“Direct Selling” Compensation Plan – Eye Opener
The compensation plan is one of the key elements of a Direct Selling company. It is extremely important that this element is perfectly tuned to reward the hard work of the direct sellers and leadership.
Direct sellers throughout the world prefer to enroll with a Direct Selling company that offers fair payout for the results of their efforts. Though this is not the only evaluation parameter as many people think.
The compensation plan is a vital part of the Direct Selling ecosystem!
The payout or commission that a Direct Selling company reimburses to the direct sellers for sales depends on its compensation plan. It is a formula for remuneration.
Strategy India, a consultancy specializing in Direct Selling defines – "Compensation plan" is a method to calculate the commissions/incentives and/or the rewards to be given to/among direct sellers from the turnover achieved by them and/or their marketing organization.
There are different types of compensation plans. The compensation plan of a Direct Selling company depends on different factors including the amount available for distribution, the structure of the marketing organization and other variables. The plans differ from company to company.
A compensation plan provides the following details:
- The conditions that a direct seller must meet for being eligible for a payout. It is the minimum sales a direct seller must make in a specified period.
- The criteria for receiving a performance bonus in addition to regular remuneration. A few companies offer bonuses to their direct sellers whose sales performance is outstanding.
- The frequency of the compensation payout, i.e. weekly or monthly is defined in the compensation plan.
- The compensation plan lists the current level/rank of the direct seller and the eligibility conditions for achieving the next rank.
- It lists the remuneration or percentage commission offered to a direct seller for his personal sales and/or the sales of his marketing organization.
Why Strategy India defined and categorized compensation plans?
Common people, government agencies, and individuals associated with Direct Selling companies may find it hard to distinguish one Direct Selling company from another. It may also be confusing for them to decipher different types of compensation plans. Strategy India has defined and categorized different types of compensation plans which is advantageous for the stakeholders.
The definitions and categorization help to clear confusions from people’s minds that are related to Direct Selling industry.
- People think that all Direct Selling companies are multi-level marketing (MLM) companies which is not true. There are different types of Direct Selling companies.
- It is a common misconception among masses that all MLM companies are Direct Selling companies. An MLM company may or may not be a Direct Selling company depending on whether it meets the fundamental criteria of Direct Selling.
- People believe that all MLM companies are pyramid schemes.
- It is commonly presumed that all MLM companies are unsustainable and will run out of business eventually.
For Prospects – Help choose a company with the best compensation plan
The compensation plan is one of the primary factors for attracting prospects since direct sellers enroll with a Direct Selling company for financial payout. The payout for the same sales turnover may be higher in one company as compared to another. Under ideal scenario when all the parameters are the same, an individual would prefer a company which pays out more.
For Direct Sellers – Build their Business for Maximum Financial Success
The remuneration received by a direct seller depends on the way they build their business and how they expand their marketing organization structure. The compensation plan may have a condition which requires a direct seller to make a minimum purchase before he or she starts earning from the compensation plan.
By being informed of the compensation plan of their Direct Selling company well in advance, a direct seller can plan and build their business to maximize profits. They can also be aware of criteria for receiving performance bonuses and achieve the same.
Different Types of Compensation Plans
Strategy India has listed a broad classification for compensation plans. They are divided based on generations, achievements, and payouts.
Based on Generations or Levels:
Based on the number of generations in the marketing organization structure of the Direct Selling company compensation plans can be classified into three types.
- Direct Compensation Plan – Direct Selling companies with a single level structure use a direct compensation plan. If the company follows this type of compensation plan, all direct sellers will be connected directly to the company. There is no direct seller under another one. Incentives are paid to a direct seller depending on the volume of products or services that they have sold themselves or consumed personally. A direct seller does not receive incentives for sales of other direct sellers.
- Single Generation/Level – In a single generation compensation plan, a direct seller receives a commission on their own sales or personal purchases as well as those made by the direct sellers directly connected to them who may or may not be introduced by them. It is generally used by Direct Selling companies that have a single level marketing organization structure. A few Direct Selling companies that have a multilevel marketing organization structure may also deploy a single generation compensation plan.
- Multiple Generations/Level – In a multiple generation or multilevel compensation plan, direct sellers are compensated for their sales and those made by direct sellers connected to them in their marketing organization. The maximum number of generations from which a direct seller will receive compensation may be fixed or infinite.
Based on Level/Rank/Title Achievement:
The compensation plan of a Direct Selling company may be dependent on the level or rank achieved by a direct seller. As direct sellers make sales, their level or rank increases depending on their turnover. It also increases their percentage commission accordingly. For example, a direct seller who has a turnover of ₹1,00,000 may receive 10% commission while another direct seller who has a turnover of ₹2,00,000 may receive a commission of 20%.A Direct Selling company may use one of the following achievement-based compensation plans.
- Non-Cumulative – In a non-cumulative compensation plan, the current rank, level or the percentage commission of a direct seller is reset at the beginning of a month. They have to start afresh at the beginning of each calendar month. All direct sellers are at same level or rank and will receive the percentage commission based on their performance in that particular month. The percentage commission might increase based on their sales volume.
- Cumulative – In a cumulative compensation plan, the current level, rank or the percentage commission of a direct seller is not reset at the beginning of a calendar month. A direct seller continues to enjoy the privileges of the highest rank they have achieved. The percentage commission or rank of a direct seller from last week or month is carried forward. The compensation is paid on the sales made in a month or a specified period. The rank or level of the direct sellers increases based on the total sales volume in their direct seller lifetime.
Based on the frequency of Compensation Payouts:
The third classification of compensation plans is on the basis of the frequency of payouts. Companies consider the total sales made in a specified time period and pay commission accordingly.
- Weekly – A weekly compensation plan computes the sales made by a direct seller in a week and pays commission on them. The payout is disbursed on a weekly basis.
- Monthly – A monthly compensation plan considers the sales made by a direct seller in a calendar month. The compensation is paid to the direct seller once every month.
It is important for both prospects and direct sellers to be aware of the compensation plan of a Direct Selling company.
The knowledge regarding the compensation plan can help individuals choose the right Direct Selling company. Direct sellers can optimize their working to maximize payout as per their compensation plan and aim for bonus incentives.
There is no right or wrong compensation plan as long as the payout is made for following the fair practices directly linked to sales and leading the marketing organization. Though care must be taken to ensure that the payout committed to the direct sellers does not exceed the fund provision available for distribution on the sale of the products.
Strategy India has undertaken the endeavor to make the industry aware of different Direct Selling compensation plans and make it easier for prospects to choose one that suits them the most.
