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The Alchemy of a Pyramid

ComplianceLegalRisk Roundup

FTC Maintains Pressure on Compensation Plans

Direct sales companies should prepare for a new wave of regulatory actions

By:  Brent Kugler, Guest Contributor

Companies should take the time to consider if their plans hit the guardrails laid out by the most recent statements and actions of regulators.

Like it or not, the legal requirements for multi-level-marketing (MLM) compensation structures have changed in recent years. Many existing comp plans used by direct selling companies for years may now, if challenged, be considered non-compliant by the Federal Trade Commission (FTC). Indeed, comp plans considered to be compliant as recently as two years ago may today run afoul of the FTC’s latest criteria for evaluating compensation structures.

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March 1, 2021 0 comment
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Direct Selling Experts Rebut ‘Alchemy’ Paper
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Direct Selling Experts Rebut ‘Alchemy’ Paper

Lack of variability, faulty assumptions cited as ‘fundamental logical errors’

By:  Teresa Craighead

“What they are doing in this paper is trying to put forward a logical argument to set up a premise, to analyze it and to draw conclusions. The problem is that they commit some really basic logical errors, and you don’t have to be a logician to understand them.”

—Dr. Anne Coughlan, professor of marketing, Kellogg School of Management, Northwestern University 

On October 13-15, 2020, the Direct Selling Association (DSA) held a virtual Legal and Regulatory Seminar that included a session discussing the Andrew Stivers, Douglas Smith, and Ginger Jin paper, “The Alchemy of a Pyramid” with three experts: Dr. Anne Coughlan, the Polk Bros. Chair in Retailing and professor of marketing at Kellogg School of Management, Northwestern University; Dr. Patrick Brockett, the Gus Wortham Memorial Chair in Risk Management and Insurance at McCombs School of Business, University of Texas at Austin; and Dr. Linda Ferrell, Marketing Department Chair and professor of marketing at Harbert College of Business, Auburn University. Comments in this article are taken from that discussion.

In the July 2020 issue of Social Selling News, we published an article, titled “FTC Reveals True Goals in Research Paper” (page 24), in which we discussed some of the conclusions reached in a paper published by SSRN, an international social sciences research journal. 

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December 1, 2020 0 comment
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FTC Reveals True Goals in Research Paper
ComplianceLegalRisk Roundup

FTC Reveals True Goals in Research Paper

Regulators want to dismantle all multi-level marketing companies

By:  David Bland

The paper indicates that the FTC views all companies with a multi-level compensation plan structure as dangerous to the public, and it recommends removing the levels as the best course of action.

The FTC authors suggest three actions that could prevent the risk of pyramid operations.

First, they state that an obvious option would be to end the recruitment aspect of the business. 

Second, they suggest that changes to recruitment incentives could “reduce an operator’s ability to induce or allow participation in a transfer scheme.”

Third, they argue that if sellers were not required to make purchases in order to qualify for recruitment rewards, the company would no longer be able to convince the seller to accept retail losses in hopes of gaining back profits with future recruitment.

Until recently, any company in the direct selling channel with viable products and consumer demand for those products could consider themselves operating under Federal Trade Commission (FTC) favor. However, the agency appears to be changing its mind about practices it previously accepted, as indicated first by AdvoCare’s surprising abandonment of its multi-level compensation plan a year ago under FTC pressure.

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July 1, 2020 0 comment
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