|
|
|
| |
|
Binary Compensation Plan
|
|
| |
Introduction
What is a Binary Compensation Plan?
The Legal Framework
Governing Binary Compensation Plans
The Bottom Line
Endnotes
Binary compensation plans have become the darling of startup multilevel marketing companies. From the distributors' standpoint, binaries have a lot of sizzle. They are relatively simple to understand and offer fast-paced growth opportunities. Companies find them attractive for the same reasons. In addition, several companies utilizing binary plans have recently entered the market and generated eye-popping sales and profits. This, of course, has led to an influx of programs modeled after the highly successful plans.
Unfortunately, not all that glitters is gold. In the last 24 months, the multilevel marketing industry has seen a dramatic increase in regulatory actions. These actions have come in the form of joint efforts between the states and the Federal Trade Commission (notably Project TeleSweep in 1995 and Project Missed Fortune in 1996), as well as numerous individual and joint state actions. Companies utilizing binary compensation plans have been hit particularly hard in these actions. As a result, those companies that have been hit have had stringent limitations placed on their programs.
These limitations oftentimes strike at the heart of their method of doing business and require significant changes to their marketing approach.
So what is the problem with binary plans? Why have states attacked them with so much more vigor than companies utilizing other compensation plans? I have many people ask me if binaries are "legal." The short answer is the proverbial and oh-so-lawyerly "Yes - but" response. Yes, they can be designed to operate legally, but in addition to proper design, companies must properly implement their programs so that they accurately follow the design.
Several relatively new MLMs that entered the industry using binary plans simply failed to adhere to the legal principals governing the MLM industry in implementing their plans. Unfortunately, these companies were quite visible, and consequently there have been highly publicized actions brought against them. Naturally flowing from these actions is a great deal of bad press that has tarnished the image of binary plans, including those that are operating legitimately.
Fortunately, solutions are available, but they require companies to carefully analyze their programs and make some painstaking changes. This article will discuss several key areas of law applicable to the multilevel marketing industry and apply these legal principles to the operation of binary compensation plans. In conducting the analysis, it will focus on a common binary format utilized by companies selling prepaid long distance telephone cards.
Although not all binary plans follow this format, it is a blueprint that has been frequently copied by new companies entering the marketplace. Moreover, since companies selling prepaid telephone cards utilizing this format have been among the hardest hit by regulatory agencies, these plans provide an ideal case study for legal analysis. Bear in mind however, that the principles apply to all binary programs regardless of the product or service that is being offered. The plans used by the prepaid telephone card companies are simply an illustration of problems that can arise in any program.
Return to Contents
What is a Binary Compensation Plan?
A binary plan is a multilevel marketing compensation plan which allows distributors to have only two front-line distributors. If a distributor sponsors more than two distributors, the excess are placed at levels below the sponsoring distributor's front-line.
This "spillover" is one of the most attractive features to new distributors since they need only sponsor two distributors to participate in the compensation plan. The primary limitation is that distributors must "balance" their two downline legs to receive commissions. Balancing legs typically requires that the number of sales from one downline leg constitute no more than a specified percentage of the distributor's total sales.
1. Multiple Business Centers
A unique attribute of binary plans is that distributors are allowed to operate multiple positions, or "business centers," under the umbrella of a single distributorship. A business center is simply a position within one's own marketing organization. When a distributor enrolls, he is automatically assigned his first business center. The distributor may then purchase additional business centers and place the centers at strategic locations within his downline organization.
The Products
Multilevel pre-paid telephone card companies have adopted the binary plan as the program of choice. Until recently, most programs were strikingly similar to one another, right down to the prices charged for the products. Upon each entry into phase one of a program, distributors received an inventory of phone cards with a total of 60 minutes of long distance time for their initial $100.00 payment. Upon cycling into phase two, companies charged $300.00 for phone cards totaling 300 minutes of time. The $1,000.00 charge as a distributor entered phase three netted 960 minutes of phone card time. Recently, companies have begun lowering their prices as they have recognized the necessity of becoming more price competitive.
Return to Contents
The Legal Framework Governing Binary Compensation Plans
Amid the confusion and concern over the legality of binary plans, many people have lost sight of the fact that binary plans operate under the same laws that govern other multilevel compensation plans. There is no law stating that operation of a binary compensation plan constitutes a consumer fraud, or a company using a binary plan is a pyramid. Thus, so long as the implementation of a binary plan complies with the laws governing the operation of multilevel business, it will be legal. However, because of their structure, binary plans have unique challenges to implementing their programs within that legal framework.
Four principal areas of law governing the multilevel marketing industry are:
1) anti-pyramid laws;
2) business opportunity laws;
3) securities laws; and
4) lottery laws.
A comprehensive discussion of each of these areas of law is properly the subject matter of its own article. However, a brief overview will assist us in examining which aspects of a binary plan present the greatest risk of running into legal problems.
1. Anti-Pyramid Laws
Pyramids are illegal in every state as well as under federal law. It would be convenient if these laws were uniform and cohesive; unfortunately, the industry is not so lucky. The application and enforcement of the laws varies from state to state, so the best we can do in the limited space of this article is generalize about what actions will cause a company to violate pyramid laws.
The fundamental question that must be asked in every pyramid analysis is "What must a distributor do to earn a commission?" If a company pays its distributors based on the recruitment of other distributors (headhunting) rather than for legitimate sales to end consumers, it is a pyramid. This rule appears straightforward, but its application can be difficult because most pyramid operators are not so foolish as to blatantly pay a commission based on recruitment of other participants. Rather, they typically disguise the program as a legitimate multilevel marketing business by offering a product or service that the distributors can sell.
The question then becomes, "How do you determine if a company is simply offering a product or service that is merely a facade for a pyramid?" In a nutshell, a legitimate program will incorporate and enforce policies which effectively deter and prevent inventory loading. But on this point, industry and law enforcement officials diverge on what constitutes "inventory loading," and what measures are appropriate to deter it. Ever since the Federal Trade Commission's decision in The Matter of Amway Corporation, Inc.,
industry has taken the position that so long as a company is willing to repurchase unwanted inventory at a rate of at least 90% of the net cost to the distributor for those individuals who elect to cancel their participation in a program, the company is not engaged in inventory loading.
The second design aspect of binary plans which results in an emphasis on recruiting over sales arises from the practice of selling multiple business centers. This format lends itself to the argument that the companies are more interested in head-hunting, or "selling positions" rather than moving products to end consumers. |
| |
|
|
| |
|
