Financial pressures & waning recruitment have set off alarm bells for many leaders. Is it time for a comp plan reboot?
NO DIRECT SELLER can survive without a strong compensation plan. Complex and often confusing, rewards systems have hefty influence on company culture, product reach and even what type of distributor or customer a company can attract.
The right compensation structure can help a company thrive, expand across markets and build powerful brand loyalty. An ill-fitting comp plan, however, can create exactly the opposite—tanking distributor morale and limiting who and how many people a company can reach.
For decades, compensation plans have been built to highlight the industry’s ability to create superstars and high earners regardless of education or experience and touted the ideal that a distributor could work diligently for a few years then benefit from residual paychecks with little ongoing effort. It was a promise that spent an inordinate amount of money on team members whose efforts would intentionally taper off in the long run.
This top-heavy structure, coupled with today’s inflated costs surrounding supply chain processes, raw materials and the salary creep of a highly competitive market for internal teams, has led companies to feel more financial pressure than they were just a few years ago. As a result, the industry is undergoing a paradigm shift in its approach to the modern compensation plan.
According to Dan Jensen, an industry consultant since 1979 who has specialized in comp plan design since 2000, approximately 80 percent of his new clients say they are paying out more than they can afford.
“This is a sensitive topic, but the real issue is that the compensation plan should be designed to pay more for the leaders who are engaged and less to the leaders who are disengaged,” Jensen said. “Every dollar spent on people who aren’t working is a dollar less that can be given to someone who is.”
Pay for Performance
In the 1980s and 1990s, compensation plans were designed to dedicate 40 to 45 percent of revenue to commission payouts. This was seen as the core element of success for companies and did, in fact, attract new talent to brands and products. But industry experts say that approach is no longer feasible.
“That’s really hard to sustain now,” said Brett Duncan, a direct selling strategist and Co-Founder and Managing Partner of Strategic Choice Partners. “When you’re giving away half of your revenue to the field, you can’t afford to keep paying for other expenses—advertising, marketing, technology innovation—and distributors will pick up their business and move to another company that already has those things in place.”
Compensating leaders who are not doing the lion’s share of the work disregards an ethos held by the next generation of social sellers called “pay for performance,” a principle that one direct selling executive believes is as important to distributor longevity and success as fairness, equity and transparency.
“If you, as a sales rep in traditional business, overperform, you make an outsized bonus because you are growing the business and overdelivering,” the executive shared. “What we see in legacy compensation plans is that they are violating that pay-for-performance guiding principle. There are a number of people getting paid massive amounts of money who are simply not performing.”
At the same time, regulatory pressures by the Federal Trade Commission (FTC) have sparked a change in how leaders should talk about success. The lifestyle claims, emphasis on luxury rewards and “life-changing income” opportunities have become not only ineffective, but illicit.
There was a rags-to-riches lore that companies touted for a long time and when the FTC shifted its stance from ‘is this factual’ to ‘is this typical,’ the marketing value of those stories plummeted. Companies began to realize they maybe didn’t need to be paying large amounts of money to individuals.
An Affiliate Marketing Reality Check
Structural disadvantages, as seen in these top-heavy compensation structures, create unsustainable trajectories for companies. Over time, as payout numbers creep upward and activities of the recipients stagnate or decline, so too will companies. Put plainly: companies need to make more money than they spend and attract more distributors than they lose.
But the diminishing return model that has become clearly visible in legacy plans is now expected to appear in the earliest examples of companies who have left the multi-level model for a single-level, affiliate-based approach.
Industry analysts say leaving the direct selling model entirely and converting a salesforce to only affiliates will only work until attrition takes hold. Direct selling distributors build community and bring in new team members, but affiliates compete with each other.
“Anyone switching is doomed to not get to scale,” Jensen said. “Eventually their attrition rate will match any enrollment rate they have. And it will be flat. There is no way around that.”
The alternative is experimenting with the affiliate approach in a way that Jensen describes as “not breaking the mold of the normal direct selling model.” It was a strategy he used to develop Neora’s compensation model, which delivered a 78 percent ratio of customer-to-distributor volume and defeated the arguments the FTC brought against it.
“What caused that ratio? It was an alignment of a new compensation plan with improved business practices that made it safer for customer gatherers—affiliates—to join and share products with customers,” Jensen said. “They didn’t have to build a team, but many learned it was better to build a team in time, and eventually, former affiliates had downlines.”
The New Compensation Plan Framework
From the stage at the DSU 2024 Fall Event, Bridgehead Collective Founder and CEO Heather Chastain shared her recent research, indicating that a decreasing number of direct sellers have interest in building teams or moving up in rank. This is a striking observation, since the typical compensation plan stands in contrast to that data, focusing on team volume and only rewarding those in the highest level of leadership with certain titles.
“I’m calling for a change in our thinking,” Chastain said. “I’m encouraging us to think of people who are ‘just selling’ as equally valuable and worthy of recognition as those who are building teams. You should be able to walk the stage at the highest level of recognition without having a team underneath you.”
This change also includes simplifying the language around compensation and being clear and transparent about how and when sellers will be rewarded. The typical compensation plan features complex language with multiple ranks, each featuring a different payout percentage, and bonuses held behind intricate, layered requirements. Historically, this way to drive different revenue building behaviors has been called breakage because the barriers to the reward were so nuanced and detailed that many sellers wouldn’t check all the boxes required to earn the bonus, and companies would save money while benefiting from enhanced seller activity. Today’s sellers see these as “gotcha” moments, and it creates the perception of dishonesty and ultimately leads to missed expectations and disillusionment.
Instead, Chastain encourages executives to forgo percentages and points for easy-to-understand round numbers: $1,000 selling bonuses; $500 auto-ship rewards; $20,000 rank advancement awards.
“This next generation of sellers doesn’t want to do a lot of math,” Chastain said. “Look for ways to streamline and simplify. It increases transparency, increases the ability to train effectively and attracts new people in a different way.”
Loyalty Over Monogamy
According to her research, Chastain debunks this idea that “brand loyalty is gone” and says the next generations of social sellers actually have stronger brand loyalty than the ones before them. The difference is that they feel that way for multiple brands.
“The idea that any human on the planet would only use products from one single company is silly and marketing themselves as if they do is outdated,” Chastain said. “It’s unrealistic and comes across as inauthentic.”
Exclusivity clauses and restrictive language around who distributors can represent are becoming a thing of the past, according to Chastain. Companies that are capturing the loyalty of the new consumer are finding ways to embrace those who may be thought of as “unfaithful.”
“One CEO I worked with started calling and congratulating his sellers on their success in other companies,” Chastain said. “What that did for his retention of those leaders was phenomenal. When they felt like he believed in them and cared about their success and their fulfillment beyond just caring about their utility to him, it tethered them in a meaningful way.”
Front-End Optimization & Rapid Rewards
Distributor retention is now decided in the first 90 days. Not only are attention spans shorter, the options for making side hustle money are seemingly endless—and fast. The goal, according to Jensen, is to think of rewards as a pay-per-hour proposition.
“This isn’t to say that a company should pay hourly wages, but rather consider how well they compensate new team members for their time spent in the business. Time is your top competitor! If it isn’t worth their time, they leave. If it IS worth their time, they stick. This issue drives new recruit retention more than any other factor.”
“And if you can keep five percent more of your new recruits than you do today, your business could easily double inside of three years. It doesn’t take big movements to make huge revenue changes in the long term. Increasing retention at the front end of a plan even by a little bit has massive revenue consequences downstream.”
Any discussion of change, even ones that will create a healthier work environment for sellers, can send distributors into panic mode, which is why foundational changes to incentives and rewards should be approached like an evolutionary strategy rather than an unexpected course correction.
One source recommends helping disengaged and heavily compensated leaders gradually shift back toward activity by steadily lopping off the depth of the plan in phases and over time. This gives top tier leaders an opportunity to preserve or rebuild and honors their participation in helping build teams.
Executives and founders are encouraged to reevaluate which voices are getting the most attention.
“It’s a seismic shift,” an executive source said. “It means moving from listening to highly compensated leaders all the time, who may or may not be in touch with their customers, to understanding the people who are personally driving the volume and the business.”
Presentation Matters
Recruitment, at its core, is about acquisition. When distributors leave, or companies find themselves lacking in recruitment, it can be easy to assume that a compensation plan reboot will fix their problems. But a desirable rewards structure alone won’t attract new distributors. Acquisition is an expensive task, whether it is distributors, influencers or advertisements that is bringing new team members in.
This is why positioning is critical. If a compensation plan uses language like “unilevel” and “breakage,” it will attract experienced network marketers, while likely ostracizing the rookie entrepreneur looking for easy entry into a new side hustle. Deciding who the product and opportunity is for first, then designing a rewards structure around that target, will have greater success than simply casting a wide net hoping to attract every niche.
“We’re at an inflection point,” Duncan said. “We’ve always had these different audiences like hardcore networkers, social sellers and people looking for ways to earn a few hundred bucks each month. The danger is trying to attract everyone. You must pick who you want to focus on and make sure you’ve designed a plan that is attractive to that group. It’s not only a comp plan decision; it’s a culture decision and a training decision as well.”
WHAT THE SUPPLIERS SAY
We reached out to two of the leading companies in compensation plan management to get their perspective on what their clients are trying and how they help execute that vision.
“Direct selling companies face increasing pressure to adapt or add to their compensation plans to meet the evolving needs of the market, empower their distributors, and stay competitive. At Exigo, we believe one solution is to leverage software to manage and model any compensation plan scenario and analyze their impact before implementation. This helps companies to create adaptable, effective incentive structures that motivate distributors, drive sales and support long-term growth.” —Rodger Smith / President & CMO, Exigo
“The direction of direct selling today is one of omnichannel marketing and extreme flexibility in compensation plans. We are seeing the proliferation of affiliate models and know that affiliate should not be a fork in your business road, but it can be a branch in your business tree. Exigo’s commission engine allows for variations by market, geography, or user type, allowing both business builders and influencers and consumers to all exist within a common ecosystem.” —Jack Farris / CSO, Exigo
“AT ITS CORE, a compensation strategy helps a company communicate its values and culture through key activities of support and empowerment, including:
- Share products and assist customers (help people)
- Develop a team with others who also want to share products (help people help people)
- Guide others to develop teams focused on sharing products (help people help people help people)
Today’s compensation plans encompass much more than just commissions. Compensation strategies are adapting to focus on customers and their expectations; prioritize simplicity; emphasize continuous performance-based activities; adjust to demands of global markets; allocate commission dollars and more. These strategies should concentrate on offering straightforward sales options that allow individuals to earn supplemental compensation. Companies can efficiently allocate commissions for customer acquisition and support, team building and leading sales teams.” —Steve Hooper / VP, InfoTrax Consulting Services
From the November 2024 issue of Direct Selling News magazine.
