A friend of mine who is starting a direct selling company posed this question to me:
How many downlines in my compensation plan should go toward the company?
The number of downlines that come direct to the company has a big impact on how quickly your compensation plan matures and hits its highest possible payout levels. Too often, however, the founding management of a direct selling company fails to consider the impact of this issue. Regardless of the design of your plan or whether you use a network, one to one or party plan sales marketing program, the number of lines direct to the company is a prime consideration.
Here is the rule: The fewer lines of business that come direct to the company, the faster the payout will reach the maximum possible payout.
The Difference Between an Open-Neck and Closed-Neck Plan
I find it useful to label the options in this situation as employing an “open neck” or “closed neck” plan. If you think about the shape of the plan as being like a bottle versus a jar, then an “open neck” compensation plan is like a big pickle jar with a very wide top. A “closed neck” plan is more like a Coca-Cola bottle with a very narrow top.
Open-Neck: Big Pickle Jar
Closed-Neck: Coca-Cola Bottle
In closed neck plans that have a small and fixed number of founders (often 10 or less), all of the downline volume gets consolidated and squeezed into the narrow opening at the top of the plan thus quickly pushing the few folks who are direct to the company to the very top payout levels of the plan.
Conversely, an “open-necked” plan has many, maybe an unlimited number, lines of business direct to the company. By continuously adding new immature lines of business to the total volume the new line volumes that are only qualified at lower payout levels of the plan dilute the overall impact of the higher payout levels of the older more mature downlines.
So Which Plan is Better?
Some believe that using a closed neck approach will produce top income earners more quickly and therefore be more attractive and inspiring to potential sales people. While it is true that a closed neck plan may create high-income levels more quickly, the downside is that once the limited number of direct to the company “founders” is filled, then no one else ever can climb to such a high position. More importantly, when the downline volume is consolidated under a few founders, it makes the company more vulnerable to disputes with top leaders.
Open neck plans tend to grow top earners more slowly thus extending the full payout maturation of the compensation plan. However, open neck plans often allow the company to use more aggressive corporate recruiting to achieve growth and geographic expansion more quickly.
Making Your Decision
Clearly, there are pros and cons to both approaches. The important thing is that founding company executives need to think about these pros and cons in the beginning when designing the plan and setting the policies that will govern the plan and the company’s relationship with the field leaders. Moreover, it is critically important that those of us who help companies design compensation plans explain the impact and outcomes of these choices to company founders.
Once a company is several years down the road with one approach or the other, it is very difficult to change.
About Alan Luce
Alan Luce is a veteran direct seller and senior management executive at major companies like Tupperware and PartyLite gifts.
He was the founder & CEO of Dorling Kindersley Family Learning, which became a $40 million business in its first 4 years. Today he’s a consultant to more than a hundred direct selling companies, from start-ups to major powers such as Princess House, Avon and Amway.
An expert in compensation plans, startup strategies and sales management programs, Alan sits on the boards of numerous direct sales companies. His many honors include induction into the Direct Selling Association Hall of Fame and the Direct Selling Education Foundation’s Circle of Honor.