MLM Compensation Plans: The Different Types of MLM Pay Plans

There are many different types of MLM Compensation Plans.  Every company 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 pay plan you pick should support your short-term and long-term objectives.  For example, if you enjoy retailing and need immediate income, you might want to pick a pay plan with a good retailing commission.  And 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 compensation plan for you.  Only you know what is best for you, so please do your due diligence.

Prior to joining any MLM Company, you should have a thorough understanding of its compensation plan. You should know exactly how much you will get paid when you do certain things.  You should know what you need to do to earn $1,000 per month, $3,000 per month or $10,000 per month.  You should 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?

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.

In the paragraphs below, I’m going to take a few minutes to review the four 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 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 too.  You are just limited to where you can place them in your group.

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 on your first level.

Each one of your distributors can have five 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 help your downline build a downline. You help lots of people earn small commissions, even if they don’t sponsor anyone themselves.

forced matrix plansThat 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.

In the above example, you wouldn’t earn one cent off people in your 8th level, 9th level and so on. Read more about forced matrix plans.

2. Binary Plan: With a Binary MLM Compensation Plan, you only have to build two legs. You have a left leg and a right leg.  In other words, you are limited to two people on your front level.

Once you sponsor your first two people, you are forced to place everyone else under them in your downline.  Basically, you are building a POWER LEG, where you place everyone you sponsor at the bottom most point of either your right leg or left leg.

Depending upon your MLM Company, you normally get paid on your smaller leg.  Every company does it a bit differently though.  Some companies do “cycles” when you hit so much volume in one leg and so much volume in your other leg.  For example, if you have 500 points in one leg and 200 points in your other leg, you would cycle and earn a commission.

The major advantage about this type of plan is that you get to help people build a team. It is a very supportive environment. There is a lot of synergy.  As you place people under other downline members, everyone benefits.  In addition, you probably have people in your upline placing people on your team!

The major disadvantage to this type of plan is that people often get lazy. Most people will only join your team if you put them in your power leg.  In addition, they expect you to place people under them and build a team for them.  Also, with this type of compensation plan there is typically no “retail” aspect to the business.

In recent years, the binary compensation plan has grown in popularity.  Personally, I am NOT a fan of this compensation plan, but I do see its merits.  Read more about binary plans.

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

With a breakaway plan, your successful downline distributors “break away” 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 anymore.  Instead, you get a small percentage of that person’s group sales volume each month as your bonus, normally three to six percent.

breakaway plansFor 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 sales volume. Instead, you get 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 achievement level 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.

4. Uni-level Matrix: With a uni-level Matrix 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 team volume.

unilevel plansHowever, to get paid on levels below that you must achieve a certain pin level 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 really 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). 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.

5. Hybrid Compensation Plan: The hybrid compensation plan is when a company combines one or more of these traditional 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.

Final Thoughts

In summary, all MLM Compensation Plans have pros and cons. None are perfect.  My best advice is to make sure that 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. If it’s confusing to you, it will be confusing to others as well.

If you are a good leader, salesperson and recruiter, you can make money in ANY company. Most companies 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 really believe that your short-term and long-term goals should influence what type of company you join.

What do you think?  What is your favorite type of 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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9 thoughts on “MLM Compensation Plans: The Different Types of MLM Pay Plans

  1. Nicole

    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.

    Reply
    1. chuckholmes Post author

      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.

      Reply
  2. Nicole

    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.

    Reply
    1. chuckholmes Post author

      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.

      Reply
  3. Jay Leisner

    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.

    Reply
    1. Greg Boudonck

      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.

      Reply
      1. chuckholmes Post author

        You need both. I would personally pick products over compensation plans if I had to pick one or another. Without good products nothing else really makes sense.

        Reply
      2. Diamond Grant

        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.

        Reply
        1. Greg Boudonck

          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.

          Reply

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