Herbalife Reveals Modest 2013 Compensation of U.S. Distributors

LOS ANGELES—Herbalife Ltd., whose multi-level marketing (MLM) business is under investigation by state and federal authorities including the FTC, generates billions of dollars in annual sales with operations in 91 countries.  But the average Herbalife distributor or “member" isn’t likely to see a monstrous paycheck from the company.

Only 1 percent of Herbalife’s U.S. sales leaders with a downline, or 704 individuals, earned US$100,000 or more last year in average payments. More than half (56.1 percent) of the sales leaders with a downline, or 40,120 members, brought home a modest $1,000 or less, according to Herbalife’s statement of average gross compensation released last month.

Herbalife members who sponsor others and form what’s known as a downline network have a chance to earn money such as commissions, royalties and bonuses from Herbalife based on product sales to their network. Herbalife’s MLM model has been the subject of criticism for more than a year after billionaire Bill Ackman of the hedge fund Pershing Square Capital Management accused Herbalife of operating a pyramid scheme through exploitation of its members.

Ackman has taken a short position on Herbalife stock, giving Pershing the chance to profit if Herbalife implodes and its stock price plunges. Herbalife has vigorously denied the allegations and questioned Ackman's credibility and aggressive tactics.  

For the 71,535 Herbalife members who are sales leaders with a downline—comprising 13.6 percent of Herbalife’s total U.S. members—the average compensation last year was $5,381 excluding expenses members may have incurred promoting the business.

Roughly 17 percent  of sales leaders with a downline didn’t make a dime.

The company noted the figures excluded any compensation its members may have earned through retail sales to non-members, which the company doesn’t track.

Most Herbalife members, including its sales leaders, earn little to no income. In total, only 62,374 individuals, or roughly 12 percent of Herbalife’s members, earned compensation from the company.

The question dividing Herbalife and its critics is whether individuals, including minority groups, have a reasonable expectation of compensation when they join as members.

Ackman accused Herbalife of luring new members into its massive network by making promises that they can accumulate vast wealth and enjoy the millionaire life.

Herbalife is keenly aware of the allegations.

“Anyone considering the Herbalife opportunity needs to understand the realities of direct selling. It is hard work," the company declares in its statement of average gross compensation. “There is no shortcut to riches, no guarantee of success. However, for those who devote the time and energy to develop a stable base of customers and then mentor and train others to do the same, the opportunity for personal growth and an attractive part-time or full-time income exists."

The compensation statement reflects a level of transparency that few MLM companies provide, said Julian Cacchioli, a spokesman for Herbalife.

The fact that a relatively small percentage of Herbalife members earn compensation doesn’t provide evidence that members have been duped, according to the company. Herbalife noted 78 percent of its members, or 408,640 individuals, purchased its products for the wholesale discount and/or to sell them to non-members. According to a survey commissioned last year for Herbalife, 73 percent of its members join the company to obtain a discounted price on Herbalife’s weight-management and nutritional products for themselves and their families.

Only 22 percent of Herbalife’s U.S. “members" (formerly known as distributors) even had a downline network last year, according to the company.

Few Herbalife members with a downline are even eligible for compensation from Herbalife.  Of the 45,076 “non-sales leaders with a downline," only a small fraction (5,037 individuals) were eligible for payments. And of the 2,929 members who received compensation, the average payment was a negligible $105.

In spite of those statistics, Herbalife’s global base of members is gargantuan, totaling 3.9 million as of March 31, 2014.  Herbalife said it offers a number of protections for its members, including clear disclosures regarding compensation, low start-up costs and a 90-day money-back guarantee if an individual cancels membership within that time.

Although most of Herbalife’s members aren’t becoming rich, the company itself is a financial juggernaut. On April 28, Herbalife revealed that first-quarter net sales rose 12 percent (year over year) to $1.3 billion on a profit of $74.6 million, or $0.74 per diluted share. In the United States alone, net sales rose 11.9 percent to $247.8 million.

And for the few select Herbalife members who ascend to the top of the food chain, it’s a good life. Last year, 199 members earned more than $250,000 in average payments, with average gross payments—including commissions, royalties and bonuses—totaling $666,680.