Compensation Plan Breakage - Why and How
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
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 obvious:
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
Other sources of breakage
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.