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:

• UniLevel Plan
• Stair-Step Breakaway Plan
• Forced Matrix Plan
• Binary Plan

How to Understand a Compensation Plan

Despite the fact that every network marketing company’s 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 don’t be discouraged, we’ll talk you through them and then towards the end evaluate the different plans available.

Sponsor
The sponsor is the person responsible for introducing and signing you up with their network marketing company. Your sponsor is also the person responsible for making sure that you receive adequate training and support to help you succeed.

Distributor and Associates
You become a distributor once you sign the paperwork and join the network marketing company. Some companies may refer to their distributors as associates. These terms will be used interchangeably throughout this website.

Business Centre
When you first join a network marketing company you are given a business centre which then entitles you to get paid a commission in reward for the work your organisation achieves. The organisation refers to both yourself and all the members (distributors) that you and your team have sponsored. Think of your organisation like a big department store where all the shops inside are independently owned and operated. Although you are not the boss of each shop, as they are independently owned, you do earn a profit from their work. Likewise, in network marketing the more work your organisation does the more you get paid inturn. The diagram below illustrates both a business centre and your organisation.

Upline and Downline
Two of the most common terms used in network marketing are 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
One of the main differences between the numerous compensation plan structures is the width and depth of the plan.

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.

Level
Level refers to the position of a distributor in a downline relative to an upline distributor. As demonstrated in the diagram below those highlighted would be referred to as 2nd level distributors as they sit 2 levels below your business centre in the compensation structure. Naturally those frontline distributors who are positioned directly below you could also be referred to as 1st level distributors.

Crossline
Crossline refers to the relationship between two or more distributors who work for the same company, but whose efforts do not influence one another’s commissions as they are not part of each others organisation. For example, all distributors on the same level would be cross line from one another.

Legs
Every frontline or first level distributor that you sponsor into your organisation forms a new leg. For example, in the diagram below there are 3 frontline distributors and therefore 3 legs (2 outside legs and a middle leg). If it was a 4 x 6 plan there would be 4 legs (2 outside legs and two middle legs). In some plans where there are a large number of frontline distributors these legs are often numbered from left to right 1st leg, 2nd leg, 3rd leg,…etc.

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.

Point Value
Regardless of what kind of industry you work in, the main goal of that industry is to sell a product or service. The network marketing industry is no different. For every product sold in network marketing, a predetermined amount of the profit is paid to the team of distributors who were responsible for the sale.

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 doesn’t 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.

Product	Price	Point valve
X	$20.00	15
Y	$10.00	10
Z	$25.00	16

Calculating Point Volumes and Commissions
The commission you earn in a network marketing business is directly related to the total volume of points that flows through your organisation. Therefore your goal is to build your business so that you have a greater volume of points flowing through your organisation, thereby earning a higher commission cheque.

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:

• Level volume - the amount of points each level of your business has accumulated in that pay period.
  
• Leg volume – the amount of points each leg of your business has accumulated in that pay period.
  
• Group volume - the amount of points that has accumulated through your entire organisation in that pay period.
  
• Carry over volume – the amount of points not paid a commission in your last pay period that are then carried over and entitled to earn a commission in your next pay period. Carry over volume basically allows any unpaid points to carry over to the following pay period so that you don’t lose any commission.

Variable Level Commissions
This is where compensation plans begin to confuse people looking at the business for the first time. In particular, the Stair-Step Breakaway, UniLevel and the Forced Matrix Plans normally offer a variable commission rate for each level of distributors within your organisation. For example, in the diagram below the left hand side demonstrates how the commission rate might vary on points accumulated on each level.

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.

Rank Advancements
As discussed previously, when you first join a network marketing business you become either a distributor or an associate depending on the company. As your organisation grows and you reach a certain level of volume flowing through your organisation (or a certain number of levels deep), the company allows you to rank advance - meaning that you gain a new title and earn recognition from your peers.

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:

• Leader
• Director
• Bronze Director
• Silver Director
• Gold Director
• Ruby Director
• Emerald Director
• Diamond Director

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.

Bonuses
Many network marketing companies offer bonuses as part of their compensation plan as a way of attracting people to join their business model. These bonuses are normally in the form of a bigger pay cheque, however in recent years there have been a number of new companies that are now offering car and travel bonuses. It is important to understand that normally these bonuses only come to those who achieve a certain level of success, hence there is normally a fair amount of groundwork involved before you are entitled to earn such bonuses.

What is the Best Plan?
Every compensation plan has both benefits and drawbacks, some of which are discussed in the links on this page. When it comes to recommending the best plan it really depends on what previous experience you have had in the industry. Given our experience in the industry with a number of different compensation plans we tend to lean towards the fairer of the compensation plans.

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.