Ted Nuytens of Business For Home has posted an excellent article by Adonis E. Hoffman, an attorney and marketing professor in Washington, DC, who follows the MLM industry. Please read the article at Business For Home or here on our site as a Word doc before reading excerpts and our comments below.
We judge the worthiness and stability of a company based on The Five Pillars:
- Company Management Experience and Integrity
- Timing in the Industry, Timing in the Company
- Remarkable Product
- Compensation Plan for Part Timers
- Duplicatable Training System For Success
Some excerpts from Hoffman and some comments from us …
The FTC does not move with such force and deliberation against a company unless it has clear and convincing evidence of wrongdoing. This is not to convict FHTM before it has its day in court, but simply to note that hundreds of hours of investigation by both the state AGs and the FTC went on before they decided to shut down FHTM. Not only was there smoke, but there also must have been some fire.
A move like this by the FTC will have a huge impact on the industry, the company, and the distributors. The tendency among the now orphaned reps will be to damn the FTC as ‘anti-MLM’ and belittle their evidence as ‘hearsay.’ This is a natural reaction borne of disbelief and an unwillingness to accept responsibility for having made a bad choice. Killing the messenger will not help you understand what happened, and will not help you make better choices when seeking a new home.
When these high profile, hard-line enforcement actions take place, there really are no winners. The company loses its credibility. The independent representatives lose their investment, not to mention their confidence and security in the company. The customers lose their source of products. Moreover, the industry loses its longstanding battle for acceptance as a credible, legitimate alternative to traditional employment.
We agree with Hoffman on all points but the last. If the network marketing industry is to continue to gain credibility, it must welcome any help it can get in cleaning up not just its image but its business practices. That means policing companies like FHTM, the travel companies, the energy companies, the communications companies, the information companies, and any other opportunities that do not pay commissions from the sale of goods and services to the end consumer.
Our article “What Are You Selling? Really? Are You Sure?” covers this topic in more detail.
Companies are not shut down overnight. Usually the management has been given plenty of warning and have been involved in a series of lawsuits of escalating severity. If the management refuses to make the changes necessary for legitimacy, the end is inevitable. Closing down those who refuse to comply is a good step toward the improvement of the industry’s reputation.
Don’t forget that the FTC and the Attorneys General are protecting us from companies who would rather live in our pockets than in the marketplace. Zeek Rewards is a perfect example.
Whatever the case, it appears FHTM had more than a few vocal, disgruntled representatives with gripes ranging from lack of appreciation, lack of support and lack of respect. These individuals were instrumental to the government’s findings against FHTM. While no company should be in the business of coddling non-performers, every organization that has a track record of losing as many representatives as FHTM is alleged to have lost should take affirmative steps to ascertain: (1) why those reps felt compelled to leave; (2) what the company could have done better to retain them, and (3) what the company can do going forward to show that it is (or was) concerned about them, as professionals. Allegedly, FHTM did not do any of these things, or else it would not have brigades of former representative ready to go negative. The lesson for MLM companies in the future is that one disgruntled former rep can be a problem. Scores of disgruntled reps can invite the unwanted scrutiny of state and federal authorities. Much of that could have been prevented.
MLM companies have chosen the network marketing model because it works. And why does it work? Because of the hard work and extreme dedication of its distributors. Companies should be treating their most valuable assets like royalty. They should be treating us with dignity and respect and paying us fairly for our sales.
Instead, many companies will offer you a dream with one hand while the other reaches for your wallet. They will rely on hype and enthusiasm, hoping you’ll put up with the poverty until next year’s Parade of Millionaires. Some even go so far as to blame the distributors for problems brought about by mismanagement, corruption, greed and ego at the top. We spent a year in a company whose CEO actually blamed his collapse on “lying, cheating, thieving distributors.”
One of the government’s claims against FHTM is that over 95 percent of the reps made little or no money whatsoever, while one or two percent of its leadership earned incomes averaging over $300,000 and upwards of $1 million. If such an allegation is true, this is a legacy no self-respecting company in any industry should be proud to report. These kinds of statistics point to failure of the company, not to success, and no amount of spin or doctrine or motivational rallying can change the fact.
A responsible company will take the necessary steps to adjust its practices so the ratio of top earners to low earners is not wildly out of balance. A responsible company will institute reforms to spread the company’s wealth, even if it means re-jiggering the compensation plan to reward effort. A responsible company will bring in compensation experts to fix what is broken. The key lesson for any company in the industry is that federal legislators will not tolerate an egregiously outbalanced compensation structure, where there is no apparent regard for some kind of equity. When allowed to persist for years, as it is alleged against FHTM, the government easily can conclude that a pyramid is operating.
Having spent five long frustrating and expensive years in Excel Communications, we can speak from experience about the FHTM business model. It was the Excel compensation plan that purportedly made Paul Orberson the first distributor ever to earn a million dollars a month. So why wouldn’t he adopt a plan that had been so lucrative for him? And why wouldn’t he put himself at the top of the pile rather than remain a lowly rep? In a pyramid, the higher you are, the fatter your wallet.
When Excel was disintegrating in 2004, many leaders admitted that 80% to 90% of their checks came from CAB’s, i.e. Customer Acquisition Bonuses. This is a euphemistic way to say that their pay was coming directly from the pockets of the new recruits who paid as much as $500 to get started and up to $1000 if they also bought a training position. These bonuses should not be confused with legitimate commissions paid for the sale of goods or services. Excel paid shamefully low residual commmissions – 2% on personal customers, five levels of 0.25%, one level of 1% and a paltry 5% way down on the seventh level.
Pillar Four is a compensation plan for part timers. Excel didn’t have it and neither did FHTM.
As residual pay was so poor (an average of 1%), you and your team had to constantly be recruiting for you to keep your check, and your downline had to be constantly growing in size. That’s how we spell Pyramid, and that’s why we called Excel 90% illegal and 10% impossible.
Fortune Hi-Tech was no different, and that’s just one of the reasons they’ve been in hot water for so long. Their refusal to change has led to their demise.
From the outset, FHTM was inextricably tied to the personality of its founder and chief executive Paul Orberson. A man with an outsized personality and compelling personal story, Orberson is nothing short of charismatic – in an evangelical sort of way. While that characteristic is enormously attractive to many, it apparently had the opposite effect on many others. Not one to back down from a righteous confrontation, Mr. Orberson drew very stark lines in the sand and invited regulators and anybody else to cross it. His “them versus us”, and “us against the world” philosophy indeed alienated many in the industry. The problem with such an approach is that it invites unnecessary scrutiny and confrontation. Orberson became a lightning rod for everything the outside world considers wrong with the MLM industry, and his personality shaped the culture of FHTM. It was easy to cast him as a villain, and thus justifiable to come down hard on his personal assets. This enforcement action apparently had been building for years …
It is always the better course of action to engage and cooperate with state attorneys general and the Federal Trade Commission. Avoidance and aggressiveness is never the a prudent course to follow.
Pillar One is company management experience and integrity. We’re not sure it can be called integrity if you underpay and ignore your reps, and adopt an aggressive taunting stance toward the regulating agencies who are there to protect the consumers and distributors.
These regulators are sworn to uphold the public interest. When consumers are harmed by business practices bordering on unfairness and exploitation, these agencies will move in swiftly. Smart MLM companies will do everything they can to insulate themselves from the factual conditions that gave rise to the actions against FHTM. A few of the basic rules apply. Compensation has to be based on the sale of goods, products or services, not on recruitment. While team building is essential to success in MLM, the primary focus of every company must be on moving products.
Pillar Three is a remarkable product. Almost all earnings in FHTM came not from the sale of goods and services, but from the sale of the business itself. FHTM was not selling a product. It was selling permission – permission to go out and find others who would buy permission to go out and find others who … well, you get the idea.
According to Rod Cook of MLM Watchdog, CAB’s are or should be on their way out. [We have done a bit of paraphrasing here.]
The Customer Acquisition Bonus is used for companies that have low paying residual services (rarely products) in order to create income flow for leaders. Within a year after Excel started, about seven Attorneys General accused Excel of running a pyramid. Excel argued their way out of the pyramid charges by pointing out that other non-MLM telephone company competitors were paying brokers and even consumers $100 (example) to switch to their telephone service. The $100 was out of the present and future cash flow generated by end user consumer customers paying their telephone bills. That is how this became a common MLM Compensation Pay Plan for low paying services …
Companies still using CAB’s are the energy (gas and electric) companies, and some MLM telephone companies. One energy company has an 89 page lawsuit filed against them alleging they are a Pyramid Scheme.
If you’d like to avoid misfortunes like this and learn how to choose a reliable five pillar company, start by reading this free report Big MLM Lies.
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