Compensation plans are confusing. Here's what you should know.

If you've ever purchased a house or a car, traveled to a foreign country, or ridden the subway in Asia; you know what it can feel like to be confused and frustrated. All of these scenarios include jargon, numbers and structures/systems that are foreign and downright complicated. And guess what? Most compensation plans fall into this same category. You read over them and they just don't make sense. You're sure there's a gotcha or two built into the plan. You just know it, but you don't know where or how. In this article, I hope to help you better understand from a higher level the different types of compensation plans, pros and cons of each, and what I personally like best. Let's begin.

Before we begin, please note that every company has to put limits on what they will and can pay out in commissions. Otherwise, they'd quickly go out of business (note: there are many businesses that have gone out of business because they've paid out too much). Most businesses pay out a total commission of 35-50%. This limit appears in how deep a company will/can payout or what benefits they can offer.

What's a unilevel?

With that out of the way, let's talk about the main types of compensation plans--unilevels, binaries, and matrices. Unilevels are basically plans that pay a percentage of the sales volume on each particular level. For example, in a unilevel plan, you might earn 20-30% on your personal sales, but 5% on all volume on every level below that, usually limited to 5-6 levels deep. Now keep in mind, companies may change those percentages per level depending on where they want you to build. They might put higher percentages on your first level and decrease them the deeper the plan goes. For example, you might earn 20% of your personal sales, then 10% on your first level, 8% on your second, 6% on your third, and so on. Or they may pay the higher percentages deeper. They might pay 5% on the first level, 6% on the second, 8% on the third, and 10% on the fourth. Companies will put the higher percentages upfront based on the sales cycle of the products they sell. For example, if the company sells a durable good (home goods, jewelry or apparel for example), they know those customers don't "consume" that good; hence, they won't need more of that durable good the following month. That requires the representative to continue to sell each month to maintain their income, title and benefits. In this case, the company would want to have a higher percentage payout upfront to reward those monthly sales. On the other hand, if the company sells a consumable good (like skincare, supplements, or food for example), the compensation plan could contain lower percentages but go deeper. Why? The sales rep doesn't necessarily have to "sell" every month. Once they get a customer, they need to maintain that customer with the best customer service possible. They can build up a clientele, a customer base who'd purchase every month for years; thus allowing them to focus on team building activities, training their organization, and earning those deeper commissions.

Now, interestingly, unilevel plans are normally designed for companies who want to compete on brand and product, meaning their products are differentiated and efficacious (people will buy them even without becoming a sales rep).

What's a binary?

Binaries are a bit different. Binary itself means two. In other words, in a binary compensation plan, you are required to only have two teams or legs direct to you. Whoever you enroll as your first two people, those become your two teams or two legs. From that point on, your goal is to keep your legs balanced. Most binaries allow you to earn off of your "weak" leg, or the smaller of the two legs. For example, if you have one leg that has 5K in volume and another that has 2.5K in volume, you'd only earn some percentage off the weaker of the two legs. Now, some binaries allow you to earn as much off your strong leg as you have in your weak leg, meaning if you have a weak leg of 3K, you will earn off the 3K in your weak leg and 3K in your strong leg. So here's how this plays out. If I'm an active sales rep with two teams, and I have one leg that's just taken off with tons of people flowing in, I will naturally work more closely with that weaker leg to build it out. I see all the volume in the strong leg and work my tail off in the weak leg because I know whatever effort I put in on the weak leg, it will pay that much more from the strong leg, as well. Now, here's where the magic happens. Part of the recruiting process includes this as a benefit. It might sound like this, "Listen, I have to build under you. I'll be adding people regularly and I need to put them in my weaker leg." It's FOMO. It's get in now before I add others under someone else. Inherently, the companies that have binaries are normally focused on recruiting into the business. Don't get me wrong. Recruiting is required for growth, but if there is no product or selling going on outside of that, if the products don't have any intrinsic value outside of the business opportunity, the recruiting is simply building a house of cards. Unfortunately, many times a binary will focus so heavily on recruiting and the "biz opp" that the product and brand are really a second thought.

What's a matrix?

Let's talk matrices. I haven't seen a true matrix for a long time. They seem a little outdated, but here's the gist. Matrices force you to build out an organization, similar to the binary; however, it allows for 3+ people direct to you. To get paid the commission on a certain level, you need to have that level filled up. For example, a 3X3 forced matrix dictates that you have to have 3 people on your first level, 9 people (3 to each of your first level reps) on your second level, 27 people (3 to each of your second level reps), and so on. If someone drops off or you have a hole in the structure, it requires that you have to fill it to earn the specific payout. Similar to the binary, it drives recruiting--"get in now I have to build under you." These can take the emphasis off products and brand, placing the emphasis more on the structure and recruiting than anything else.

What do I prefer?

When it comes to compensation plans, if you can't tell, I prefer a unilevel for a couple of reasons. First, they're the most honest plan. There are no psychological games or sales pitches of "get in now so I can build you a team." You're not placing people and playing favorites. There are no hard feelings or expectations. You get paid on the volume your team generates. It's as simple as that.

Second, I fundamentally believe direct sales is dead without brand or product. If the focus is too heavy on recruiting and compensation, rather than products and brand, you're simply building a glass castle. Companies and organizations need solid customers that love their products outside of the business opportunity to really have a true direct sales business. Unilevels allow those who want to focus on product to focus on product. Those who want to build a team can, but the companies by and large focus on product and brand. That focus is what creates a true business opportunity.

Third, everyone is rewarded for their personal activities. There are no expectations of leaders having to build under anyone else. You build your customers and team. I'll build mine, but I'll help you know what to do along the way. Your people are your people. You earn off of what you sell and you earn off of building a team. Everyone basically earns off the clientele they service and the business they work to support and build. There aren't a lot of gotchas.

Listen! Asian subways, contracts when purchasing a home, and foreign languages are complicated and can be difficult to understand. Compensation plans don't have to be. If they are, something probably isn't right. Look for simplicity and you'll most likely make the right choice.

Tell me what you think. Am I missing something on binaries? Are unilevels not as great as I think they are? I'd love to hear your perspective, or if you're looking at making a change and want to talk comp plans, want some reassurance, I'm always open to talk.