Designing a compensation plan is a serious task in direct sales. That’s why there are professionals specialized in this field. I have listed in this article seven major mistakes direct selling businesses make while designing their compensation plans.
Building the Business Idea Around a Compensation Plan
Company’s compensation plan should never be the starting point for the business idea, strategy or the business plan. Designing the plan and trying to build the whole business around the that comp plan is not the way to long-term success. It should never be forgotten that a compensation plan is just a tool (although a very important one) to move the products to end users.
Treating the Plan as a Stand-Alone Element
A compensation plan is a strategic element of a direct sales business. Being so, it has to be in harmony with all the other elements. The target market chosen, product portfolio, expected characteristics of the field force, intended tone of communication, to name a few… All these must be in consideration while developing the plan.
Failing to Reward Key Behaviors on the Field
A direct sales company expects various behaviors from its sales force. Some well-known examples: Consultant acquisition, personal selling, organizing online and offline sales parties, training, coaching… The compensation plan has to make sure each desired behavior is rewarded in full accordance with its importance. It is just as crucial not to reward any unwanted direct seller behaviors.
Making It Over-Complicated
Sale force is motivated, directed, and incentivized by this plan. There is no proven direct correlation between the degree of its complexity and the earning potential. An unnecessarily complex plan only discourages newcomers. This is especially true for those whose goal is only part-time income. In this sense, the best plan is the one that a newcomer easily understands and is comfortable with.
Putting a Cap on Direct Seller’s Earnings Potential
Restricting the earnings potential can easily be accomplished by limiting the “depth” of the plan. This will though, mean the compensation plan will not be able to attract strong field leaders from outside or to create them within. Unless the idea is to have a sales force consisting mainly of part-timers and of those who are not that ambitious, it is not advisable to do this.
Not Putting a Cap on the Expenses Generated
By looking at a public direct sales company’s income statement, one can quickly see that sales commissions is a very significant expense item. While providing unlimited income opportunities to an individual direct seller, there should always be a cap on this expenditure as a percentage of company revenues. Believe me, it is not that difficult to achieve these two simultaneously.
Ignoring the Compliance Aspect
Last but not least, a compensation plan has to comply with the regulations, period! Numerous brilliant business ideas and successful launches have shortly become history, simply because this aspect is deliberately or unintentionally ignored. It is true that there may be some differences in regulations from one country to another, but universally accepted principles are pretty straightforward.
Like I said at the beginning, designing a compensation plan is a serious task. While it can boost a company’s success, it can easily do the opposite!
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Hakki Ozmorali is the Founder of WDS Consultancy, a management consulting and online publishing firm in Canada, specialized in providing services to direct selling firms. WDS Consultancy is the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.
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Excellent and insightful article! Well done!
Thank you very much, Dan!