Breakage is defined as the commissions left unpaid each
month compared to the theoretical maximum of the plan. If a compensation plan pays a maximum
of 45% but the actual pay-out is 35% each month, then the breakage would be 10%. On the surface, one
might suggest that breakage is unfair, unethical, or at the very least, misleading, considering a plan that
represents itself as paying 45% but actually pays 35%. Upon further study, however, a plan which uses
breakage wisely will reward the producers much more generously than one without Breakage. It allows
a company that can only afford 35% for commissions expense to pay perhaps 45% or more to the
distributors doing the greatest amount of work. Breakage can be a strong competitive advantage if it is used
correctly and for the right reasons.
Objectives for breakage in a plan
Every piece of a good compensation plan has a
specific purpose or desired result. With breakage, we want
- Keep the total commission
expense at or below a target maximum. If we can only afford to pay 30%,
with breakage we can often afford a plan which can pay out up to 35% to
40% (or more) to the productive distributors.
- Reward specific behaviors
which are most desired by the company such as recruiting, retailing, building
managers and leaders, and retention. (See my Principles of a Successful
- Reward those who exceed
minimum levels of performance more than those who don't.
- Avoid rewarding distributors
who fail to perform consistently.
The benefits of properly using breakage
Breakage is applied by imposing reasonable rules
to qualify for commissions. If a distributor fails to perform at a desired
level, the commission that he would otherwise receive is retained by the
company. For example, if a distributor failed to meet his $100 minimum personal
volume requirement, the company might keep his commissions instead of paying
them to another distributor. This allows the company to pay more to other
distributors who are meeting or exceeding the desired level of production. In
essence, the company withholds commissions for lack of performance and
increases the compensation of those performing well. The advantages are
- Distributors who meet or
exceed expectations are rewarded more generously using commission dollars
that would have been kept by distributors who are performing less.
- The company can afford to pay
more than they could otherwise afford expanding the capacity of the plan
to provide incentives for desired behavior. The company gets more of what it
wants (desired behavior) and the performing distributor gets more of what
he wants compensation and recognition. Breakage can be a win-win deal
for both company and distributor.
There are many ways to implement breakage and
methods vary according to the type of plan used.
Bob, a breakaway manager, fails to meet his
minimum $100 personal purchase for the month. He would have otherwise received
a 25% commission of $200 on his group volume. Rather than paying it to his upline,
Bob's $200 is retained by the company. The company determines that about 1% of
total pay-out is retained from unqualified managers like Bob each month. The
company decides to put this 1% into a bonus pool paid to every distributor who
sponsors at least three people in the month. For each new recruit, the
participants in the bonus pool receive one share of the pool. The company
happily discovers that redirecting the commissions into the pool has resulted
in a 10% increase in recruiting and a 4% increase in sales volume for the
fiscal year from those new recruits. Equally important, over $100,000 has been
paid to those distributors recruiting three or more people in a month making a
number of very happy and committed distributors.
After a recent compensation plan change, the
plan calls for a 4% first generation bonus to managers who achieve $100 in
personal volume and $1,000 in group volume. If a manager achieves $2,000 in
group volume, the commission is increased to 7%. When the 4% is paid instead of
the 7%, the company retains the difference as breakage. The company has
determined that about 25% of their managers achieve the $2,000 GV level, so
they pay out the 7% 1st generation bonus about 25% of the time. The total 1st generation
bonus paid is about 5%. In their old plan, the company paid out a 5% 1st
generation bonus if the manager achieved $1,000 GV. In their new plan (4% -
7%), they pay out the same commission but have found a 50% increase in managers
achieving $2,000 GV each month. They can afford to pay 7% to the higher
producers out of the 1% obtained by lowering the original 5% to 4%.
Strategies for the wise use of breakage
- Don't set performance
thresholds (GV, PV, etc.) too low. Breakage is only available when there
is a gap between poor performance and desired performance. If you need to
set low levels of performance, than offer graduated compensation
opportunities for those who are willing to work harder. Low performance
requirements produce low performance.
- Redirect the breakage into new
incentives when possible. Increasing the 5th generation bonus from 5%
to 6% may make a few leaders happier, but they may not do anything
different to obtain it bigger checks for doing the same old things (no
wonder they are happier!). Putting another 1%, however, into a new 6th
generation bonus (assuming the old plan paid only 5 generations) which is contingent
on adding another 3 personally sponsored breakaway leaders will stimulate
leaders to recruit and build more front line breakaways than before.
- If your plan uses titles or
ranks like stair-step breakaway plans do, then always use "paid
as" titles. Let distributors keep the highest title they achieve, but
always "pay them as" the title they actually qualify for each
month. To continue paying them based on performance that occurred months
ago is wasting incentive dollars which could be applied to the better
producers. It also reduces breakage opportunities.
- For group volume incentives
(front end stair-step), consider rewarding the breakaway manager based on
his actual group volume instead of his title. For example, if a plan calls
for a breakaway manager receiving a maximum 25% on his group, consider
adding a minimum volume level to receive the full 25%. If he falls below
the minimum, then he would earn less, perhaps much less, than 25%. The
difference between actual and maximum would be retained as breakage and
added to other incentives in the plan.
- Never roll up volume from an
unqualified breakaway to his upline. Rolling up commissions (called compression)
is often desired, but avoid rolling up volume which would add to
the group volume of upline managers. This results in creating phantom
qualification volume for upline managers not related to any real
performance and often rewards the poor performer who receives a nice check
and wonders what he did to earn it. The net effect is to eliminate
breakage and waste your incentive dollar.
- Distinguish between active and
qualified when qualification levels are defined. Active usually
refers to personal performance often measured in Personal Volume (PV). Qualified
often goes beyond active adding group volume or sponsoring
requirements. Breakage rules can be defined differently for active and
qualified. For example, the company might keep as breakage some commissions
for unqualified distributors who fail to meet their group volume
requirements, but roll up commissions (no breakage) for those distributors
who are not active.
- Grandfathering: A common
technique when a company changes their compensation plan is to grandfather
existing leaders and distributors into former (often lower) levels of
performance requirements to "soften the blow" of the new plan.
While this may be essential to winning their support for a much needed
plan change, it is often unwise to offer these special arrangements for long
periods of time. Wise companies often make grandfathering a temporary or
transitionary arrangement. Grandfathering often reduces the breakage the
company would otherwise receive due to poor performance. The net effect is
that the producers are compensated less while the poor producers are
Other sources of breakage
- Shallow company downlines:
Companies that sponsor wide and new start up operations find a "windfall"
in the commissions left unpaid because there is no upline to pay them to.
Be careful, however, because as the downline grows and matures, this short
term windfall diminishes.
- High end titles and ranks:
Many companies implement plans where the top end ranks or titles are achieved
so rarely that few, if any, collect the corresponding commission benefits.
These unpaid commissions provide breakage until more and more leaders
achieve these higher titles and collect the commission benefits.
Finding breakage opportunities in your plan
To determine where your breakage opportunities
are, follow these steps:
1. Write down each type of commission your plan
pays and what it's maximum pay-out could be. For example, if your plan pays out
5 generations in the "back end" of 5%, then your maximum generation
bonuses total 25%. Try to identify each individual type of commission such as
1st generation, 2nd generation, group volume bonus, etc.
2. Determine how much each type of commission
actually pays out. Jenkon's Summit V Commissions Module provides standard
reports each month that provide this valuable information.
3. Subtract the actual pay out from the maximum
for each commission type. The difference is your breakage.
Once you know where you already have breakage,
you can also spot areas where you don't. Look at these areas and determine if
you want to have more breakage and modify the plan accordingly.
Breakage can be a significant competitive
advantage if you use it wisely and a terrific tool to reward the producing
distributors more than you could otherwise afford. All plans have some breakage
opportunities which can be tapped to make the plan an even more powerful
motivator. As in most things, moderation is more prudent than extremes when
applying the principles of breakage to your own plan.