Multi-level Marketing (MLM) is a marketing strategy whereby sales persons not only receive compensation for sales they make directly but also generate income from the sales of other people recruited to join the organization. Over time, networks of downstream producers develop through which multiple people within an organization are compensated each time a sale occurs.
MLM is legal. MLM organizations usually have very aggressive sales cultures since many people stand to benefit from each sale. Amway, Avon, Mary Kay Cosmetics, and Herbalife are a few examples of companies that use MLM. MLM companies are often viewed skeptically because of high pressure sales tactics and because MLM bears a close resemblance to an illegal scam known as a “pyramid scheme.” Virtually all companies in the Memphis area use a “single level marketing” model where each member of the sales force is compensated only for sales that individual generates.
Banks historically have operated using a single level marketing approach. However, in the early to mid 1990’s banks began implementing more aggressive compensation plans for employees in order to promote increased loan production. By the late 1990’s the incentive plans of many banks had become multi-layered and extremely complicated. For example, within a branch, employees received a cash incentive for just about every loan product sold. The branch manager also received an incentive based on the loans generated by the employees of the branch. An area manager overseeing multiple branches received an incentive for the production of all assigned branches. A regional manager responsible for a team of area managers was compensated for area production. And so it went all the way up the ladder to the CEO. Making more and more loans became the overriding focus of many banks because so many people within the organization got a “piece of the action”. The end result was that emphasis of the banking industry shifted from the historical perspective of evaluating the credit worthiness of the borrower and the appropriateness of the loan product to funding as many loans as possible.
Not surprisingly, the Amway approach to banking ended up causing billions of dollars in loan losses. The massive number of bad loans forced most banks to conservatize their lending practices as well as incentive plans for loan products. However, a MLM approach is still in effect at many banks for non-lending products and services. Many bankers today have strict sales quotas for various products. In addition, some products and services pay a larger incentive than others. Customers should be aware that the advice and “sales pitch” they receive from their banker may reflect a desire to reach a sales goal or generate the maximum incentive as opposed to being sincere advice reflecting the best interest of the customer.
The sales incentive structures used in the recent past by banks and still in effect in some situations for non-lending products do not meet the strict definition of MLM. But, the overly aggressive marketing and compensation plans utilized by many banks have been detrimental to individual customers, the banks themselves, and the economy in general. It would be nice if banks would abandon the high pressure, MLM sales approach and go back to meeting their customers’ needs by providing quality service with no hidden agenda.
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