Breakage

Breakage is the percentage of commission retained by the company due to poor performance by a network member. If the compensation plan is the carrot then breakage is the proverbial Stick.

Breakage is used by most companies to balance the networks need to make large commissions with the companies need to show a profit.

The unfortunate truth is that only 20% of all network members will put in the required effort. This 20% must be rewarded if your network is to grow. The compensation plan is therefore normally geared to pay this 20% an excellent to exceptional income. To maintain company profitability, qualification criteria are implemented. This ensures that inactive or ineffective network members receive the minimum reward.

How would this work in practice?
Let’s take a company that pays a total commission of 50%.

• 25% Discount
• 10% Differential over-rides
• 6% Royalties
• 6% Bonuses
• 3% Once off bonuses

Example of possible breakage rules:

• Each member must achieve minimum personal sales
• To receive differential over-rides a members must have a certain number of direct recruits
• To receive a royalty a member must have minimum personal group volume
• To receive bonuses a member must have minimum personal and minimum total group volume
• To receive a once off bonus a member must achieve a certain rank

As stated before, only 20% of the network will achieve the big bonuses and within that 20% a small group will achieve all the possible bonuses. This means that a sizable section of the possible commission payout will be retained by the company. It is therefore quite conceivable that a company such as this would pay an average of 40% rather than the full 50%.

This may seem a little harsh at first glance but there are few places in life where you are rewarded for poor performance. Run any business badly and you are unlikely to make money from it. Even as an employee, you can only get away with a certain level of ineptitude before getting your marching orders. Breakage allows the company to reward top people without risking bankruptcy.

Of course, this can lead to a great deal of winging. If you go onto the web (www can sometimes stand for “World Wide Wingers”) you will discover thousands of sites established by people who are disenchanted with the MLM industry. Although there are unfortunately many legitimate problems stemming from unethical business practices, you will find the vast majority of complaints come from people who would like to do nothing while earning something.