The Differential Bonus is a bonus that is most used in the direct selling and party plan environment. It is a highly predictable way to pay the leadership but there are some serious issues that need to be considered.
The Differential Bonus is simple to understand and this simplicity is the reason that many companies adopt it. It is the difference between the percentage that the leader and agent receive on a sale.
Let’s say we have two people, Mary and Anne. Mary is a team leader and Anne is her sales agent. Mary qualifies for 35% and Anne qualifies for 25%. In this scenario, every time Anne makes a sale, she receives a 25% commission. Mary receives 35% - 25% = 10%. 10% is the difference between the two commissions.
This concept extends all the way up the network. Mary’s upline, Joan, qualifies for 45%. She would, therefore, earn 10% on any sales done by Anne or Mary, 20% on any sales made by personally recruited agents and 45% on personal sales.
This is one of the most predictable compensation mechanisms. The team leaders focus on team building and sales training. They will know the approximate sales volumes for each of their agents and as a result, have a highly predictable monthly income. Sales are generally very stable and the company sees a very small fluctuation in the monthly numbers.
Another key benefit is the structure. You can have one or more national leaders. They could each have a regional leader, who in turn have team leaders, who then directly recruit and manage the sales force. In my experience, direct selling companies using this type of structure and these compensation rules are not the fastest growing companies, but they are on average the most stable.
What happens when Anne gets promoted to the same rank as Mary? I’ll tell you, it’s a mess! Anne qualifies for 35% commission, the same as Mary. The difference between Mary’s commission and Anne’s commission is zero. Mary stops earning from Anne. If Mary has several people in her team who get promoted at the same time, her entire income could disappear and the result could be that she leaves the business completely.
To overcome this situation, companies create roadblocks to promotion such as promotion rules that prevent a person getting promoted without replacing themselves in the team, special breakaway commission that continues to pay a percentage of the team volume to the upline leaders and various other creative ideas. The problem is that no matter how you spin it, the last thing that Mary wants is for Anne to get promoted. She will therefore not encourage Anne to recruit or do anything that may help Anne get promoted and threaten her income. As a result, Anne does not develop a team and the company grows very slowly indeed.
If you decide to adopt this compensation mechanism, you will need to treat it far more like a traditional sales business. Promotion should be hard to achieve, and you will need rules and strategies to ensure that your team leaders are not wiped out by automatic downline promotions.