The problem is that sales do reduce by 15% with the first Level 1 recruit and by 10% with every

next recruit.

But It is not stated directly, whether the sales reduction by 10% with each new Level 1 referral should be count from the initial
volume (without any referrals) or from the new, already reduced volume by adding the 1st (2nd, 3rd) referral.

Here, I will show the calculations for worst scenario and count 10% of initial sales volume.

15% decline in sales result in 15%x25% = 3.75% decline in commission.

Each additional recruit result in 2.5% (10%x25%) decline in commission.

For an average DBK salesperson in 2010 these declines are 3.75%x$781 = $29.29 per month for the first recruit and $19.53
(2.5%x$781) for each next.

The lowest possible compensation rate for level 1 referral is 5% for Leaders. Thus, to cover initial commission loss, first referral
should make sales at least $29.29/5% = $585.80 per month or 75% ($781/$585.8) of its recruiter sales, two referrals –
($19.53+$29.29)/5% = $976.40 both or $488.20 per person or 62.5% of its recruiter sales.

With each additional referral, sales volume per one reduces. Average first-year representative generates $648 per month, so it
should be profitable solution to build your own team.

It becomes more difficult with Managers and Directors. The worst scenario is to have 10 Level 1 recruits for Director (or 5
for Managers), so let us calculate this scenario.

For Directors it is impossible to have decrease in sales, counting from initial sales volume, because 9x10% + 15% = 105%, so,

let us assume that sales decrease are from new sales volumes. Sales with 10 referrals:
100%x0.85x0.99 = 32.9% from initial sales
and sales volume still needs to be at least $1,500.
So the minimum initial sales should be about $1,500/32.9% = $4,560.

Most likely, Director’s initial sales were not $4,560, but let’s assume that this is theoretical figure, and this large would be
Director’s sales if he would have no referral or 10 referrals less (if he has more).

So, his commission would be $4,560x32% = $1,459.20, but now he has $1,500x32% = $480.

To cover his opportunity loss, his 1st Level recruits should make sales of ($1,459.20 - $480)/12% = $8,160 or $816 per person
per month.

These numbers look less achievable, but the point is, that in the real life it doesn’t work this way. In fact directors definitely should
have several Levels’ referrals, so it should be profitable for them as well.

Each average 2nd level 1st year referral adds $648x8% = $51.84 without decreasing sales and 3rd level referral - $648x6% = $38.88.

It’s hard to assume how much next level recruits he could have, but let’s assume bad scenario of having half as much referrals on
each next level, then a Director with 10 1st level subordinates, should have additional 5 on Level 2, 2 on Level 3, and 1 on Level
4.

Addition compensation would be $356.40. Then, the required sales per each Level 1 recruit would be $780.36 and it is a little less
than average sales per person in 2010, so it looks achievable.

The same calculation for Managers: 100%x0.85x0.94 = 55.8% = $1,250, initial sales = $2,240.

Opportunity loss: (2,240 – 1,250)x32% = $316.80. $316.80/10% = $3,168 or $3,168/5 = $633.60.

It looks like it pays back to build the team for leaders, pays back a little harder for Managers and even more hard for
Directors, but we calculated pessimistic scenarios, so in fact it should pay back, we just need actual information.
There are several options how to act: 1) longevity bonuses; 2) change current compensation program – a) “do away with
management incentives” & increase cash payouts on sales; b) revise management compensation rates; 3) launch some exclusive
items available for loyal reps; 4) educate reps about long-term sales ladder.

1) Longevity bonuses.
First-year sales rep generates in average $648 in revenues, fifth year sales rep generates in average $1,340 in sales. The sales
growth is by 20% every year during first 5 years and 1% each year afterwards. 20% sales growth results for company in 2% profit
growth (10% operating margin) from that salesperson.

This means that increasing representative’s compensation by 2 or more percent for additional tenure year will reduce company’s
profit from that person, and after 5th year it will reduce company’s profit dramatically, because sales volume growth is much
slower. In addition, the longevity bonus in an amount of 1% per year could be perceived by salespersons as a mockery. In spite
of that, the third option should be more acceptable and resultative. Long-tenure sales reps would feel appreciated by having some
exclusive items and it wouldn’t cost company any additional money, because the production of exclusive items shouldn’t cause
more than usual items.

2a) Increasing payout on sales and “doing away with management compensation system” both would result in less motivation to
build their own team, but motivating salespersons to build their teams is the only way for DBK to increase dramatically revenues,
thus this option is unacceptable.

2b) Revising compensation system should not result in sales growth, but most likely will result in profit decrease in both absolute
and relative numbers.

3) Mentioned above in the first option.

4) Reps’ education would result in additional $1 million expenses and should increase the profit at least as much, so the sales
should increase by additional $10 million or 13% sales growth. Actual growth is about 60% last two years, so, the number of 10%
seems achievable and could be worth a try.

Actual suggestions: launch education program, provide some exclusive items for long-tenure representatives.