By Len Clements © 2000
Before we begin this discussion of compressed pay plans, a couple of caveats.First, I want to make it clear that I am NOT addressing any particular company’s plan, but only compressed plans in general.
Secondly, I am not saying, nor have I ever said, that compressed plans are wrong or bad. They are not. In fact, the intent behind them is actually quite noble. The argument I’m presenting here is that they are not as good as they are usually presented to be. Many of the benefits associated with such plans are usually exaggerated, and in some cases wholly fictitious.
I’m just trying to explain the parts that you won’t hear at the opportunity meeting.
Myth #1 – You Can Earn (big number) Dollars With Just (little number) People In Your Downline!
Usually, the pitch goes something like this: if you just get four people who also get four, who all do a $100 monthly product purchase (and you are paid 15% on level one and 45% on level two) you’ll make $800 with just 20 people! Many promoters will even go so far as to call this scenario “Realistic” and “Conservative.” In fact, it’s ridiculous. It’s what my statistics instructor once referred to as “garbage math” (math that’s technically accurate, but extremely misleading). Aren’t we assuming here that there is a 100% activity rate, a zero percent attrition rate, and every single person that you enroll enrolls four others who buy $100 in product every month? What percent of all those you enroll do you think will enroll four others? Let’s be optimistic and say 10%. So, you’d have to actually enroll forty people to find four who’ll enroll four. Will those 16 on level two stay with no downline? Sure, a very few might stay just for the products, but certainly not most – unless you have more people under them? Right? Downlines are not pyramid shaped, they’re diamond shaped. The widest point tends to be in the middle, not the base. So, where is the bottom half of the diamond in this scenario?
Bottom line: In “real life” you’ll need a LOT more people that 20 to achieve this $800 income on a regular basis.
Myth #2 – If you can make $1,000 with just 25 people, then you can make $10,000 with just 250 people.
Many compressed plan promoters love to show us pay out examples where 80% of your downline volume falls on the big 40-50% second level. A ratio of over $40 per distributor can be earned. But then they’ll imply (and sometimes directly state) that this huge ratio will continue in proportion to your downline growth (as in the hypothetical example above). This is naive at best, and fraudulent at worst. Sure you’ll earn $40 per distributor when the vast majority of your 15-30 active distributors are on the 40-50% level (usually the second level). But what happens when you have 200 distributors and maybe 20% of them are on the big level, and some are now out of your pay range and earning you nothing? What happens when you have 1,000 distributors and about 5% are on the big pay out level and 80% of your downline is below the third level? Now you’d likely be earning less than $5.00 per distributor.
The larger your downline gets, the less you’ll get paid on each person – and the rate your earnings ratio decreases will be far greater than in a non-compressed plan. It will be very exciting at first if your checks rockets up to a couple hundred dollars. But, soon (much sooner than in a deeper paying plan) the rate of increase will drop to a snail’s pace. Your group could double and your check might go up only 5% because your downline growth is now primarily out of the pay range of the plan. The real unfortunate part is, most compressed plans cause you to hit this “income wall” well before you reach the income level that you could comfortably live off of.
Bottom line: You will not maintain the large earnings per distributor ratio that’s displayed in many compressed plan income scenarios.
Myth #3 – You have a better opportunity to earn $5,000 to $10,000 per month in a compressed plan.
Notice how compressed plan promoters always focus on scenarios that will create a few hundred dollars per month. Why do they usually show pay out comparisons with other MLM pay plans based on only three level scenarios? Why do almost all of the income testimonials deal with how quickly people made money, but almost always amounts less than $1,000 per month? Because that’s what they’re best at – generating a few hundred dollars faster than their competition. It’s the only comparison they can win at. However, 86% of all MLMers want to earn a living at this business*. We want to sleep in in the morning, not have to commute, take a day off whenever we want to, travel more, spend more time with our families – and $800 per month ain’t gonna’ do it! In fact, those 86% want, on average, about $6,000 to $10,000 per month*. So, why don’t compressed plan proponents ever show us what our downline would have to look like to make the amount of money we actually want!
Because you’d have to have an absurd number of people across your first and second level to fit enough sales volume on those levels to achieve these kinds of incomes, that’s why.
What 86% of MLMers are really looking for (although most don’t know it) is a middle weighted compensation plan. One where, yes, it takes a little longer to get into profit in the beginning and makes it a lot tougher to become a millionaire, but optimized the opportunity to earn a few thousand dollars per month.
Bottom line: In a compressed plan it’s easier to make a car payment, but it’s harder to make a living!
Myth #4 – Compressed pay plans are plans for the “little guy,” not for “heavy hitters.”
The “Little guy” has just as big a dream as the “Heavy Hitter.” The vast majority of “part timers” also want to become financially independent (make a comfortable living) with their MLM opportunity. Unfortunately, to earn even a modest $6,000 to $10,000 per month (that’s not even in the “heavy hitter” ball park), you’ll have to be a mega-recruiter! Do the math yourself. Create $10,000 income earning scenarios and look at the monumental width that must occur in your first two levels to achieve it. “Little guys” (part timers, average folk, what ever term you wish to use) are people who recruit one, two, maybe three people, right? Okay, just to be fair, let’s go ahead and assume everyone does recruit four. So, you have 4, 16, 64, 256, 1,024… and you’d be paid on the 4 and the 16 – that’s it. No, no “infinity” bonus because you’re a “little guy,” remember? In most plans you’ll need to sponsor around 6 to 15 people to really take full advantage of that. Now, create scenarios where everyone recruits 1 to 4 people and make it pay even $2,160 per month (the average U.S. income). It’s impossible!
One popular compressed plan program claims you can make “$5,000 with just 120 people!” They used to pay 15% on level one, 45% on two, and a 15% “infinity” bonus starting on level three (they’ve recently changed their plan to add more depth to the pay out). Well, let’s assume you sponsor ten who sponsor ten and throw in ten more on level three. That’s 10 people on level one, 100 on the jackpot level, and ten on level three. Let’s continue this level of absurdity and assume a 100% activity rate (everyone does $100) and zero attrition. Not only would you have to be a mega-recruiter yourself, but you’ll have to recruit ten others who can recruit ten, and… you still wouldn’t make $5,000!
Bottom line: It’s not a plan for the little guy, it’s a plan for those with little goals.
*MarketWave survey, 1990-2000.
Myth #5 – There are people making over $20,000 per month.
I only know of three people who are working a compressed pay plan who have publicized earnings of over even $10,000 per month. One, however, routinely photocopied his checks and when his income allegedly went from $10,000 one month to over $20,000 the next, the check number only increased by 12. There are a myriad explanations for this – not of them are good. The other guy is actually buying product each month to qualify multiple positions and is citing his combined income from all of those positions. I asked the third to recalculate her income to see how much more money she could have earned if the plan was more middle weighted. She refused.
Actually, the strategy of qualifying multiple positions makes perfect sense considering it’s the only way to access enough sales volume to make this amount of money. Of course, for every extra position you create, you screw your upline by building subsequent volume one level further away from them. The income increase you receive from the extra positions does not come from the company, it comes out of your upline’s pocket. So, if you can take money away from your upline by “double dipping” what’s stopping your downline from doing the same thing to you? They only way you can benefit from the ability to qualify multiple positions is if you do it but no one in your downline does. The option of you, or your spouse, qualifying extra positions is a feature common to compressed pay plans. The benefit is illusionary. It’s smoke and mirrors.
Bottom line: I publicly challenged anyone working a compressed plan to show me downline data proving income of more than $20,000 per month from a single qualified position. Many claimed they did (or knew of someone who did), but not a single one has ever provided easily obtainable verification.
Myth #6 – Retention rates are exceptionally high (or, attrition rates are exceptionally low).
When anyone gives you an exact number here, they are flat out guessing. To me, the “retention” of a distributor means he/she is still actively working the business to some extent. When a distributor stops working the business, or realizes they are going to have a tougher time earning a good living with a compressed plan and they change their building efforts to another opportunity, then they would not be “retained,” agreed? But wait. If they knew they could keep making a token $100 purchase and continue to earn a $150 check, why would they not? Itâ€™s essentially free money. So, even though they are totally focused on building another program, they would still be counting towards “retention” figures. I know someone personally who earns about $300 per month in a compressed pay plan – and is using that money to build a downline in a competing (non-compressed) MLM company.
Also, notice how much key information is usually missing from these claims. Is a “two percent attrition rate“ good? Well, is it 2% over the life of the company – or 2% yesterday? If a distributor claims they have a 60% retention rate, is that good? If they’ve been working the business for more than a year and someone is considered inactive after just one month of inactivity, then yes it is. If they’ve only been working for four months and inactive people are dropped after three months of no activity, then no, it’s actually quite poor. Heck, if you’re not considered inactive until you don’t renew your distributorship a year later, the first eleven months you are in such a program you could rightfully claim a 100% downline retention – even if every single distributor has quit!
Bottom line: If you torture the data long enough, you can make it say anything.
Myth #7 – The higher than average retention rate will increase your income.
Although there is no solid evidence that there actually is any less attrition in compressed plans, common sense would dictate that there certainly would be some. If more people get into profit quicker, then more people will be “locked in“ and continue to make a token product order to maintain that small income. While this is true, we must again revisit the issue of where that volume is in your downline. In other words, does it really make any difference if the sales volume goes away because the person quit, or they don’t quit and the sales volume occurs outside of the limited pay range of the plan? In a deeper paying plan you may have higher attrition, but youâ€™ll eventually get paid on far more of the people who do stay.
There’s also a legal consideration here. To suggest that more people will stick because their quota is smaller than their commission check is tantamount to saying they don’t really want the product, they’re just buying it as a formality. Such practice has been the catalyst to numerous legal actions by state and federal regulators (as it could be indicative of an illegal pyramid). If the compressed plan promoter were to then suggest that, in fact, that’s not the reason for the reduced attrition, but rather it’s due to some other more legitimate reason, such as an affinity towards their great products, then that’s fine. But then, that would mean that their reduced attrition had nothing to do with the compressed plan. They can’t have it both ways.
Bottom line: The reduced attrition (if any) vs. the limited range of the pay plan is usually, at best, a wash.
Myth #8 – You can still earn in great depth due to “Infinity” and “generational” bonuses.
Infinity bonuses pay down to the first level where there’s a distributor who is also qualified for the bonus. At that point it is totally or partially blocked. When someone in your downline reaches the equivalent infinity bonus rank as you, your infinity bonus stops with the person directly above them.
Mr. Webster and I have a very different definition of “infinity.“
While infinity bonuses are not wrong or bad, and they do enhance a pay plan to some degree, it is wholly illusionary that it pays even close to infinite. In fact, it is quite simple to prove mathematically that most infinity bonuses are designed to add, on average, only one, maybe two levels to the plan – that’s all! Think about it. Most MLM companies are paying out about 40-50% on wholesale (not BVs or CVs). To pay more than 60% is risky, and more than 70% is a death wish (unless, of course, you have obscenely overpriced products or an extremely low BV to wholesale ratio). Well, most compressed plans are already paying out 50-65% on the first two levels. Let’s factor in some breakage and say it’s 50%. Now, add a third level of 10% and the company is paying 60%. Add a fourth level of 10% and you’re probably looking at a Chapter 7 bankruptcy. Some promoters of these plans will tell you that the 10% on the third level pays all the way down to infinity, thus creating the illusion that the pay out is 10%, 45%, 10%, 10%, 10%, 10%… and so on. It does not. This is classic smoke and mirrors.
By the way, this is not theory. I’ve seen hard data that shows that over 80% of the total “infinity“ bonus is derived from just the first one or two levels the bonus is paid on.
Ask the next compressed plan promoter if you can get paid on someone 200 levels deep. When they say Yes (because they have an “infinity“ bonus), ask them what the odds are that the person all the way at the top of that leg would not also be qualified for the maximum infinity bonus with a 199 level deep downline! Or, that no one among those 199 people would also be qualified and block the bonus.
The reality is, the larger and deeper your downline grows, the more people you are going to have on your first few levels who are also going to have larger, deeper downlines. Doesn’t that make sense? So, as you’re downline gets bigger so does the layer of people right below you who are also getting the infinity bonus and blocking it. The more you need the infinity bonus, the less of it you quality for. When you fully qualify for all of it is in the early stages when you least need it!
I’ve heard several compressed plan promoters claim that, in fact, they are paid “twenty levels deep“ or “I’m earning on my 30th level.“ Notice, they never tell us what they are earning on those levels. One honest gentleman who was making such a claim admitted to me that his 18th (bottom) level income was .03% (that’s three one hundredths of one percent) of his 18th level volume – which earned him 70 cents. So, in fact, his claim that he was “getting paid“ 18 levels deep in a compressed plan was a true statement.
Unfortunately, I don’t have the space to write a primer on“generational“ bonuses. But those who are familiar with this concept will understand (I hope) that the same blocking phenomenon will occur here as well. The larger your downline grows, the more likely you will develop “Directors“ or “Executives“ in the levels closer to you. Eventually, as your downline becomes larger and you really need to get paid deeper, the three or four “generations“ you are paid this usually small percentage on (1-4%) will also compress up to where, someday, they could simply become three to four levels.
Bottom line: Again, infinity and generational bonuses are good. I’m not saying they are not. They just don’t add nearly as many levels to the pay out in reality as they do in theory.
Myth #9 – Compressed pay plans are a new, or “revolutionary” concept.
The first pay plan I know of where the majority of the pay out fell within the first three levels was called Personal Wealth Systems. It paid three levels (about 6%, 6%, and 47%). It also launched in 1985. They eventually switched to a six level plan.
The next one I’m aware of was called Legacy Lifeline. They launched in 1991. It took them less than three months to change to a six level plan.
Next was Outback Secrets. They switched to a five level plan with infinity bonus after about a year.
I was involved as a distributor for a company called Beverly Hills International. They started out paying 40% on level three. They ended by cutting that in half and spreading the balance in depth.
Yes, this has been tried before. And in every case one of two things MUST happen – the company has strong growth, or they don’t. If they don’t, that’s not good. I know for a fact that in three of the above examples the challenge was specifically stated as a lack of ability to “attract leaders“ (why would those who feel they can build large, deep downlines want to build one in a compressed plan?). Now, if there is prolonged, strong growth, then inevitably leaders develop with large downlines. And, what do you think those leaders do when they look at their huge downline and realize that they’d be earning two or three times as much if it were in a deeper paying plan? That’s right. They either demand a restructuring of the plan, or they leave. And that’s exactly what history has shown us. It’s not just my theory, folks. Those few companies employing a compressed plan who have achieved sizable organizations are all struggling today to maintain their organizations. There are no exceptions.
Bottom line: The past can tell the future.
Myth #10 – Compressed pay plans are “Wave 4” plans.
The term “Wave 4“ was coined by Richard Poe in his best selling book of the same name (published by Prima). In an interview that appeared in the May 1994 edition if Upline Poe was quoted as saying “I think the next frontier of network marketing involves the compensation plans, where everyone can realize that comp plans can evolve… that there can be more money available to rank-and-file distributors who are doing a moderate amount of work.“ Many assumed Poe was referring to compressed plans and began touting such plans as “Wave 4“ as advocated by the famous MLM author Richard Poe. In fact, Poe was not talking about compressed plans, but was discussing the shifting of pay outs from the back end more towards the middle!
One page 135 of Wave 4 Poe specifically addressed his feelings about compressed plans. Here he discussed the benefits of more money up front, but also addressed the “equally obvious“disadvantages.
At the bottom of page 135 Poe goes right to “The Wave 4 Myth.“That being, that his earlier comments in Upline were referring to compressed plans.
One page 136, under the section titled “A Delicate Balance“ he clearly describes “Wave 4“ plans as providing “a delicate balance between front-end and back-end commissions.“
Bottom line: A “Wave 4“ plan is a middle weighted plan, not a compressed (front-weighted) plan.
In conclusion: When you create a plan that essentially says “If you can’t build a big downline, then here’s a plan for you,“ you create a downline full of people who can’t build big downlines (or, at least think they can’t). In my opinion, it’s MLM welfare. It rewards mediocrity and penalizes excellence. Rather than lowering the bar, maybe we should all get back to teaching our people to jump higher.
[The following contains excerpt from the book Inside Network Marketing (also published by Prima) and an article that appeared in issue #6 of the MarketWave Alert Letter]
COMPRESSED COMPENSATION PLAN DEBATE RAGES ON.
In September of 1998 I proposed an idea to Corey Augenstein, publisher of Network Marketing Today magazine (previously MLM Insider). I suggested that he publish a series of debate articles with two industry authorities taking opposing sides to an MLM related controversial issue. While there were myriad topics to choose from, we decided to take on the issue of compressed comp plans (those that pay the bulk of their pay out on the first two levels, usually 10-15% and 30-45% respectively). I nominated what I thought would be a worthy opponent primarily based on his success in such a plan, and his professional demeanor, at least up to that point. I took the “con” side, my opponent took the “pro” side. We each wrote a 2,400 word article presenting our case, then we each were allotted 1,200 words to rebut the other’s presentation. I wrote an opening article which dealt mainly on the manner in which many were promoting the plan, rather than attacking the plan itself. Unfortunately, rather than debate the merits of the compressed plan, my opponent instead chose to debate the merits of me.
I have made several attempts to publicly debate the issues I raised in the article, including three hours of air time on my radio show, and every time I was met with the same frustrating challenge – my opponent seldom addressed any of the specific information in my article but instead always attempted to diminish the credibility of the source of the information (a common debate tactic usually employed when one’s argument is weak).
To that end, what some compressed plan proponents have done recently is take my “con” article completely out of context and have disseminated it (mainly via the internet) as a stand alone article. Then, they will attack the article as a biased propaganda piece allegedly written with malicious intent. As a result, I’ve been attacked for “focusing only on the negative” and for not presenting a “fair and balanced” presentation. Most seem to appreciate the fact that I dealt mainly with the hype that surrounds this plan, but then they often ask why I just picked on compressed plans when such hype is rampant in all types of plans. Of course, these folks are not being told that they are reading the con side of a debate article specifically focusing on this particular type of plan.
For the record, I do not believe, nor have I ever stated, that compressed plans are wrong or bad, or should be avoided. Yes, they absolutely do offer certain advantages that other plans don’t. There are pros and cons to every type of plan. My only challenge with this type of plan always boils down to one single issue. That being…
Based on a survey I’ve taken of over 6,000 active MLMers (from 1990 to present) the vast majority of distributors want to eventually quit their jobs and earn enough from their MLM business to comfortably live off of. The survey question read “What is the minimum you would have to earn on a monthly basis for you to consider yourself successful?” Six percent checked $86,000 (one million per year). Which means 6% misunderstood the question (I suspect most would still consider themselves successful if they only made $25,000 per month). Another 8% said they only wanted a “supplemental income” of $200-$300 per month. The remaining 86% were just looking to make a nice living, which they quantified as $6,000 to $10,000 per month (the mean response).
So, clearly, the vast majority of MLMers are looking for a more balanced, middle weighted plan (although most of them may not know it). A compressed plan would be most advantageous to the 8% looking to make a few extra hundred bucks. However, to suggest, as almost every compressed plan promoter I’ve ever seen has done in some form or another, that you not only have a greater opportunity to get into profit (more money up front), but you have an equal or better chance at $6,000-$10,000, and “without penalizing the heavy hitter” who seeks wealth, is simply not a true statement. If you add to the front end of a comp plan, you absolutely must take something away from the rest of the plan. That’s just common sense.
Imagine you have a pitcher that contains 100 ounces of water (representing one dollar). You also have three cups in front of you that represent the front, middle, and back end of the compensation plan. The company can afford to pay out, let’s say, 60%. So imagine levels one and two are the front cup, levels three and four are the middle cup, and five and six are the back cup, and each level pays 10%. So, you pour 60 ounces of water from the pitcher into the three cups. Let’s say you pour 20 ounces into each cup (so youâ€™re essentially paying 10% down six levels). Now, tell me how you are going to add more water to the front cup without removing some from one or both of the other two cups? Most compressed plans pour about 40 ounces of water into the front cup (about two-thirds of the pay out falls on the first two levels).
The point being, a plan cannot be all things to all people. If you add to the first two levels (heavily weighting the front of the plan), you absolutely must make it harder (I never said impossible) to earn a middle range income or create wealth. Sure, some have succeeded in earning 10K monthly incomes in compressed plans – and it took more work, more recruitment, and more sales volume to achieve their 10K monthly income by working a compressed plan as opposed to a middle weighted plan.
The standard rebuttal (when, God forbid, someone actually focuses on the point) is that there is increased sales volume due to a lower attrition rate, which is due to more people getting into profit quicker. While the argument has substance, no verifiable data has ever been produced to substantiate the claim. I’ll concede that there is certainly some amount of reduced attrition, however, at the point in your downline’s progression where you would first begin to earn a living in a middle weighted plan, the amount of sales volume you’re losing in a compressed plan (because it’s falling out of the pay range of the plan) would more than outweigh any reasonable estimate of increased volume due to lower attrition. Furthermore, to suggest there are a significant number of people who are making token purchases simply to qualify for an even greater income opens up some serious pyramid issues. If they are staying active because they love the products, that’s great. But it also means the reduced attrition has nothing to do with the compressed plan.
As I predicted, virtually every company using a compressed plan has adjusting it to shift more of the pay out towards the middle and back of the plan. I believe we will continue to see a migration back to a more balanced, middle weighted approach.
In the mean time, I will continue to challenge not the compressed plan structure itself, but those who present it as being advantageous to the 86% of us who want to earn $6,000 to $10,000 or more a month. Yes, some are. Again, I didn’t say it was impossible, just harder. If there’s any water in the middle and back cup, then there will be exceptional situations where such, or even greater incomes will be earned. However, I challenge anyone in a compressed plan earning $10,000 or more per month to calculate their income if the pay out were evenly spread down seven levels and not come out thousands of dollars ahead.
Compressed plans are fine, and even advantageous for certain people. But, like any type of plan, it can’t serve every income goal. One size does not fit all.
For so many years we’ve had to deal with plans that made a few people obscenely rich at the expense of everyone else. Yes, that it true. The compressed plan is an overreaction to the mega-quota-laden, back-end heavy break away plan. It’s an extreme over-compensation. Eventually, as I said, I predict we’ll see an adjustment back towards the middle. Pay plan designers will start shifting a portion of that huge second level back down to the lower levels. Still not the best plan for the “heavy hitter,“ nor as good as it was for the “little guy“ who only wants to make a car payment. But, the man or woman who wants to make a nice, comfortable $10,000 per month will be SO glad they did!