MLM Compensation Plans: The Different Types of MLM Pay Plans

There are many different types of MLM Compensation Plans to choose from. Every company in our industry has a “somewhat” different compensation plan than its competitors. Look at any 10 companies and you will find 10 different pay plans.

Which plan is best for you? I’m not sure. The compensation plan you pick should support your short-term and long-term business objectives. For example, if you enjoy retailing and need immediate income, you might want to pick a pay plan with a good retailing commission. If you want “long-term” wealth creation, you want a plan that rewards you for building a large team.

The purpose of this post is to help you choose the right MLM Compensation Plan for you.  Only you know what is best for you, so please do your due diligence before joining a network marketing company.

Prior to joining any MLM Company, you should have a thorough understanding of its compensation plan. You must know exactly how much you will get paid when you do certain things. You must know what you need to do to earn $1,000 per month, $3,000 per month or $10,000 per month. You must understand the retailing bonuses, fast start bonuses, team overrides, leadership qualifications, etc.

That way, there is no confusion or misunderstanding. After all, if you don’t know HOW you get paid, how can you expect to be successful in the business?

To take it one step further, I think you should pick a MLM Compensation Plan first, and then find a company that uses that pay plan.

I know that VERY FEW distributors will ever do that, but I think it’s a wise move.

The Most Popular MLM Compensation Plans

In the paragraphs below, I’m going to take a few minutes to review the most common types of MLM Compensation Plans in our industry. We’ll cover some of the pros and cons of each plan. Let’s get started:

1. Forced Matrix Compensation Plan

Forced Matrix Plans allow you to have a specific amount of people on your each level of your organization. You can personally sponsor as many people as you want to. However, you are limited to where you can place those people in your genealogy.

For instance, a 5 x 7 forced matrix plan allows you to have five people on each level. After you sponsor your first five people, you must place all future distributors on level two or below. You’re still their sponsor, but they’re not placed on your first level.

Each one of your distributors can have five people on their first level, and so forth. In a 5 x 7 matrix plan, you could potentially have:

  • 5 on your first level
  • 25 on your second level
  • 125 on your third level
  • 625 on your fourth level
  • 3,125 on your fifth level
  • 15, 625 on your sixth level
  • 78,125 on your seventh level
  • TOTAL 97,780 potential downline

The major advantage of this type of compensation plan is that you can help your team build a group. You can help lots of people earn small commissions, even if they don’t sponsor anyone themselves. How? Because you must place people you enroll under others, once your first level matrix positions are filled.

That can have a positive effect on retention rates in your team. When you place new distributors under someone else, they get a small check. You still get the biggest part of the commissions though.

Another advantage is that you have people in your upline helping you build a team, by placing people in your group.

The major disadvantage of this type of MLM Compensation Plan is that it breeds laziness and a “welfare mentality” in your team. People expect you to put people under them. Furthermore, if you build a large organization beyond the payout levels, you miss out on lots of money (unless there are infinity bonuses).

In the above example, you wouldn’t earn one cent off people in your 8th level, 9th level, and so on, even though the number of people on those levels alone is probably larger than the 7 levels above them combined. Read more about forced matrix plans.

The main reasons MLM companies choose the matrix MLM compensation model are to promote team collaboration and drive increased group sales. The defined width and depth of the matrix ensure that sales representatives focus on recruiting to fill in their frontline first and then developing the downlines. For the MLM company, this helps to build a team culture that supports new representatives and rewards initiative. The fixed structure also makes the overall and individual teams easy to manage.

The relative simplicity of the matrix MLM compensation plan is easy to explain to potential representatives, and the spillover approach assists in developing strong MLM networks. For sales representatives, the earning opportunity is significant. As the matrix structure’s depth fills in, the representative’s opportunity for compensation and bonuses increases.

Many matrix MLM compensation plans allow for position compression to fill in gaps that appear in the structure if a sponsoring representative drops out. Position compression enables the gap to be filled by moving a downline representative into the open spot in the matrix structure. The downline opening is then filled by recruiting a new representative to fill that spot. In the meantime, imbalances in commission and bonus payouts caused by the frontline gap are avoided or minimized. ~ ByDesign.com

2. Binary Compensation Plan

Binary compensation plans are the most popular pay plans in our industry, in modern times.

For many years, I HATED binary compensation plans. I didn’t think they were a good deal. I avoided them. I’ll also admit, I never took the time to completely understand them. I just repeated things my mentors told me.

Now, after spending the past three years with a company using a binary compensation plan, I would NEVER, ever, consider a different type of pay plan.

Binary means two. In a binary compensation plan you have a left team and right team. Everyone you enroll is placed on either your left team or right team. There are no other options. There are:

  • Two spots on your level 1
  • Four spots on your level 2
  • Eight spots on your level 3
  • Sixteen spots on you level 4
  • Etc.

The whole concept of a binary is you get two who get two who get two, etc. Although things never work out this way exactly, it’s a simple and easy to understand concept. From what I’ve read, and from my own experience, the average MLM Rep only sponsors about 2.2 people during their time with a company.

Using those statistics, I can’t think of a more fair compensation plan than the binary. I always tell people this:

If you can’t build TWO legs, how can you expect to build five, ten, or twenty legs, that most other network marketing companies require?

The major benefits of a binary compensation plan are:

  • Potential spillover from a Power Leg.
  • Teamwork and synergy; everyone works together to help each other.
  • Only must build two legs compared to five to twenty that most other companies require.
  • Unlimited levels paid on (in most cases).
  • Rewarded properly for building depth.

A binary compensation plan does not pay on levels like other plans, but on the sales volume of the weak leg. The plan pays Karen 10% on her weak leg, so if her two legs are close to each other in volume, she’s getting roughly 5% of her entire organization’s volume. With a binary plan, depth really doesn’t matter, because these plans pay distributors on their volume all the way to the bottom of the tree. What matters is the balance of sales volume between the legs. ~ MLM.com

3. Stair Step Breakaway Compensation Plan

This is quite perhaps the oldest type of MLM Compensation Plan and it’s used by most of the large, established, successful MLM Companies (Amway, Nu Skin and Herbalife).

With a stair step breakaway plan, your successful downline distributors “break away” from you once they’ve attained a certain achievement level in the compensation plan. Once they breakaway, their sales volume is no longer counted as part of your sales volume qualifications. Instead, you receive a small percentage of that person’s group sales volume each month as your bonus, normally three to six percent.

For instance, Amway uses the breakaway MLM Compensation Plan. Once your downline distributors attain the status of Platinum (Direct Distributor), they breakaway from your downline.

Their sales volume no longer counts as part of your qualifying sales volume. Instead, you receive a 4% monthly bonus off their volume (if you maintain certain requirements). When you help others achieve the same success, you also get additional leadership bonuses

The major disadvantage of a breakaway is that you end up losing a large part of your downline. Yes, the people are still technically on your team, but you can lose out on a lot of money.  For instance, if you sponsor ten people and one of them accounts for most of your volume, once they breakaway, you could “lose” your title/rank in the company.

For example, if you are doing 30,000 points in volume in each month and John’s group accounts for 27,000 points of that volume, when he breaks away your volume is down to 3,000 points. If you have to maintain 5,000 points to remain qualified to get commissions from John’s group, and you don’t have it, you would potentially earn NOTHING from his group.

To succeed in this type of compensation plan you really need to be good at sponsoring and you need to develop several leaders to really maximize the compensation plan. In other words, you must go wide and sponsor lots of people.

In addition, this plan penalizes you for building leaders and working in depth (because people break away).

At its essence, a Breakaway plan is a Unilevel (unlimited width) that utilizes a specific set of bonuses. Because of the popularity and recognition of the term Breakaway, it is included as its own plan type here. Breakaway plans are characterized by the notion that when a Downline salesperson reaches a certain level of achievement, that person, and those below him/her, breaks away from your primary sales team. You continue to receive commissions as usual on your primary sales team, however you then also receive overrides on the team that has broken away. ~ Breakaway Compensation Plan

4. Uni-level Compensation Plan

With a uni-level MLM Compensation Plan you can sponsor as many people as you want to on your front line (first level). In most cases, however, you are limited on how many levels deep you can get paid (initially).

For instance, you might get paid on your first three to five levels deep, regardless of your rank with the company. Anyone placed within those levels counts as part of your qualifying team volume.

However, to get paid on levels below that you must achieve a certain rank/title in your company, sponsor a certain amount of people, or achieve a certain monthly volume. If you only sponsor a few people and one of your people takes off with the business, you could potentially miss out on a lot of money.

If someone you sponsor builds an organization 30 to 50 levels deep, you leave a lot of money on the table (if you aren’t a leader yourself). Plus, if your best leaders show up in depth, outside of your pay levels, you miss out on LOTS of money.

However, if you are good at sponsoring people, you can build a wide and large organization. Remember, width gives you profitability and depth gives you security.

The Unilevel comp plan is easy to understand and very simple. It is similar to a traditional sales job in the fact that every person you personally sponsor is on your front line (no spillover) so you get a direct commission from your efforts.

However, in this type of compensation plan, the higher percentage commissions usually are paid from your first level. Therefore the ones usually get paid the most are the experienced network marketers and representatives who are good at selling. ~ Rich Mentorship

5. Hybrid Compensation Plan

The hybrid MLM compensation plan is when a company combines one or more of these traditional MLM Compensation Plans. You see a lot of companies doing that in today’s world. For example, they might have a binary structure, but also have a uni-level payout and matrix component.

Final Thoughts

In conclusion, all MLM Compensation Plans have pros and cons. No compensation plan is perfect. My best advice for you is to make sure you thoroughly understand the company’s compensation plan, before you get started with the company. You must have a clear understanding of how you will get paid.

In addition, you must be able to explain the compensation plan to your prospects and new distributors in a simple, easy to understand manner. If it’s confusing to you, it will be confusing to others.

If you are a good leader, salesperson, and recruiter, you can make money in ANY company. Most companies in our industry are designed for the heavy hitter and mass recruiter. On the other hand, if you struggle at selling, recruiting and leadership you will probably struggle with ANY company you join (until you develop those skills).

I believe your short-term and long-term goals should influence what type of company and compensation plan you join.

What do you think? What is your favorite type of MLM Compensation Plan and why? Which one do you participate in? What do you like and dislike about it? Leave a comment below to share your thoughts. I look forward to hearing from you.

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Chuck Holmes
20+ Year Network Marketing Professional
Email: mrchuckholmes@gmail.com

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14 thoughts on “MLM Compensation Plans: The Different Types of MLM Pay Plans”

  1. Jay, with so much experience and insight, (like Sheffield Group) why have you not used it to create your own award winning perfectly orchestrated network marketing company? Just curious.

  2. Hi just want to update you with some new information that has changed since this original posting. In regards to Amway’s comp plan when Platinum leg breaks Amway has now increased the leadership bonus from 4% to now 6%.
    Thanks for taking the time to write this article.

  3. The best compensation plan is one that gives greater rewards for selling or retailing than recruiting new prospects for the business. You can sell products in your sleep online and if your product solves a problem or fills a need you will always find customers. Once you are successful selling the product prospects will approach you about being a distributor.

    1. You should get paid to sell. I agree with that. But the whole purpose of network marketing is to get paid on multiple levels, by helping a lot of people each do a little bit. Direct selling is more focused on one person’s ability to sell products.

  4. I think that the after the product the compensation plan needs to be reasonable. I’ve seen plans that are almost impossible to work. I think a good plan is one that rewards you more for the work you do as opposed to only paying out big once you’ve built a massive team. It takes time to build a strong team. In the meantime you need to be able to make real money on your own. Many people quit MLM businesses because they find after awhile that the compensation plan sucks.

    1. Yes, the compensation plan must be balanced and designed for the part-timer. That being said, no compensation plan is going to reward someone a lot for just doing a little bit.

  5. While compensation plans are important, when joining a new network marketing or party plan direct selling company it’s more important when choosing a company to select one that offers the types of products you are most passionate about.

    In the beginning, you won’t be earning all of the types of compensation available in the compensation plan. It’s not important to understand all of the components of your company’s compensation plan before you join.

    Also, it’s not required that you be able to explain all parts of the compensation plan before you recruit others. As an independent representative, you are a messenger, not the message.

    At Sylvina Consulting, we help to build and launch network marketing and party plan companies. Competition plan design is one of her specialties.

    We like to say that the compensation plan is one of the puzzle pieces that touches other components. Every piece needs to fit with the other pieces. The company’s culture is another piece. And the company’s products or services form yet another.

    1. Personally, I feel that compensation plans are at almost the same level as having products you are passionate about. If you have products or services you love, but the compensation plan is hated, you may go look for a different MLM. That works in the opposite form too….if the compensation is wonderful, but the products or service are terrible, you probably will not last either.

      Both are important, so do your research before joining. It just makes good sene.

      1. You make a good point Greg. Compensation means nothing if the product is not of good quality. But as you said, research about both the product and the plan is essential. I have know people to get into MLM and when asked about the products or the compensation they have absolutely no idea. It makes you look bad and the company too.

        1. Amen to that. One of the first things people will look at when you are talking with them about the business opportunity is how much you know about the company you work with. No one wants to follow someone who is uneducated about the business. It really pays to learn all you can about the company, especially the products and the compensation plans. These are the questions prospects will have.

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