Binary Compensation Plans: The Good, the Bad, and the Ugly

by Dan Jensen, Compensation Plan Specialist

Binary compensation plans were invented in the 1980’s and, over time, gained some notoriety for fast growth leading to periods of popularity in the global Direct Selling / MLM Industry. They have several unique characteristics that set them apart from most other types of compensation plans.

How Binary Plans Work

Lineage

A distributor has only a “left leg” and “right leg” in their binary lineage structure.
The leg with the least amount of volume is considered the “Weak Leg” or “Pay Leg”
When a person already has both the left and right legs started, any additional recruits they enroll are placed by the computer in one of the two legs chosen by the sponsor. This is called “placement” and “spillover”.
- Each company maintains a policy for how the computer decides the next available position for a new recruit which is most commonly the outermost available position like the outside edges of a Christmas tree. Sponsors are often not allowed to choose the exact location their new recruit is placed but they are allowed to choose which leg, right or left. Some binary plans do allow specific “inside leg placement” where the sponsor chooses the precise location where a new recruit is placed. This practice is not recommended as it leads to considerably higher payout cost for the plan and very high levels of plan manipulation by the field.
- The sales pitch often used is that an individual may have one leg built for them through this spillover from their upline while they must build the other leg themselves. However, this is seldom the reality.
- Leaders learn quickly the strategies of building their binary downline structures, always focusing their efforts on adding more recruits into their weakest leg while trying to balance the two legs (which is nearly impossible to achieve for leaders).
Many Binary plans do not use the Binary Lineage for team structure requirements in their Career Path (title) requirements. Instead, the Enrollment Lineage is used for some of the title requirements instead. We recommend not using the Binary Lineage for any Career Path requirements including volume and team structure to avoid rampant manipulation and disproportionate results for different builders.

Payout

Most binary plans pay weekly
Binary Commissions are most often a percentage (often 10%) paid on the volume from the Pay Leg (weakest volume leg), infinitely deep.
Some binary plans pay a fixed bonus amount for one or more volume levels in the Pay Leg (Usana). For example, a binary payout may pay $50 per block of $500 in volume in the Pay Leg. Any volume that does not complete a block of $500 is carried forward to the following week(s) until the next block has been accumulated.
When a commission is paid, the amount of paid volume is deducted from both the Pay Leg and the Strong Leg. The Pay Leg volume starts the next commission cycle (week) at zero while the Strong Leg starts the next cycle at a reduced amount using the rules of Carry Over Volume (see above).
- Example: if a Pay Leg has $500 in volume and a Strong Leg has $2,000 in volume, the Binary payment is paid on the $500 Pay Leg volume. The Pay Leg volume is reset to zero and a matching $500 in volume is removed from the Strong Leg, even though no additional payment is made on that volume.
A minimum “cycle point” is defined where volume in the Pay Leg must reach a minimum threshold before any binary commission is paid to the recipient. If volume in the Pay Leg is below this cycle point, no binary commission is paid until a future commission period (week) when the minimum cycle point is finally achieved. In most plans, that unpaid volume may carry forward (see “Carry Over Volume” below) until the minimum cycle has been achieved in the future.
- Breakage (unpaid commissions) is high from reps that never (or rarely) achieve the minimum cycle volume amount. This breakage is vital to keeping the comp plan payout affordable to the company (see Traps to Avoid below).
All binary plans have “Carry Over Volume” where unpaid volume is carried forward in both legs to the following week as long as the rep remains “active.”
- Unused volume in the Strong Leg is carried over to the following commission period. This unused Carry Over Volume is often seen as a compelling reason for a distributor to stay active in the business with the hope they will eventually be paid on the unused volume of their Strong Leg in a future commission period. This can only happen if they successfully develop their Pay Leg into their Strong Leg some day – a very rare event. In such a situation, the former Strong Leg becomes their Pay Leg and they earn a “windfall” amount on the stored Carry Over Volume from that leg. The hope that their unpaid Strong Leg volume will someday become their weak leg is seen as a reason many continue to work and stay in the business for a while longer.
If the distributor is Inactive during a commission period (usually because they fail to meet a minimum Personal Volume threshold), the volume in both the Pay Leg and the Strong Leg is “flushed” – reset to zero. For many, the fear of loss becomes a strong motivator to stay Active. Some binary companies use this flushing rule as an added incentive to stay on a monthly AutoShip.
Because it is impossible to project the cost of a Binary payout, a payout cap is required to protect the company (see point 4 under Disadvantages to Company).

What does the Binary Plan Reward Me for Doing?

When a builder recruits another person, the “pitch” is often focused on encouraging them to build one leg assuming that the new recruit will receive many recruits through Spillover from the upline into their Strong Leg. “If you join under me, you build one leg and I (and my upline) will build your other leg”. As a result, recruiting is the primary behavior the Binary Plan rewards. Some might suggest it is a “recruiting machine”. Your results may vary…

Advantages to Company

Some Binary Plans find strong recruiting results as builders work to balance their left and right legs, focusing almost entirely on their weak leg.
Some suggest the Binary Plan is a simpler plan to explain and work because it only has two legs to focus on. My experience does not support this due to the many other complications the rep must understand such as placement, Enrollment Lineage, Binary Placement Lineage, Spillover, Carry Over Volume, and Flushing.
A Binary Plan seems to work best when the primary strategic focus is on recruiting reps into the business rather than enrolling customers. It supports a “buying club” culture where anyone who wishes to use the product enrolls as a distributor.
Binary Plans tend to highly favor and promote the use of AutoShip to ensure the regular purchase of products.

Disadvantages to Company

A heavy recruiting emphasis for some can feel too much like an “MLM” and is easily perceived with skepticism. A recruiting culture is often driven mostly by the opportunity and less by the unique benefits of the product and company mission. This rarely creates strong loyalty in the field.
Customer enrollment is often very weak as the sales force focuses on recruiting people into the business (opportunity emphasis over product) like a buying club. Customers cannot take a position in the binary lineage because they are not independent contractors. If they are given a spot in a lineage, regulators usually consider them as reps. As a result, in a binary plan, customers are usually recruited as reps, creating a buying club culture.
Legal challenges in some countries have proven to be more common due to the lack of customer enrollment and heavy emphasis on recruiting. In the United States, attorneys are advising their clients that a minimum of 51% of company revenue must come from known customers who are not distributors. Otherwise, the company may be vulnerable to legal challenge as they grow. A binary plan might make this goal much more difficult to achieve.
Most countries in Asia allow Binary Plans with the exception of Malaysia and some states in India. There may be others we are not aware of.
Due to the infinite depth of pay on the Pay Leg of each distributor, it is impossible to project the cost of a Binary Payout, resulting in a history of Binary Plans paying out too “hot” – paying out more than originally designed as the sales force matures and downline depth increases overall – unless the company utilizes a payout cap, limiting what will actually be paid. When a cap is used, if the Binary payout exceeds the cap, then payouts are reduced to remain within the specified cap.
- This problem often manifests itself only after several years of strong growth. Many binary plans eventually require reducing the Commissionable Volume (CV) (or Bonus Volume / BV) ratio to the rep price in order to reduce the payout to affordable levels or reduce the amount of reduction occurring due to the cap being exceeded. Some plans reduce only the binary payout or only a check match payout when the cap is applied.
The premise behind the Binary Plan is often based on the assumption that “my Strong Leg will be built by my upline through the Spillover from their recruiting”. However, this assumption often proves to be wrong or even deceptive – most people (more than two-thirds in our research) receive little or no spillover from their upline and have to build volume in both legs while only being paid on the volume in one leg. As a result, two people producing the same volume and number of recruits can have very different outcomes in the Binary Plan depending on where they are placed in the lineage. One may receive lots of spillover (recruits who create volume) from their upline building their Strong Leg without any effort of their own. Their entire focus is solely on building their Pay Leg. For another person who receives no Spillover from their upline, they must build BOTH legs – at least two or three times the work to get the same earnings as the first person. Thus, the actual outcomes for people prove to be less predictable and often disappointing based on the excitement felt when they joined. This causes many to leave the business disappointed.
Growth for all Direct Selling companies can be no greater than the growth of leaders the company develops over time. The more leaders a company develops, the faster they grow. In a Binary Plan, everybody has two legs. They receive no commission from their Strong Leg. But where are most of the potential leaders in their downline? Always in their Strong Leg – that’s what makes it a STRONG LEG! As a result, builders are not rewarded through binary payout for developing leaders who are in their Strong Leg. This results in fewer leaders developing and higher failure rates for existing leaders.
- For this reason, most binary plans have a “check match” payout technique that compensates somewhat for this big weakness. The check match payout often rewards them for leaders in both their Strong Leg and their Pay Leg by paying a percentage of the binary earnings of downline people (usually leaders) in both legs.
Retention rates of binary plans have generally proven to be the lowest in the industry. Industry averages for all flavors of direct selling comp plans are considered to hover around 20% over a 12 month time period for recruits. Binary plans rarely exceed 10%. While growth can be significant for a short period of time, once the company peaks and sales begin to decline, the momentum often collapses, and leaders leave quickly. As a result of collapse, companies with binary plans appear to have the highest fatality rate for startup MLM companies.
A series of upline sponsors doing little can benefit greatly from the efforts of one or two superstars in their Pay Leg because they receive infinite depth on the same leg. They, of course, love this. For them, the binary system may become an entitlement system. The company, unfortunately, pays out very large amounts to undeserving people at the expense of others who are more deserving. The saying “what one man receives without working, another works for without receiving” is very applicable here.
When a recruit is placed in a binary lineage structure, it is inevitable that some will have distributors under them in a binary plan due to Spillover. Most binary plans act like buying clubs where both business minded builders join to earn money and customers join as reps to buy at a discount. Most recruits are actually customers (“custo-reps”). Legally, this may invite regulatory challenges in some countries because a customer does not recruit and receives no commission but placing them in the lineage makes it appear that they do. Herbalife, for example, claimed to the FTC that their thousands of “members” were only customers because they did not recruit anyone. The FTC rejected this argument because the customer-members were in the lineage structure and had the opportunity to earn money.
A binary plan creates a system of “shared benefits” where some will benefit from the efforts of others with little or no engagement – an upline recruiter may build your strong leg through spillover. Crucial to this discussion, however, is the disconnect between reward and performance and luck. Sustainable comp plans are based on key principles such as “do this, get that… don’t do this and don’t get that”. “Shared Benefits” appears to weaken this vital principle rewarding some lucky few for doing little or nothing while requiring others to work hard and do it all by themselves to get the same reward. Those who do less get the same reward as those who do much more, creating an unpredictable (and unsustainable) business model and a lower level of competency in the field. Do NOT reward people who do little or nothing. You cannot grow your business on the backs of incompetent people. This concept of “Shared Benefits” appears attractive on the surface but it can be very problematic for the company over time creating an entitlement culture (I deserve it). It can be a “ticking time bomb”.
Another concern is the lack of impact on the earnings of a leader who disengages from the business. The binary payout is based purely on volume – usually not current rank or performance. Thus, a 5-Star-Leader who is paid as a 3-Star-Leader because they fail their downline leader structure requirements will likely see little, if any, drop in their binary income. This will create a serious problem in the future with poor leader engagement levels. Leaders whose incomes continue despite their lower level of performance will eventually perform at lower levels. We see this problem everywhere in our industry. This will create a decline in corporate revenue which will be very difficult to turn around. How can you ignite growth without leaders who are willing to re-engage and work harder when they don’t have to?
Binary plans have been outlawed in several countries.

Advantages to the Distributor

The infinite depth payout promotes tap rooting in the Pay Leg – the reaching down to develop rising stars in that leg. This is excellent but is limited to the Pay Leg.
- Most Binary Plans use other strategies to reward the development of other leaders, even those in your Strong Leg, such as through a Check Match.
Its greatest strength is the motivational reward for recruiting people into your weak leg. The Binary payout mechanism is a powerful recruiting tool.

Disadvantanges to the Distributor

Every binary plan has a minimum “cycle point” where a minimum amount of volume in the Pay Leg (weak leg) is required to get ANY commission. The percentage of new recruits in their first 90 days who get to the minimum cycle point is historically very small. Until they achieve the minimum cycle point, they do not receive any binary commission. As a result, we see a consistent pattern of very low retention rates of new recruits for binary plans worldwide – lower than industry averages by far. In a world of instant gratification, most new reps do not have the patience to wait for their binary volume to get to the minimum cycle point. They bail quickly.
- We could argue that an easy solution would be to not have a minimum cycle point but that would result in the Binary plan paying much too high. The breakage caused by the minimum cycle point is essential to keeping the binary plan payout within budgetary limits.
Rarely will a rep have perfect volume balance between their left and right legs (unless manipulation is occurring). Some reps get lots of Spillover and build only their Pay Leg thereby receiving binary compensation sooner. Others must build BOTH legs but get paid only on their Pay Leg. Thus, the rep who builds both legs often has developed 3 times the volume of another rep who built only their Pay Leg (due to this natural imbalance between legs). How can anyone consider a plan “fair” when it pays the same reward to a person who worked three times harder than another?

Common Traps to Avoid

Most binary plans will eventually pay out more than the company can afford usually due to increasing depth and the amount of placement manipulation occurring. As an example, if a company could pay out 35% of volume from their binary plan, for every order placed the company could pay an average of 3.5 upline sponsors their 10%. In the early growth years, the company may find a low payout of the binary plan while the lineage was shallow to the company and most leaders. But over time, as leader organizations grow deeper, the average number of people paid on any individual order may grow from 3.0 upline sponsors to more than 5.0 upline people (paying out 50%).

In some cases, the company collapses because they avoid the inevitable fixes required to keep the plan within budget. Various sources of breakage must be designed into the plan to keep the plan from paying out too hot. These sources of breakage include:

Minimum cycle point: A rep must achieve a minimum amount of volume in their Pay Leg before any binary commission is received. Common cycle points range from $300 to $700 (USD). The lower the cycle point the less breakage the plan creates causing it to pay out more. Too high of a cycle point causes reps to realize that they have to wait too long before they earn any commission so they leave the business.
Spillover placement must be limited to the “Outside Leg”. Think of the edges of a Christmas Tree – the edges are the Outside Leg. If the exact location a new recruit is placed in is allowed to be chosen by the Sponsor (I’ll place Linda under Sarah), rampant gaming occurs with builders placing new recruits in just the right places needed to keep their legs balanced and reward specific downline friends and family members, significantly reducing the breakage necessary to keep a binary plan affordable. The affordability of a Binary relies heavily on the field’s inability to balance their legs.
Company capped payout: Almost all binary plans have a declared “cap” that limits how much the company will pay out. Common caps are 50% of CV (or BV). Binary plans vary in how these caps are implemented. Some limit the cap only to the binary payout while others first reduce other payout mechanisms such as check match payouts before a binary payout is reduced. Caps must be disclosed to the field and are often looked down upon for obvious reasons – but they are necessary to keep the plan affordable when the business grows large.

Conclusion

Binary Plans are very popular in Asia. Leaders often gravitate to comp plans they can manipulate or “maximize” their income. This manipulation is rampant in Asian markets and eastern European markets. Yet, Binary Plans can create significant growth for many months and in rare cases, even years. A well-designed Binary Plan must consider both its strengths and its weaknesses. Failure to anticipate the weaknesses can result in a collapse of the business. When designed well and with proper policies to avoid manipulation, a Binary Plan can provide sustainable growth as other compensation plans.