Whenever a compensation plan will be changed, before the changed plan is announced, we need to understand what the effects will be upon the earnings of all of the representatives.

“Prototyping” is the term that I use to describe the process to calculate the results of a new compensation plan using historical data. The historical data will include multiple sets of one or more genealogies and the transactions upon which compensation will be paid through a different compensation plan.

In addition to calculating compensation over multiple commission periods, prototyping also includes performing calculations using multiple versions of a new compensation plan, each with a similar but unique set of values in its requirements and rewards.

The purposes of prototyping are to identify:

1. the specific people who would earn more (winners)
2. the specific people who would earn less (losers)
3. the counts of winners and losers for each paid-as rank of the plan
4. the percentage of winners and losers for each paid-as rank of the plan
5. the difference in total payout between the historical and new compensation plans
6. whether the compensation goals of the plan change will be met

Prototyping gives you the ability to fine-tune the rules of the new compensation plan to minimize the number of losers, the amount of loss, and the differences in total payout between the new compensation plan and the current compensation plan.

If you don’t take the time to do prototyping, you won’t know the results of the new compensation plan until after it goes live.  Not knowing about the losers or the change in total payout in advance is, in my opinion, malpractice.

Prototyping is one of my recommended compensation plan best practices.

When I do prototyping for a client, I create a spreadsheet into which data can be placed from your MLM software developers.  As each version of compensation plan values is processed, we can compare the results to previous versions.

Until we calculate results using multiple versions, we won’t know which version is the best. I prefer to give each version a letter, “A’ through whatever.  You might discover after running 12 versions, for example, that version “E” was the best one.

What Kind Of Historical Data To Generate

When you compare the results of multiple compensation plans using genealogies and volume transactions from the same commission runs, you will want to compare both detailed data and summary data.

The detailed data should include individual representatives’ ranks, paid-as ranks, earnings by commission type, and total earnings for each of the compensation plans.  The summary data should include counts of winners and losers by paid-as rank and total earnings for each of the compensation plans.

Having this data will give you the information you need to be able to decide which requirements and rewards will be fine-tuned for the next version of compensation plan prototyping.

Prototyping takes time. To reduce the total time required for this activity, be sure to ask your software developers to:

• place the values of the new compensation into a table you can control
• give you the ability to execute commission runs without their assistance
• create a report you can generate without their assistance with the data you need to evaluate the results and to compare the results to those of previous versions of prototyping

Don’t Forget Transitions

How do you transition from one compensation plan to another?  Do you just announce it a few days before it goes into effect and pray?  The answer is “no.”

You absolutely need to have a compensation plan transition strategy.

Help Is Available

Changing or replacing a compensation plan is a complex process, a process of many important steps.

Good news!  You don’t need to take these steps by yourself.  Contact Jay Leisner at Sylvina Consulting for professional, confidential expertise in compensation plan design and improvement.