Herbalife Inc (HLF.N) disclosed more information on Wednesday about how much its US distributors earn, looking to provide more clarity as it defends its business model from critics like billionaire hedge fund manager Bill Ackman.
The greater detail about 2012 distributor compensation follows sustained criticism by Ackman, who has a US$1 billion (S$1.24 billion) bet against the company and alleges that its direct-selling model is nothing more than a "well-managed pyramid scheme."
Ackman's arguments include assertions that Herbalife's disclosure on average compensation is "materially deceptive" and that Herbalife distributors "experience an abnormally high failure rate." Wednesday's enhanced disclosure is intended to address those concerns.
Specifically, Herbalife says that 88 per cent of its distributors received no payments in 2012, including 71 per cent who did not recruit any other distributors. The remainder potentially recruited other distributors but did not make money because their recruits did not sell enough product.
Herbalife said that on average, 73 per cent of its "distributors" join Herbalife just to get a discount on the products rather than to earn money.
That goes "a fair ways down the road to change the math for Ackman," said D.A. Davidson analyst Timothy Ramey. "Ackman kept including these people in the denominator, representing them as failed businesses. They're not failed businesses."
Ackman was not immediately available to comment.
The new disclosure, posted on Herbalife's website on Wednesday, reveals the compensation structure for Herbalife's entire distributor network, not just for the upper tier as it had in the past. How much Herbalife pays its distributors, and for what, is a central theme in the high-stakes debate over the legitimacy of its business.
Herbalife President Des Walsh told Reuters that Herbalife is not a pyramid scheme because its distributors do not get paid anything for recruitment in and of itself. He does agree that recruitment is a path to greater income, since distributors can get payments related to the sales performance of distributors they recruit.
In Herbalife's 2011 disclosure about distributor compensation, it only mentioned payments for those distributors that made it to supervisor level or higher, a group that in 2012 only accounted for 17 per cent of all US distributors.