There is no perfect compensation plan. Every type of compensation plan, be it matrix, unilevel, breakaway, Australian or Venusian, has its advantages and disadvantages—its own unique income-generating benefits and its own unique challenges.

The binary plan is no exception, and despite the rampant rumors that pervade the industry (mostly via Internet message boards), there is nothing inherently illegal about the binary plan. I have no special affinity towards binary plans, but I loathe the mudslinging competitor who unjustly maligns the plan with claims of “imminent regulatory action.” Some even go so far as to suggest a pending federal action to outlaw the plan all together—yet another example of the sort of scare-tactic recruiting that has been increasing since the early 90’s.

The argument goes like this: so many of the state and federal attacks on network marketing companies in the last few years (which, by the way, have been few and far between) have been against companies employing a binary-type compensation plan, there clearly must be something legally suspect with this type of plan. Let’s examine this charge.

Witnesses for the Prosecution — and the Defense

The first regulatory attack on a company using a binary plan was on the very first company that ever popularized such a plan. In fact, this company’s founder was the recognized creator of the plan; he was eventually indicted on 11 federal counts and sentenced to prison, then fled prosecution and was featured on the TV program “America’s Most Wanted”—ultimately resulting in his capture!

Granted, this does not bode well for the binary … but every plaintiff would look guilty if we heard only from the prosecution. Let’s hear from the defense.

Each and every time a binary-plan company has suffered regulatory attack, the legality of the compensation plan was never once the target of the attack. It was always what these companies were doing with the plan that caused their legal grief. What were they doing? The same thing every legally flawed network marketing company in history does, regardless of plan type: they were selling something that had no significant value beyond its qualifying the purchaser in the compensation plan.

The Infamous Purchase-to-Qualify

In a typical binary plan, distributors receive multiple “business centers” under which they may build a downline sales organization. The more positions you “activate,” the greater the potential income. The result often has been large up-front purchases of products—not for consumption or resale, but in order to acquire multiple positions. The more you buy, the more centers you activate: essentially, you are being paid for recruiting (since only new recruits would make such purchases).

Legal network marketing companies pay commissions only on retailable products (or services) that people would buy based on their actual value; i.e., products people would reasonably buy even if there were no income opportunity associated with the purchase. Therefore, the purchase-just-to-qualify operation is deemed an illegal pyramid scheme.

However, such token purchases primarily for income qualification purposes exist within every type of compensation plan. Whether you buy $5000 worth of widgets to qualify for the Universal Master rank or $100 worth just to meet your monthly quota, if nobody but reps is buying (and they are buying mainly because they have to to get paid), then you are equally vulnerable whether or not your company uses a binary plan.

State and federal regulators don’t just swoop in and permanently close down such companies. They issue injunctions or restraining orders that temporarily limit or cease operations while the company and the agency (and eventually the courts, if either side chooses to take it that far) decide the eventual fate of the operation.

Usually the company makes rapid and significant changes to the program in an effort to satisfy the authorities so they may resume business as usual. Historically, with rare exception, network marketing companies in this situation will quickly agree to any and all revisions demanded of them.

In fact, every binary-plan company under attack was at some point given this opportunity. Several eventually satisfied the attacking agency and were allowed to resume business. And in these cases—now get this—when all demanded changes were agreed to and the new, revised program was unveiled, every single one of these companies still had a binary compensation plan!

Clearly, the type of compensation plan they used was not the issue.

It’s Not What You Have—It’s How You Use It

Many network marketing companies that have been legally attacked or even shut down have had perfectly legitimate products of demonstrable value and legally sound compensation plans (at least in their design). What many fail to understand is that regulators do not simply ask, “Is there a product?” or “Do people get paid for recruiting?” They watch how distributors actually use the products, and how they promote the compensation plan. In other words, regulators take action based not on what the program is designed to do—but on what distributors are actually doing with it. (A baseball bat is designed for the safe, innocuous task of hitting a baseball, but it can also be used as a weapon.)

Today, a host of companies that employ binary or binary-hybrid plans are all considered safe, legal companies and, over a combined history of almost 30 years, have had no legal challenges to their manner of compensation. The binary aspect of these plans vary little from those used by companies that have fallen to regulatory action. What’s the difference? These latter companies either sold products that lacked real value, or had quality products which were being purchased primarily to qualify for a higher-paying position in the plan.

The legality of a network marketing opportunity has little to do with the design of its compensation structure and everything to do with the motivation for buying their products—regardless of the type of plan they use.

is author of Inside Network Marketing (Random House)
and the best-selling cassette tapes “Case Closed!
The Whole Truth About Network Marketing” and The Coming Network Marketing Boom.”