MLM compensation plan: how it works, without promises or numbers

When I was digging the foundations for the seating area Lenka wanted so much, I understood one thing right at the start.

Before you pick up a spade, you need a plan. Where to dig, how deep and what will stand on it. Whoever builds without a plan has to redo it later.

Network marketing has such a plan too. It is called the compensation plan (or marketing plan), and most people have never read it. They simply sign because the presentation was nice.

So let’s do it differently. I’ll explain how an MLM compensation plan works, without promises and without numbers.

What is a compensation plan in MLM?

An MLM compensation plan is a written company document that describes how partners‘ rewards are calculated: what points are awarded for, what the conditions are and how the reward is shared among the members of the team.

It is also called a marketing plan or a reward plan. It is usually part of the contract or the terms and conditions. And that is exactly why it is worth reading.

It is like building documentation. You don’t have to be able to draw it, but you have to understand it.

How does an MLM compensation plan work in practice?

A compensation plan works by every purchase of products creating volume for the company, that is, points, and from those the rules of the plan calculate a reward for whoever made the sale and possibly for their team too.

1. A customer buys a product. The purchase is recorded against whoever recommended it.
2. The purchase creates points or volume. The company records them as personal or team volume.
3. The plan sets conditions. This is called qualification. For example a minimum personal activity in the monitored period.
4. When the conditions are met, the reward follows. According to how many levels the plan has and how volume is calculated.
5. As you grow, your position changes. It is called a rank or career level and has its own conditions.

Every company has the exact conditions different. That is why you should always ask for a specific document.

What types of MLM compensation plans exist?

The most common types of plans are unilevel, binary, matrix and stairstep breakaway. They differ in how many people you can have on the first level, how many levels count and how volume for the reward is formed from the team.

Unilevel is usually considered the easiest to understand. According to an overview by a US lawyer focused on MLM, the binary plan is limited to two legs in width and stairstep breakaway is one of the classic types, in use since the mid-20th century. There are also hybrid plans that combine several approaches.

Types of MLM compensation plans: how they work and what to watch out for

Type of plan	How it works	What to watch out for
Unilevel	You can have an unlimited number of people on the first level. The reward is calculated from a limited number of levels in depth.	Find out how many levels count and under what conditions.
Binary plan	Everyone has at most two direct legs and volume is often calculated from the weaker one.	The volume of the weaker leg affects the reward. Watch whether the plan forces you to buy products just for volume.
Matrix	The structure has a fixed width and depth, for example three people per level.	A fixed width means people are placed under others. Ask how the placing works.
Stairstep breakaway	When conditions are met, a team “breaks away” and the original sponsor receives a share of its volume.	Find out exactly what changes after the break and what happens if you don’t meet the conditions.
Hybrid plan	Combines elements of several types.	It tends to be more complicated. Have it explained with an example, not with an income figure.

What are qualification, points and volume in a compensation plan?

Points or volume are the value of product purchases that the company records, and qualification is the set of conditions you must meet for a reward to be paid out. Both are fixed by the plan.

In practice volume is divided into personal (your purchases and your customers‘ purchases) and team (the purchases of people in the team). Qualification then sets what you must meet over a certain period.

There is a common trap here. If a plan depends on you buying yourself to keep your position, it isn’t about customers. It is about how much goods you buy yourself. Ask how volume from real customers is counted.

What should I ask to see in writing about a compensation plan?

About a compensation plan, ask to see in writing the complete reward rules, the qualification conditions, the entry costs, the rules for returning goods and the conditions for ending the cooperation. A verbal promise is hard to prove, the text stays with you.

My short checking question is this: can I take that document home and read it in peace?

1. The complete compensation plan. Including the conditions for each rank.
2. Entry costs. What you have to buy or pay before you start.
3. Compulsory purchases. Whether a monthly purchase is expected of you and in what form.
4. Returning goods. What happens to products you don’t use.
5. Ending the cooperation. How and under what conditions you can finish.
6. Real customers. How much of the volume is made up of people who build nothing and only buy.

You will find more questions for choosing a company in the article How to choose an MLM company.

What are the warning signs in an MLM compensation plan?

The main warning sign is a plan that rewards mainly the bringing in of new people and not the sale of products to customers. That is already a mark of a pyramid scheme, which EU law prohibits.

According to the American Federal Trade Commission (FTC), pyramids are identified by whether rewards are paid for recruitment and don’t depend on sales to real customers. You will find very similar logic in the EU rules (Directive 2005/29/EC, Annex I). More in the article Is MLM a pyramid scheme?

• The reward is paid mainly for recruiting new people.
• The starter package is expensive and compulsory.
• The plan can’t be obtained in writing or nobody wants to explain it.
• Specific amounts or quick results are promised.
• You have only a few hours to decide.
• Nobody outside the system buys the products.

If you see two or more such points, slow down. The main article on how MLM works is What is MLM.

Frequently asked questions

What is a compensation plan in MLM?

A compensation plan in MLM is a document that describes what a partner receives a reward for, what the conditions are and how the reward is shared among team members. It is also known as a marketing plan. Always ask to see all of it in writing before you join.

Which MLM compensation plan is the best?

There is no best compensation plan. It depends on the company, the products and your way of working. Each type has its strengths and weaknesses. More important than the type of plan is whether the reward comes from selling to real customers and whether you understand the conditions.

Is a binary MLM plan worse than unilevel?

A binary plan is not automatically worse than unilevel, it just works differently. The width is limited to two legs and volume is often calculated from the weaker one. It is harder to understand. That is why you should have it explained with a simple example, in writing.

How do I know a compensation plan is a pyramid?

A compensation plan is a pyramid if the reward is mainly for bringing in new people and not for selling products to customers. Other signs are an expensive compulsory entry and products that almost only members of the system buy. The law prohibits such a system.

Do I have to buy products myself to qualify?

It depends on the company’s rules. With decent companies the point is mainly that you use and recommend the products. But if buying is necessary just to meet the conditions and customers play no role in the plan, that is a warning sign and you should take notice.

So what about that plan?

A plan is not evil and it isn’t a miracle. It is the rules of the game.

I wouldn’t dig foundations without a plan, and in the same way I wouldn’t sign anything I don’t understand. Read all of it, even the boring paragraphs.

Do you want to go through what it looks like at the company I work with, and ask whatever you like? Arrange a private presentation. Calmly and without pressure.

Sources

• MLMLegal: Binary Plans, a description of plan types
• FTC (United States): Business Guidance Concerning Multi-Level Marketing
• Directive 2005/29/EC concerning unfair business-to-consumer commercial practices (Annex I)

Tom