How to Develop Commission Plans That Ignite Positive Distributor Behavior

by Mark Rawlins

Have you ever wondered about the power required to launch the space shuttle? The space-shuttle propulsion system, called the Space Transportation System (STS), is the most technologically advanced and complex machine in the world. With all of this power, the space shuttle is propelled away from the earth's gravity into space. When a network marketing company launches a well designed commission plan, it can have a similar effect on their distributors.

Since the commission plan is the vehicle by which distributors receive their monetary rewards for the work they do, it needs to be reliable. It needs to ensure both distributor satisfaction and company profitability. Most importantly, the distributors need to believe, that the company's commission plan is giving them a fair opportunity to control their own destinies and meet their own financial goals. Three key issues need to be addressed in developing a commission plan.

Know your company's mission, product, and service strategy and intellectual distribution strategy.

I can't stress enough the importance of knowing these things before a company embarks on designing their commission plan. Your company mission creates a framework for what products you do and don't sell. Knowing your product and service strategy will allow you to make the all-important decisions about pricing and commissions percentages. I can't emphasize enough the importance of this step. In the end, one of the most important factors as to whether or not your company will be successful is will consumers, who are not earning commissions, and never plan to earn commissions, buy your product? It is important that the consumer feel that she or he is getting value for their money.

If you don't know how much of a role you expect your distributors to play in your intellectual distribution strategy, it will be difficult to decide how much of a sales commission they need to earn for fulfilling that role. A commission plan should naturally flow from these important decisions.

Decide what percentage of your product price you want to pay out in commissions.

If you ask distributors what percentage a company should pay in commission, many of them will say, "The more the better." Is that true? Is more always better? I argue that it is not. Let's take it to the extreme case. If the company pays out 99.99% commissions on a product that cost $1.00 to produce and will cost $1000.00 to sell, what's the problem? No one is going to buy the product so the distributors income will be $0.00. An economist who advised US President Reagan created a theory about income tax rates that showed the same thing. Congress thought that if it kept raising taxes, the government would get more revenue. Arthur Laffer showed that when the tax rate reached 30%, tax revenue would actually start to decline because people no longer had an incentive to work. If the Tax rate is 0%, the government receives zero revenue. If the tax rate is 100%, the government receives zero revenue. So the optimum tax rate to receive the maximum amount of revenue is 30%. The same is true of commission percentage; if commission percentage is 0%, distributor earnings are zero and if commission percentage is 99.9999% distributor earnings will also probably be zero. So what is the optimum percentage? The perfect percentage is where a distributor earns the most commissions, but the product has not started to price itself out of the market. Each product line is different. I don't know that anyone has done the research in our industry that Mr. Laffer did about taxes, but history can give us a good indication. If you look over the last 20 years at the companies that have been successful, most of them pay between 40% and 50% in commissions, plus in some cases profit on retail sales. Now obviously if a company is selling long distance they can't pay anywhere near that kind of percentage, and if their product requires a lot of training they may pay more and be successful. I am simply talking about the averages.

Divide your commission payout between Sales commission and Sales management commissions.

There are basically five types of distributors who all have different needs. These differing needs dictate the need for a complex marketing and communications strategy on the part of most network marketing companies. One of the fascinating aspects of network marketing is that companies do not just have one type of relationship with their distributors. Distributors are their customers, sales forces, and sales management, just to name a few. Infotrax Systems did a research project that showed how distributors will often wear all of those hats in the same phone call to the company. Luckily, the complexity of dealing with the 5 types of distributors is to a large extent confined to marketing, communications, contests, and incentives.

Commissions deal entirely with activities that companies want to create permanent compensation for. That comes down to selling product, and managing people who sell product. Companies also want to pay people for recruiting salespeople, but that is illegal in the USA and many other countries. Many have thought they have found a tricky way around the laws, and often they get away with it for a while. But when they get successful enough, they get caught. Once companies have what the total amount available for commissions is, they need to decide how much is going to be paid to the people involved in sales management and how much is going to be paid to the person(s) involved in selling the product.

Over the last few years, more and more of the commission revenue has moved to the sales management side. In fact in some companies it is hard to see that any money is set aside for the salesperson. If you are trying to recruit a person who is only going to sell product and none of the commission amount is set aside for them, how many salespeople are you going to recruit? So the less you pay the sales person the more you can pay the sales manager, hence the more the sales manager wants to recruit them, but the less reason the sales person has to be recruited. What is a reasonable split between salespeople and sales management? Here again, as far as I know, no one has done extensive research, but over the last 20 years the successful companies seem to break it down like this:

MLM companies 50-60% Sales person 50-40% Sales manager, Party Plans 60-75% Sales Person 40-25% Sales Manager. These are averages and do not take into account the retail profit of MLM companies. These are generalizations with exceptions. Some plans do not lend themselves to being broken down in this fashion. You don't have to be perfect in designing a commission plan. Network marketing companies do succeed without the perfect mix between product prices and commissions, for example. And there are commission plans that don't adequately reward both the sales leaders and the salespeople. But if you put your value proposition through this test, you will deliver financial rewards to those who do the work, and their success will power up your business.

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