Herbalife Updates and Clarifies Its Statement of Compensation

Herbalife ($HLF – NO POSITIONS) has updated its Statement of Compensation which gives a quick 2 page summary of their business opportunities, and how much participants can expect to make.    While I’ve generally been disappointed in the Company’s “defenses” thus far in terms of rebutting Bill Ackman’s accusations, I think this is the best thing they’ve put out thus far.  I think they go out of their way to explain that the business opportunity is not a get rich quick scheme, and that they do a good job explaining the breakdown of the numbers.

I have a few beefs with the numbers, though:  First off, HLF cites the Lieberman report that says that 73% of distributors join to receive wholesale pricing on product for themselves and their family:

The majority (73%) primarily join us to receive a wholesale price on products they and their families enjoy…

Then, though, HLF states:

The majority of Herbalife’s independent Distributors (71%) have not sponsored another Distributor and are therefore “single-level” Distributors. Single-level Distributors benefit from buying Herbalife products at a preferred price for their consumption and that of their families, and for many this is the only benefit they seek.

I am somewhat confused by the difference between the 71% and the 73% numbers.

More importantly, Herbalife has updated the table that shows the average compensation for their sales leaders.

hlf_comp_chart

Let’s talk about this chart.     They clearly disclose:

“The compensation chart below indicates that 434,125 Distributors (88%) received no payments from Herbalife during 2012. However, this chart does not include amounts earned by Distributors on their sales of Herbalife products to others.”

I’m glad they disclosed it, because otherwise you’d never figure that out by looking at the chart.  To get the 434,125 number, you have to take the 351,065 single level distributors, add the 60,333 non-sales leaders with a downline, but then subtract out the 2,466 of these who DID get paid by Herbalife, then add in 25,193 non-earning sales leaders with a downline from the bottom table.  Bingo: 434,125.

My biggest beef, though, is with number on the lower right hand corner of the chart:  that $4,485 “Average Gross Payments” category for the “Sales Leaders With a Downline” Category is almost entirely meaningless in illustrating any sort of expectations for new business members.   First of all, it’s clearly disclosed that this entire category represents 17% of Herbalife distributors.  The problem, though, is that within this category, the “average” gets massively skewed by those tiny percentages of huge earners at the top.  While the rest of this document seems to be shedding light on the compensation structure in a good way – better than the company has ever done before – this number still serves to obfuscate the realities.

It’s easy for you to build a little spreadsheet and calculate the total payment for each earnings bucket in HLF’s breakdown.   Then, you can calculate cumulative earnings for certain cumulative percentages of the “Sales Leaders With A Downline” category.   I did exactly that, and it looks like this:

hlf_spreadsheet

Note that the cumulative average numbers are off slightly ($4,480 vs $4,485) due to rounding.   So let’s  look at the last two columns: (here, I’ll give you that data “zoomed” in so you don’t have to squint)

hlf_spreadsheet_focus

You can see that the bottom 94.8% of “all sales leaders with a downline” received an average of $695 from Herbalife (not including any money they made from selling Herbalife products to others at a markup).   30.6% of sales leaders with a downline received no payments from Herbalife, and 91.7% received an average of $482 from Herbalife.

If Herbalife is interested in being as transparent as possible, they should remove the $4,485 “average” for this entire category, as it bears no reflection of what sales leaders with a downline should have any expectation of earning.

 

Herbalife Statement of Compensation

KD’s Herbalife Posts

 

-KD

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