The Makings of a Modern Compensation Plan for a Direct Sales Company

Brett Duncan is a “transitionist” who specializes in helping direct selling companies define their best next steps as they transition into the new era of direct selling. He is co-founder and managing partner of Strategic Choice Partners, a consulting firm that offers strategic support and services to direct selling companies.

The Makings of a Modern Compensation Plan for a Direct Sales Company

In April, I shared with you my thoughts on The Makings of a Modern Marketing Team for a Direct Sales Company. As so many areas of direct sales has shifted over the last 10 years, in light of both changes in direct sales as well as around direct sales, it is imperative that members of the corporate team, those who are stewards of the brand and the model, proactively shift components of the business to keep up, if not stay ahead.

But marketing is not the only area that deserves our attention here. In fact, while my firm, Strategic Choice Partners, has always worked with direct sales companies to create or adjust their compensation plans, we’ve seen a massive increase in both the number of companies and the breadth of changes requested over the last 18 months.

This makes sense, of course. The regulatory environment alone is requiring every company to take a hard look at the structure of how it pays compensation. There’s no need for me to go into those details here; plenty has been written about it already. I will say that I have been a tad surprised at the lack of urgency that most companies have had in making what appear to be obvious updates in their plans in light of these new regulatory insights.

Beyond these regulatory changes, however, is an even bigger question that seems to be at the top of every executive’s mind, either consciously or subconsciously, when it comes to thinking about compensation plans. That question is this: “What exactly am I paying for?”

It’s a simple but extremely profound question. And it is of utmost importance when working through any updates to your compensation plan. If you aren’t clear on what you’re paying for (and what you’re not), then you’ll never really be clear on what your compensation plan needs to accomplish.

As I mentioned in my Annual Checkup for 2021: “As direct sales companies continue to dish out 40%+ in commissions, they find themselves asking a very important question: “What am I getting in return for that 40%?” The expenses and responsibilities of the home office in today’s direct sales landscape is much more involved than in decades past, and yet the payout of the compensation plan in most cases has not been adjusted to account for those additional expenses. It makes for quite a tight margin!”

So, what are you paying all of your commissions for? Are you leaning on Distributors to acquire new Customers, and let the corporate office do the rest? Are you leaning on Distributors to do much more? Are Distributors your primary marketing channel, or are you having to invest more in things like online advertising, influencer outreach and video production?

Here’s the fundamental thought: If you’re still paying a 1990s compensation plan for a 2021 deliverable, you’re probably finding it very hard to finance “all the other stuff” that the corporate office has to do now.

With the rest of this article, I want to merely skim the surface of a few areas that are becoming bigger and bigger parts of compensation plan design today. It’s not intended to be comprehensive. But as I’ve had conversations with so many executives over the last few months, I’ve noticed these areas and ideas always seem to resonate with them most.

1. Your Preferred Customer Program

A Preferred Customer program is nothing new in direct sales. That said, many companies (especially 10+ year-old network marketing companies) are still struggling to find the right fit in this area. This struggle is due mostly to the hope that a simple Preferred Customer program can be incorporated without impacting much of the rest of your compensation plan.

This, of course, is futile. On the one hand, to create a Preferred Customer program that doesn’t require some other shifts in your compensation plan creates a Preferred Customer program that no customer actually prefers. If we prioritize keeping our comp structure in place, paying out the way it does, hoping we can just add this new component, then it’s extremely difficult to a) create a program that’s attractive to a Customer while b) incorporating compensation components that are attractive to the Distributor for obtaining Preferred Customers.

If the last two years have taught us anything, it is that we must prioritize the Customer. The modern comp plan needs to start with putting together the best offer for your Customers, and appropriately attractive compensation for those who find and serve those Customers. Figure that out, and try to work your way out from there.

2. Your “Hourly Rate”

Compensation plans don’t pay by the hour, but the normal Distributor is certainly going to think in those terms. In a world where gigs are abundant and easy for anyone to tap into, and where time and attention are more precious than they’ve ever been, a direct selling opportunity must prove (quickly) that it’s worth someone’s time to become a Distributor.

On average, what does someone make per hour spent sharing your products with new and prospective Customers? In our experience, reaching a rate of $30/hr. is a great target.

This doesn’t need to be an exact algorithm, but rather just simple, back-of-the-napkin math. If you’re a party plan company that offers 25% retail commissions, and the time spent to prep for, present and close out a party is 4 hours, and the typical sales of that party is $400, then your Distributor essentially earns $25/hr ($100 earned for 4 hours of work). Not bad, but you may want to consider a) raising your commissions to 30%, b) finding ways to increase the average party size or c) decreasing the time needed to conduct a party.

For a more one-to-one approach, if your company offers 25% retail commissions, and the time it takes for someone to post a live-streamed video to show your products takes about one hour total, and they sell $150 worth of product during that time, then that’s $37.50/hr.

As you can see, so much impacts the earnings per hour beyond just your retail commission rate. As my partner Alan Luce explained in his most recent article, “Added to what the companies are doing, existing sellers and potential direct selling candidates have discovered that selling online, rather than using the traditional face to face techniques, is actually more profitable than the old system.”

Dig into what this hourly rate could be for your company, and across the different selling scenarios.

3. Compensation Isn’t Just Commissions

One of more refreshing components of modern compensation plan design is recognizing that not all people are actually motivated by money alone. In fact, given that the vast majority of Distributors don’t expect their direct selling opportunity to provide anything close to a full-time income, we can sometimes find ourselves increasing compensation in ways that actually doesn’t resonate best with our constituents.

Many companies are starting to incorporate very creative loyalty and/or rewards programs that operate outside of/alongside the compensation plan. In some cases, these programs are only for Customers. In other cases, they include Distributors, too. Regardless, these programs offer all kinds of fun ways to earn discounts and credits toward product purchases, among other things. I’ve been involved in a few of these programs, and I can tell you, if done correctly, they can provide a very powerful motivation for otherwise overlooked Customers and Distributors, and a powerful lever for the corporate team to access as needed.

And a quick side note here: for party plan companies, the most common concern I hear is with Hostess programs. Namely, more and more, hostess programs are being used by Distributors to collect orders. While this isn’t “wrong,” it’s certainly not why the Hostess program was created. In its purest form, a Hostess program is a very rewarding referral program. Your Distributors have likely found very creative ways to take advantage of this program. This is all fine, but when you realize how much you’re paying out in Hostess Rewards, you want to make sure this is actually getting you maximum referrals. This has led many companies to consider incorporating a broader Rewards program instead. It’s worth looking into.

4. Learn from Affiliate Marketing

I think direct sales offers a much better overall platform than traditional affiliate marketing. That said, I believe we can learn so much from affiliate marketing programs. And the modern compensation plan design will look more and more like a multi-tiered affiliate marketing program than a traditional direct sales program.

I won’t go into all the details and differences of affiliate marketing, but I believe there’s a space between traditional direct selling and “traditional” affiliate marketing that represents the future of our industry. On the one hand, direct selling provides a community and culture that brands crave to have and customers love to be a part of. Ultimately, this is what everyone loves when they look at the companies within the direct sales channel. Relatively speaking, our compensation plans are massively more lucrative than affiliate marketing programs.

That said, affiliate marketing is simple, and proves that commissions probably don’t need to be so lucrative. Affiliate marketing is asking for help with brand awareness and customer acquisition, and that’s about it. The company will take it from there. So their commissions and rewards align with that.

Several direct sales companies have added and Affiliate level to their programs over the past few years. While I think this is a step in the right direction, we must get away from simply adding on components while ignoring the rest of the program. The modern direct sales compensation plan (and overall program) needs to be attractive to an affiliate marketer, and also to existing Distributors to acquire new affiliates. This requires a holistic look at your plan.

5. Plans Are Getting Flatter (Not Fatter)

The real hallmark of the modern direct sales compensation plan is that most plans are getting flatter. “Flatter” can mean a lot of different things, but it generally refers to plans not paying out on as many downline levels, and/or plans not paying quite so much to the very top leaders over time.

This trend is typically what stops 10-year-old+ companies in their tracks. And that’s mostly because the field leaders that have their ears the most are the leaders at the highest levels of the plan. I have a completely separate article on that I’ll share at a later time ;-).

Simply put, with a compensation plan, you get what you pay for. As any of us with any corporate experience can attest to, the field has uncanny ways of showing us what we’re really paying for, and you can’t blame them for that. But as stewards of the company, our responsibility is to help stabilize the company, and grow the company. This normally occurs at the lower to middle parts of our “plan”. Which is why the modern plan will be a little flatter than what we’ve been used to.

Especially when a company is experiencing a decline in sales, it is very common to introduce new bonuses, new levels or new compensation plan elements to motivate your top leaders, thinking these All-Stars, if they could just give a little more, will help make things right. This very rarely works. The reason it rarely works is because there’s only so much more your All-Stars can give you, incrementally speaking. They already give so much. And while it may be natural for them to want a bigger slice of a shrinking pie, your job is to increase the size of the pie.

Don’t look for ways to make the top levels of your plan fatter. Look for ways to motivate the new Distributor, the new Customer and the young leader. Not only will it help the company overall, but the fact that the pie is getting bigger will actually reward your top leaders more than anything else you could come up with.

6. Simplicity

The modern direct sales compensation plan will be more committed to simplicity that ever before. We’ve touted the importance of simplicity in our industry for a long time, but few companies have really made it happen. Sadly, is a running and well-known joke that compensation plans are too confusing. We laugh about it, and then we do nothing about it.

But the modern company won’t just talk about it. They will build plans that are simple and straightforward. New companies have the advantage of starting from scratch to make this happen. Existing companies have a tougher job, having to morph their existing plans into a more streamlined model. But the innovative ones will do it, no matter how hard it is.

For a plan to be truly simple, a company cannot start their plan design with figuring out how someone can make $500k per year, and then work your way down. The modern plan also won’t be as concerned with creating massive income for its top producers. Don’t get me wrong: There will still be plenty of high incomes with the modern plan design, but that will be because the sales volume warrants it, not because of “17 ways to earn income” and infinity bonuses and the like.

There are so many other intricacies and ideas that constitute a modern direct sales compensation plan. I’m sure many of you have incorporated some great improvements into your own plan over the last few years. I’d love for you to share them in the comments.

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