Is Your Compensation Plan Broken?

How do you know if it’s broken?

In this post, I will explain the symptoms of a broken compensation plan, but first, let’s explore what a compensation plan is supposed to do for your company.

Purposes of Compensation Plans

Compensation plans should encourage and reward specific behaviors. These behaviors include:

Personally purchasing your products or services
Selling to customers (non-participants of the income opportunity)
Introducing the income opportunity to others (sponsoring)
Training, supporting, and nurturing others
Becoming a leader
Personally developing leaders
Helping other leaders to develop leaders
Meeting or exceeding minimum activity requirements
Being promoted to a higher rank or title
Meeting or exceeding rank maintenance requirements

Compensation plans should also encourage retention.

The Symptoms

Compensation plans that are broken exhibit one or more of the following conditions:

Insufficient Recruiting

When your compensation plan was designed, you may have established a goal for the percentage of all reps who recruit at least one rep during their careers. If not, set one now. Count the total number of reps enrolled. Then, count the number of these reps who enrolled at least one rep during their career. This is the percentage who have been recruited. If the percentage who have recruited is less than the goal percentage, your compensation plan needs attention, or your goal needs to be revised downward, or perhaps both.

Low Secondary Rank Advancements

Count the total number of reps enrolled. Now, count the number of reps who advanced beyond the first rank. Divide the second number into the first number to obtain the secondary rank advancement percentage. Compare this percentage to your target for this percentage. If the secondary rank advancement percentage is less than your goal, either your compensation plan needs to be adjusted to meet that goal, your goal needs to be lowered, or both.

Unbalanced Higher Rank Advancements

The percentage who advance to each rank in your compensation plan will vary. For each rank in your plan, count the number of reps who have achieved or exceeded this rank. Now, divide each number into itself plus the previous rank’s number. Each result is a rank-specific advancement percentage. Compare this percentage to the other percentages. High percentages are indicative of easy rank promotions, whereas low percentages are symptoms of difficult rank advancements. How difficult or easy do you wish each rank advancement to be? Compare the results with your goals to identify areas in need of adjustment. Also, pay attention to wild swings in the percentages. They shouldn’t be present.

Insufficient Leaders

Every compensation plan should have leadership ranks. The first of these leadership ranks deserves special attention. Count the number of reps who have achieved or exceeded this rank. Divide this number of leaders into the total enrolled to arrive at the leadership percentage. Compare this percentage to your target. If the leadership percentage is less than your goal, your compensation plan may need to be adjusted or perhaps an earlier rank should be treated as the first leadership rank.

Lacking Retail Sales

Some direct selling companies encourage retail sales, while others have low expectations in this area. Choose a specific period of time. For each month, divide sales to retail customers into total sales for this time period. This is your retail sales percentage. If your retail sales percentage is less than your target or if it is trending downward, your compensation plan may need attention.

Inadequate Activity

Your compensation plan likely has a monthly personal sales volume activity requirement or perhaps a requirement that sums personal sales over several consecutive months. As with retail sales, choose a specific period of time. Divide the sum of reps present in your time period into the number of reps who meet your activity requirement. This is the percentage active. If the percentage active is less than your target or if it is trending downward, your compensation plan and/or other areas of your business may need attention.

Conclusion

If your compensation plan is exhibiting one or more of the above symptoms or you need help setting your target percentages, we can help you. For help diagnosing and improving your compensation plan, contact Jay at Sylvina Consulting or call 503.244.8787.