Amway sets up a series of reward mechanism to encourage and recognize the achievement of sales representatives. Successful sales representatives who would like to acquire badge, medal, bonus and other rewards need to obey “Amway Distributor Business Rules”. In addition, Amway has the right to decide if sales representatives are qualified for theses rewards.
Before explaining the pin and bonus system, we have to understand its framework and the calculation concept of Amway, and then we can understand its content, meaning and spirit. (Amway (China) official website，2012)
4.5.1 BASIC CONCEPT OF COMMISSION CALCULATION
Each sales representative’s bonus revenue depends on his Point Volume (PV), and PV depends on monthly Business Volume (BV). So Amway’s products have these two volumes.
Point Volume（PV）
1. PV represents the standard of volume one must strive to reach.
2. This amount decides the monthly percent from 3% to 21% of volumes bonus.
Business Volume（BV）
1. BV is the price prior to any mark-up price, including value-added business tax and retail revenue.
2. BV is the calculated base for the commission.
3. BV is adjusted by inflation rate, so when product price rises with inflation, sales representatives’ bonus will increase with the same amount of products he sold.
The ratio of BV and PV is decided by Amway according to the change of factor such as inflation rate, living index, and market demand. Any change of the ratio of BV and PV will be announced in Amway’s journals, newsletters, distributor pricing list, business brochure, and so forth.
Table 4-1Amway’s Volumes and Bonus (Monthly)
BV PV Sales Bonus
320,000 10,000 21% of BV
224,000 7,000 18%
128,000 4,000 15%
76,800 2,400 12%
38,400 1,200 9%
19,200 600 6%
6,400 200 3%
Resource: Amway (China) Official Website and Organized by This Research
4.5.2 METHOD FOR SALES VOLUMES CALCULATION
Volume bonus is not only calculated by a distributor’s own BV but also include the BV which the distributor he sponsored gain. To be simple, the following example is based on the assumptions:
i. If the ratio BAV and PV now is 32:1, for instance, if BV is 6400, and then PV are 200.
ii. If the recommendation price and the BV are the same. In fact, the recommendation price is higher than the BV, so the real revenue shall be higher than the calculated outcome.
Example:
If you sponsor 7 distributors, each one’s PV is 200 (6,400 BV), and you also sell 200PV product monthly, and then your income is calculated as follows:
Because the total team PV is 1,600, the total team BV is 51,200.
NT$
9% volume bonus of 1,600PV （51,200BV×9%） 4,608 Volume bonus you shall pay: (6,400BV×3%×7) - 1,344 Volume bonus you shall keep: 3,264
Your retail revenue：(6,400×30%) + 1,920 Your monthly income：5,184
∴Your annual income: (5,184×12) 62,208
4.5.3 AMWAY’S PIN TITLE AND COMMISSION SYSTEM
Amway establishes many encouraging rules annually according to the different local markets to encourage local distributors to reach specific goals and help them develop widely and deeply.
4.5.3.1 THE FEATURES OF AMWAY (CHINA)’S BONUS SYSTEM
There are three concepts of bonus calculation in the direct-selling industry: accumulation, set to zero and separation.
To be specific, there are three types of accumulation mechanism:
1. Calculation with rate rank. “Perfect”, an American direct-selling firm adopts this system, and calculates volumes referring to rate table. The method has nothing to do with time. As long as a sponsor sponsors a new distributor, the sponsor can get the stable and same bonus as the new comers no matter how long the new comer achieves the highest rate.
2. Calculation with stable rate without ranking. “Makelifebetter”, another American direct-selling firm adopts this system, giving sponsors the highest commission from new comers and also is not related to time. When sponsors recommend new comers, they already reach 1000PV, so when new comers achieve personal 1000PV, sponsors’ income will be USD$200, and new comers can not get the discounts from their own 1000PV.
*PV is the rate for accounting sales revenue. Take Amway as an example, if the PV of Amway now is 1:6, then monthly USD$60,000 sales revenue equals 10,000PV.
3. Calculation with unstable rate. “Fu Long”, a Chinese direct-selling firm adopts this system The highest accumulated rate is 12%, and what a sponsor get depends on the rate difference between the sponsor’s rate and the new comer’s rate. Because both of the rate are changeable, the sponsor’s income will be different. If a new comer reaches 12% at the month he participates, he can get the 12% discount; on the other hand, his sponsor only can gain the difference between the 12% and the sponsor’s own rate. If the sponsor also
achieves 12%, then his rate difference is 0%.
There is a common point among the three types: Reach the top rate once is the most beneficial.
As to the system of setting to zero and separation, from the sales revenue perspective, Amway’s team 10,000PV is RMB60,000, but Nu Skin’s RMB8,500 net profit equals RMB10,000 sales revenue. The difference is that Amway’s volumes will not be separated until reach 30%;
however, in Nu Skin, as long as someone applies for QSR, his volumes will be separated from his uplines. Hence, although the pressure in Nu Skin is only 1/10 of Amway, but volumes in Nu Skin is harder to reach. This can be proved by the following fact: Most of Amway’s distributors stock goods to strive for commission and pin title and gain more bonus; however, distributors in Nu Skin do this to maintain their qualification. If a distributor can not achieve personal 10,000PV in Amway, he only loses the commission, and there is no need to stock. Nevertheless, a distributor will be terminated his distributorship if he can not reach 8,500PV without enough stock.
In the set-to-zero system, distributors have to cover the loss volumes due to team separation to get leader commission. As Amway’s rule, if a team separates, the team has to reach RMB37,000 sales revenue to get the part of leader commission. If the team wants to get total 4% bonus, each individual teams has to reach RMB60,000 sales revenue or develop another 21% team. Nu Skin’s SR has to quickly cover 8,500 volumes after his downline QSR separates, or his distributorship will be terminated. After separation, the team get leader commission. How much bonus upline leaders can gain depend on the volumes base of the separated team, rate multiple of each generation and number of generations. Thus, the key is the real bonus rate and the organization revenue.
As to the leader commission, some firms such as Amway and Nu Skin depend on real PV values;
some firms such as Sunrider extract fixed amount from revenue and divide the sum of total PV of all distributors, getting the real amount per point. The real income of a distributor is the amount of the real amount multiplies the point.
In theory, the base is higher, the generation is deeper, the rate will be bigger and the leader income is higher. In other words, the organization is bigger, the whole revenue is greater. However, whatever the commission system is, most of sales teams have less than 20 members, and few people
can get the leader commission to reach the top of pyramid.
The history of direct-selling industry follows the history of imitation and restructure of Amway’s commission system such as mix system, hierarchical system or dual system. Those systems are not dramatically different, so researching on Amway’s commission system is representation.
4.5.3.2SUCCESSFUL REASONS FOR AMWAY (CHINA)’S COMMISSION SYSTEM
1. Incentive Goal from Low to High
First, Amway’s required sales revenue is from low to high and from easy to hard to avoid new comers loss confidence and to make experienced sales representatives have higher goal and reach higher revenue. Second, Amway set s series of targets and levels of career planning to make distributors know what their business path. The income for each target is definite. Third, Amway’s commission incentive system has two features: one is unlimited, namely, distributors can achieve whatever target they want without any above and below limitation. The other is the commission can be inherited, and will not automatically disappear after retire or death. Both of the two characteristics are unique and appealing to distributors.
2. Match with Maslow's hierarchy of needs
Amway not only satisfies distributors’ desire for income but also supports their business and spirit. Amway gradually leads distributors from low demand to high demand; meanwhile, Amway gradually raises distributors’ loyalty to business and make them involve in Amway’s culture.
Finally distributors and Amway have the coherent value and become a stable sales team.
3. Lead to Achievement
First, instead of adopting the traditional commission method, basic salary plus float salary plus welfare salary, Amway only takes “float salary plus incentive salary. Amway holds the belief of cooperation but not employment to offer a fair chance for working hard people without stable salary.
After succeed, the entrepreneur can enjoy the benefit. They are passionate and aggressive for their business and realistic as well.
Second, power need means a desire or drive for impact and control others. Amway hope each one to become qualified and respectful leaders through establishing a design of group commission and leader commission. Amway guides distributors to have right of leadership. Because the relation between distributors and their downlines is loosen, distributors need knowledge and personal charm to lead an outstanding sales team. In the meantime, their power need can be realized.
Finally, affinity needs is looking for other’s love and acceptance, and those who want to be loved have to be cooperative but not competitive, sensitive to interpersonal skills, like to communicate and understand, and maintain harmonious ties with social relation. Those qualifications are required for Amway’s distributors because they can realize personal goals at work as well as develop relation network.
4. Promise Business’s Image and Unite Individuals
First, Amway totally respect individual personality of distributors, for instance, they can design their own operate method and goal under Amway’s management rules. Chaos happen if what an formal organization asks is conflict with the experience background of individuals. That will cause individuals’ short-term conflict of behavior and thoughts and not confident of their future. However, in the long term these conflicts will disappear because individuals can not change anything even if searching for other jobs.
Second, the level of rank imposes distributors’ pressure. Nevertheless, the relations among Amway’s distributors are help and cooperate with each other with respectful pin title instead of stick ranking because distributors can succeed only through helping others to reach success. Thus, they can compete with peaceful ties.
Third, most organizations give rewards as long as their employees do jobs well, and that will make employees only take care of details but ignore the whole entity. However, Amway’s distributors concentrate on not only their own personal sales volumes but also the whole performance of company even the globe because they can share the revenue from the globe. In other words, the relation between overall performance and personal benefit is very tight.
Finally, many organizations strengthen the power of leading to coordinate the benefit conflict between the part and whole, but that will cause employees’ reliance and subordinate. Amway’s
distributors actually lead by themselves and no one can be relied, so that increases distributors’
self-awareness and independence.
5. Natural Weed-out Mechanism
Amway’s commission system is positive intensification because distributors can get certain feedback after each deal. Amway uses bonus to encourage repeatedly selling behaviors. On the other hand, although there is no punishing condition in Amway’s system, actually there is negative intensified way. If distributors’ sales revenue decline in the following fiscal year, the threat from downing to the lower rank will accompany by the distributors. At the same time, if a new comer doe not work hard to meet the least annual revenue required, Amway will not extend contract with the distributor. If the distributor still wants to run his business, he has to start from the beginning. By doing this negative incentive with natural kick-out system, Amway’s distributors will work hard.