them and then towards the end evaluate the different plans available.
Distributor and Associates
Upline and Downline
Upline refers to all the individual distributors sponsored directly above you. Although upline distributors should provide training and support to the members of their organisation and help them become successful, their individual sponsoring efforts will normally have little or no impact on your commission cheque.
Downline refers to the individuals who have joined your organisation and are positioned below you in the compensation structure. Although you are encouraged to support your downline distributors, essentially each member of your downline owns and operates their organisation independently.
Width and Depth
Width refers to the maximum number of distributors that you can have placed immediately under you in the compensation structure commonly known as your frontline.
Depth refers to the number of levels deep in which you can earn a commission for their efforts. Naturally there is only so many times in which you can split a dollar, therefore a commission based on the work of the distributors in your downline can only go so deep.
In the forced matrix structure the width and depth of the plan is normally written as a simple equation (width x depth). For example, the diagram below suggests this plan that has a width of 3 distributors (ie each business centre can sponsor a maximum of 3 frontline distributors) and is 2 levels deep, so therefore it would be written as a 3x2 plan.
In some compensation structures it is possible to have infinite width (Unilevel and Stair Step Breakaway plans), where others may have unlimited depth (Binary plan). Each plan will be discussed in more detail through the links listed at the bottom of this page.
Another way to look at the legs of your business is that each leg represents a new organisation that is owned and operated by your frontline distributors. By helping your frontline distributors build their organisation, this helps you to build one of your legs and therefore can help strengthen your organisation.
Given that there are a number of network marketing companies that operate in a number of different countries around the world the easiest and most fair way to pay distributors commission is to use a point system. Each product has an assigned point value and your commission is determined by the volume of points that flow through your organisation. This way it doesnt matter where you operate your business from (e.g. America, Australia, Japan etc.) you are entitled to the same commission as your fellow colleagues on the other side of the world.
It is important to understand that although higher priced products normally offer a higher point value as a reward, this is not always the case. The other advantage of the point system is that because different products have different point values, if a company is trying to promote a particular product, they can allocate it with a higher point value as an incentive for distributors to sell that particular product. The table below summarises an example of point values.
Calculating Point Volumes and Commissions
Each compensation plan structure calculates total volume in a slightly different way, however they normally take into account some, maybe all of the following volumes:
Variable Level Commissions
In the above example, if you were to have the variable commission rate you would receive 10% commission based on the first level volume, 15% commission based on the second level volume and another 5% commission based on volume in the third level.
Alternatively, if the compensation plan offers a consistent commission rate (featured on the right) then you would earn the same commission percentage for each level. For example, in the above diagram you would earn a 10% commission from all 3 levels. One of the main advantages of the Binary System is that it normally uses a consistent commission rate, making it easier for people to understand.
To highlight the kind of rank advances that distributors might achieve we have listed below some of the rank achievements that are commonly known across the industry. Although you may start out as a distributor, as your organisation grows you may become a Director or potentially a Diamond Director.
Common rank advancements include:
Rank advancements not only help to recognise the leaders within the industry, but often normally have a bonus that comes with achieving that level. For example, regardless of what network marketing company you worked for, if you were to meet a Diamond Director from a different company you would immediately recognise that this person is a very successful network marketer and that you could learn a great deal from their advice.
What is the Best Plan?
A good point to remember when it comes to joining a network marketing company, what the compensation plan has to offer is only part of the equation. When evaluating network marketing companies we suggest you look at the entire package which includes the products, the comapany, leadership of the company and practicality of the business model.How does the Binary Compensation Plan work?
How does the Stair-Step Breakaway Plan work?
How does the Forced Matrix Plan work?
How does the Unilevel Plan work?
What is the Best Compensation Plan?
Meet Troy Rocavert
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