Understanding The MLM Compensations Plans

Category: Articles
Doris Wood
In Multi-Level (Network) Marketing, Distributors (independent contractors) earn their
income (retail and wholesale profits, called commissions and bonus) through a compensation
(sometime erroneously called marketing) plan based on their abilities and results. Marketing
is how we sell; compensation is how we are paid for that sale. There are generally two parts
to the compensation, commission and bonus. The commission is the amount earned when the
Distributor, who has purchased the product at wholesale from her/his company, sells the
product at retail. Bonus is the amount(s) paid on downline sales. There is normally more
than
one
type
of
bonus.
It is wise to remember that a compensation plan should be developed after taking into
consideration many factors. Under no circumstances should a plan be copied from ''a
company that is really doing great'' or by trying to write one from this article, which is for
explanation of the types of plans only.
Many components go into making up a plan and circumstances change with time. For
instance, back in 1932, when MLM first began, and for another 20 years, the vast majority of
companies developed their compensation plans without the benefit of computers. For those
companies that started back before every business had a computer, and there are still quite a
few around, it probably would cause a major shake up (as well as the loss of many dollars) if
these companies were to make any major change in their program. Yet, it is doubtful if they
would create the exact same program today.
Many factors, such as...

1. Direct sales (party plan) or MLM

2. Type of product
3. Consumable, not consumable
4. Product or service (a service is the product)
5. The product mix
6. Cost to consumer ratio

7. Corporate goals (going public or sell the company within 3 years)

8. Experience
9. Postal laws
10. Ease of sales
11. Internet Based
12. National or International
13. Room for incentives like travel and cars
14. More!

All should be considered when structuring a compensation plan. Many of those same
questions should also be considered when deciding to become a Distributor for a company.
Look over the plan carefully. Remember there is a lot more to a company than just the
compensation plan that should be taken into consideration.
This article concentrates on the types of plans used by most Multi-Level companies. Except,
of course, for those who use a hybrid or a mixture of several plans. Although both Direct
Sales and Multi Level use similar programs, they would put their emphasis on different areas.
In all plans, the following almost always remains constant.

1. The Distributor is given a discount off the suggested retail price that becomes known
as the wholesale cost or personal purchase volume (PPV) and is considered the
commission.
2. Distributor (A) sponsors (B) who is placed on his/her (A's) first level (can change in a
matrix and in a Binary). When B sponsors (C) on their first level, this constitutes A's
second level and when C sponsors his/her first level it becomes A's third level and B's
second, etc. This group constitutes a leg for A. When A sponsors a second person on
their 1st level it begins the start of the second leg, third person, 3rd leg, etc. All of the
people in all of the legs are called A's downline. All of those same people are in A's
sponsor's downline because A is the first level of his sponsor and begins one leg.
3. When a company has a varied product line that doesn't have the same amount of mark
up, the company may establish a bonus value (BV) for the product. The Distributor is
paid his bonus on either BV or PV. Watch this. It can make a difference in what you
think you'll make.
4. The total sales of each person's legs (downline) are called GPV (Group Purchase
Volume or GBV (Group Bonus Value) and it is on this amount (which can also
include personal sales) that the bonus or override is based.

5. The amount of compensation paid on the sales of a Distributor depends on the

position of the sponsor and the sponsored person in the organization.
6. All moneys are (must be) paid on the sales, never on recruiting.
7. Although a Distributor is paid on x number of levels in many plans (example six), in
reality, when the Distributor makes a purchase his upline, x number of levels
(example 6 levels), makes a bonus on the amount of his purchase.
8. Most plans pay out a total of 40% to 60% of wholesale and any plan can pay out as
much as another, depending on the structure of course.
9. Most plans require a certain amount of personal purchase volume (the Distributor
should have personally sold some of that or more) per month to collect bonus.
10. Most plans pay bonus on the wholesale amount not retail.
11. Taxes are paid on product according to the state in which the product is sold. No
commission is paid on the taxes or handling charges, such as shipping.
There are basically five types of compensation plans used in Multi-Lever (Network)
Marketing, with many variations of each. There is probably no one plan that is perfect or
right for everyone at every time. What may be the best plan for you today could change due
to regulations, your experience in the industry and/or the type of product, even new
technology. And, it's those variations that can make the difference. Most successful
company review their compensation plans on a yearly basis with a competent consultant to
make minor changes as needed so they do not have to make major changes and disrupt and
sometimes loose their sales force.
Let's take a look at the 5 different types of plans in their most basis forms without the "toots
and whistles." They are...
1. Stair Step Break A Way
2. Uni Level
3. Matrix
4. Australian
5. Binary
-------------------------------------------------------------------------------STAIR STEP PLAN:
The Stair Step Break-A-Way is probably the best known and most often used of the five basic
different programs. It was the first type used and once it was declared legal because of

Amway fighting a great legal battle for it, it got copied more and more. Most of the copycats
are no longer around cause they didn't take the important things into consideration.
It calls for unlimited first level personal sponsoring and limited depth (levels) depending
upon the amount the company can afford to pay out and how they want to pay it. The Stair
Step Break A Way is called by many different names - Conventional, Amway, Management,
etc. and has a great many variations. Different names were given to appear to have a
different approach.
There are always at least two parts to a stair step.
The ''front half'' or "front end" (or stair step) is the sales plan. Compensation rises at each
different level (step), with the highest compensation at the top step. The goal is to reach the
top of the stair step through different qualifications. Some qualifications are fulfilled by
personal (retailing) sales; others by group (depth) sales, as well as personal sponsoring
requirements and group sponsoring, while some require all. The steps usually have different
names to show that the person has reached a certain achievement level.
Depending on the type of product (service is considered product) being sold, as well as other
factors, achievement sales levels can be reached by volume accumulation over time, which
can be a month or several months. Some plans even give years.
In traditional marketing the wholesaler gets the full wholesale profit but is required to make
large minimum purchases. In MLM the wholesale profit is usually broken into several
segments (the levels) according to the volume of purchase. The Distributor can earn
according to her/his efforts.
The first half usually goes something like this illustration. (The figure on top of the line
represents the volume discount. The figure below the line represents the group purchase
volume (GPV) it takes to get the bonus (rebate) on your downline sales.) Remember these
are for illustration only. Not to be used for a real program.
25%
$5000
20%
$2500
15%
$1200
10%
$600
5%
$300

A Distributor becomes a Manager (first step) when her/his legs (group) reach $300. S/he then
earns 5% on the amount personally purchased and on the people purchases in the legs that
have not reached the $300. When the group reaches $600 s/he becomes a Supervisor and
earns 10% on personal volume and all those who have not reached $300. And earns 5% on
those that have reached $300, but not yet $600. As $1200 in volume is reached, s/he
becomes a Senior Supervisor and now receives 15% on personal sales volume and all those
who have not reached $300. And earns 10% on those that have reached $300, but not yet
$600 and 5% on those that have reached $600, but not yet $1200. ETC. Up to 25% and
$5000.
Once a person reaches the top there is usually a monthly minimum group volume requirement
(you'll understand why) to maintain that position. By continuing to build, by retailing and
sponsoring new people, they continue to earn the difference between their bonus and the
person climbing the stairs. Although the percentage on the individual climbing the stairs is
gradually less, the dollar amount is much greater since earnings are derived on that persons
group volume.
The stair step program doesn't stop rewarding one for their efforts once they have reached the
top step and someone they have sponsored also reaches the highest level of
discount/rebate. In MLM with the stair step there is the incentive to go beyond this first
half:
The second half, the back half (back end), or break-a-way, is the managing half. Here is
where one gets paid based on their management and training abilities, plus their consistency
(remember the group volume requirement). They continue to be paid on the front end as
before, plus they are paid on the sales volume of those legs in their organization who have
reached the same top bonus (step) ... who break-a-way, taking their organization with them.
The back half, which looks like an Uni-Level (explained later) but definitely isn't, is where a
person who works can achieve stability and financial independence with a residual income.
This is accomplished by working with their organization and helping those who are success
oriented build large organizations of their own. When a break a way (usually requires
personally sponsored or being on the first level for first break a way) occurs, a percentage is
earned on the break a ways group purchase volume. When the 1st level break a way has a
break-a-way (could be second generation not necessarily level) they earn and you earn.
When that second generation has a break-a-way (your third) all earn, etc., down as many
generations (or levels) as the plan can afford to pay.
1st
2nd
3rd
4th
5th generation 1%

generation
generation
generation
generation

5%
4%
3%
2%

Remember that there are many variations. Compression plays a big part of a Stair Step
program and there are several different definitions for compression. One must know what
one means for it to work. It is not discussed in this article. Qualifications need to be
determined as to when certain (and what amount of) percentages are paid. How hard (levels)

or easy (generations) do those break a ways need to be? Variations of the ''Stair Step'' have
been used for over fifty years.
-------------------------------------------------------------------------------UNI-LEVEL PLAN
The ''Uni-Level'' plan also has a good track record. Although, as with the stair step plan and
any other plan, there have been successes during the last twenty years, it is not necessarily the
result of the compensation plan. There have also been many failures, again not necessarily
the result of the compensation plan.
As with any type of business it takes more than one factor to make or break a company.
In a Uni-Level program:
1. (See explanation common to all programs.)
2. Everyone (A) sponsors goes on their first level and A can sponsor as many as s/he
wishes (called unlimited width).
3. Uni-Level does not mean one level. When the plan was first originated, all levels
were treated the same as the first and paid the same percentage. Although there are
many variations today, the name Uni-Level has stuck; only now an Uni-Level is
sometimes called Modified Uni-Level. It can have as many levels as there is money
(percentages) to pay out. From three levels to nine levels are currently being used in
the industry. And the more levels the more scrutiny by the government officials.
Remember, a Distributor is supposed to manage (keep in touch) with those s/he earns
money on.
When a larger percentage is paid on the first levels, a Distributor stands a better opportunity
to break even or earn back his monthly purchase volume (PV) required to collect bonus.
This is not to say that either way is right or wrong. Again, it depends on many things.
Recently, because of the ease of explanation, there has been a reoccurrence of Uni-level
programs. Particularly over the Internet! This is one that most "Affiliate" programs use.
Without the depth of understanding they are making many mistakes. Many of the benefits of
the stair step can be brought into a Uni-level but a company must remember that they need to
add up all those percentages on each level and add them together to get their true payout.
One of the things that have helped this type of program grow is to pay the Distributor making
the sale a higher percentage on her/his personal sales over his required purchases for the
month. This can provide an incentive to do more personal selling, which is not inherent in
the Uni-level program. There are many different ways to make a Uni-Level attractive but this
could take away from the ease of explanation.
When checking out an Uni-Level program, be aware of the total amount paid out and where
there are different amounts on different levels (modified). If small amounts are paid out on
the first levels and the real income is on the lower levels, do you stand a chance to recoup
your monthly output? What is your real chance of making a good residual income? You will
have to recruit people who are recruiters. However, without volume, which comes from lots
of Distributors, it is doubtful if anyone will make any money.

A question you might want to ask of this and all plans is can the person just starting part time
and the person that has decided to make MLM a career make an amount sufficient to
compensate for the time, effort and money they invest?
-------------------------------------------------------------------------------THE MATRIX PLAN
Some times called Forced Matrix (which AGs love to take a look at - the word forced is the
key) or Fixed Matrix, this type of plan usually provides quick growth and some quick depth
for Company and Distributor. The Matrix plan is relatively new compared with Stair Step
and Uni-Level first hitting popularity around 1984/85. Companies' not understanding this
type of program and it's true potential have failed miserably and missed tremendous potential
for both themselves and their Distributors.
See those factors that apply to all types of plans.
The Matrix incorporates many of the characteristics of Uni-Level except that it always has a
fixed number of people on the 1st level and pays bonus for a fixed number of levels in
multiples of that fixed lst level number. For instance, in a 3x3 Matrix, each Distributor would
have 3 people on the lst level, 9 on the 2nd level and 27 on the 3rd. Like Uni-Level, the
Matrix can go down as many levels as there is money to pay out. Again, for those who like
the Matrix there are lots of possibilities for variation.
In a Matrix, when A sponsors B and A's 1st level is full (upline could have filled that level for
A, called spill over), B is placed in the lst vacant position in the matrix. This is at the
discretion of the computer or the person sponsoring, depending on how the plan is written.
This allows someone else to also collect bonus on B. That person had nothing to do with the
sponsoring of B and normally does not do the training since the training is felt to be the
responsibility of the sponsor (A). In some instances this is considered an element of chance.
Qualifiers can alleviate some of this chance. All who collect bonus on B must keep in touch
with B on a regular basis. Keep in touch means phone calls, letters, newsletters, personal
training, emails, taking to meetings, etc. You must do something for B or don't take the
money is the feeling of regulatory agencies, which I happen to agree with.
In its relatively short history (compared with the stair step and Uni Level) there have been a
high percentage of failures among some companies using a Matrix. Some reasons:
1. With Regulators, when Distributors (and companies) tend to show the full progression
of the Matrix, shaped somewhat like a pyramid (it really looks like a triangle not a
pyramid), in numbers and dollars there are misunderstandings.
2. With postal authorities, who may consider it a lottery because of the element of
chance?
3. Companies, because of their lack of understanding of percentages and where they are
placed, and other factors.
In spite of the above, as of this writing, there are several very successful companies operating
for over 15 years with a Matrix. They have the right mix of qualifiers for their product and
plan. They have done extensive modifications to their Matrix Plans to overcome their

vulnerability, one being an expandable Matrix that means that when certain qualifiers are met
the Matrix shifts to a Uni-Level program.
The advantage that is cited as the major reasons for using either Uni-Level or Matrix Plan is
simplicity and ease for Distributors to understand and implement. This can be negated by the
extensive modification necessary to make the plan operative.
A question you might want to ask in this type of program is what is the advancement after
filling the Matrix. Does it offer other possibilities? Can you start another Matrix? Filling
this will depend on the width and depth as well as the other things I suggested that you take
into consideration at the beginning of this article.
-------------------------------------------------------------------------------THE AUSTRALIAN PLAN
The ''Australian Plan'' seems the most complex of the most used plans in the MLM industry.
In its simplest form, each person must recruit a fixed number who must move a certain
amount of product for the sponsor to advance (actually break a way). Yet this program is not
like any other program.
For example: A sponsors B, C and D. A must leave (give up) B & C with her/his original
sponsor and take D to start her/his own group. D sponsors D1, D2, and D3. D1 and D2
remain with A and D3 goes with D when D has met the requirement. A sponsors E & F and
they remain with A until they do what D has done, then they break a way. Depending on the
plan, A is usually paid on the volume of her/his organization and on personal break a ways,
but not on their break a ways.
This has worked in some variations with Party Plan companies, but in Multi-Level, where
people usually sponsor their family and friends first, it tends to divide people and has not
worked on any large scale.
-------------------------------------------------------------------------------THE BINARY PLAN
A program that is somewhat similar in concept to the Australian Plan is the Binary Plan.
Again, they are not easy to understand or in my opinion work efficiently. Binary plans
started several years ago (late 80s) with land and other types of contract sales, mostly in gold
or silver coins. The plan provides lots of roll over (in this case, people reenter the program
usually directly under themselves or their first level). Quite recently there have been some
variations again. The type explained was the first wave of binary and where there have been
additional or changes I've tried to explain.
Everyone starts as a Business Center (called by other names as well). Each Business Center
has two legs (also called Business Centers.) You can be (buy) up to seven Centers but
understand that each Center must have two legs so you have just filled you second level. In
order to gain any compensation rewards both legs must produce the same amount of volume
or some companies require a two thirds/one third ratio. Example: A becomes a Business
Center and signs up two centers, B & C. B & C must do the same for A to progress. B's
downline does $2000 in volume and C's downline does $1000 in volume. When the pay

period comes around, A is paid on $1000 in volume on each leg (B & C). C must produce an
additional $1000 in volume within a given period of time (check this out) or there is no
commission paid on that (additional $1000) amount from leg B.
Commissions are usually paid weekly in this type of program, but that is the decision of the
company. Again, check to make sure, especially on the part of the extra $1000 (which could
just as easily be $10,000). Is that pay-periods or months that you have to catch up? If the
sales commission is not paid because the right and left sides not equal, the commissions are
flushed or rolled up to the company.
The advantages to the Binary plan are...
1. A Distributor will usually have her/his upline working closely with her/him in order to
maximize their own commissions.
2. With multiple Business Centers you can earn multiple commissions on the same sales
volume.
3. Commissions are usually paid weekly (some even daily)
4. Commission is based on accumulated group volume to an unlimited depth
The disadvantages are...
It has gained a lot of attention from regulatory agents whom
i.

Don't understand MLM

ii.

Especially don't understand something so different

iii.

Are familiar with it primarily from the standpoint of coins (selling money)

iv.

Do understand that when a Distributor purchases more than one business center and
that goes over the threshold (in California that's $500, which has the highest) that the
amount can be considered front loading. (That's another article)

There are many lost commissions primarily due to lack of both legs having same volume by
not keeping up or catching up. They require more work and understanding to maximize
commissions
The upline spend more time and efforts working with the weaker Distributor to keep the legs
even than they spend with producers.
By a new Distributor having a large number of Business Centers it can be construed as front
loading, depending of course on the amount required to acquire a Business Center.
I have recently seen a program with three legs, called Trinary if you wilL...and I won't even
go there.
--------------------------------------------------------------------------------

IN CLOSING
All of these programs - Stair Step, Uni-Level, Matrix, Australian and Binary - can also be
written to make a Matching Funds Plan. The Matching Funds plan is a hybrid and has begun
to show up a few times over the past couple of years. Funds are not always matching but a
percentage of the amount if matched.
In conclusion, I hope this article has helped to clarify some of the mysteries for you. Having
been involved in the writing of many comp plans for over twenty-five years, I know several
things for certain, "every plan of every company is special to someone" and "the perfect plan
has yet to be written".
NOTE: This article was first written in 1995 and has been updated yearly. Keith Laggos of
Money Makers Monthly, Mike Sheffield of Sheffield Resource Network and Jeffrey Babener
of Babener & Associates have since written articles on this subject as have several others that
you might like to check out.
Doris Wood is a Support Member of MLMIA. Her company name is The Wood International
Group (TWIG)