Compensation Plans are a very important asset of Direct Selling companies. And regardless the business model you choose, whether it is one to one, Multilevel Marketing (MLM) or Party Plan, the number of lines direct to the company must be a major consideration.
According to Alan Luce, Co-Founder and Managing Principal of Strategic Choice Partners, there are two options “open neck” and “close neck”. An “open neck” compensation plan has a very wide top. And a “closed neck” plan has a narrow top.
“Close neck” plans have a small number of founders. In this kind of plans the few people who are direct to the company can quickly reach the top payout levels. Because all the downline volume is concentrated and squeezed into the narrow opening at the top of the plan.
On the other hand, an “open neck” plan can have an unlimited number of people direct to the company. In this kind of plans the overall impact of the higher payout levels of the older more mature downlines is diluted due to the continuous addition of immature lines of business to the total volume the new line volumes that are only qualified at lower payout levels of the plan.
In other words, the rule is: “The fewer lines of business that come direct to the company, the faster the payout will reach the maximum possible payout.”
But which type of plan is better? The answer is: Both have pros and cons.
A closed neck plan can be more attractive and inspiring to potential sales people, as they can quickly produce top income. However, a limited number of founders also means that then no one else can climb to such a high position. Moreover, having few founders makes the company vulnerable to disputes with top leaders.
In contrast, open neck approaches have an extended full payout maturation of the compensation plans, as top earners grow more slowly. But open neck plans also allow the company to use more aggressive recruiting techniques to achieve quick growth and geographic expansion.
Direct Selling executives need to analyze the pros and cons and the implications to the business.