Kudos to Jonathan Brand for developing an awesome new method of translating the bullshit in MLM comp plans!

Summary:

PD = Proprietary Density or % of proprietary terms in a text sample from a compensation plan. "PD" can be used to identify unreasonably deceptive compensation plans.

Example using Herbalife:

Translating Herbalife’s Compensation Plan: The PD Metric

There are 110 words in the Herbalife compensation plan excerpt below. 35 of them (31.81%) are proprietary and must be looked up to understand the basic rules. The core logic behind the binding agreement in this excerpt is completely cloaked in proprietary terms and this is where a variable called “PD” can be used to identify unreasonably deceptive compensation plans. It is defined this way:

PD = Proprietary Density or % of proprietary terms in a text sample from a compensation plan.

In the Herbalife compensation plan excerpt below, PD = 31.81%. Proprietary terms are highlighted. I propose that when PD > 18% in a compensation plan’s text sample, the sample contains an unacceptable risk of deception or fraud. The highest PD I have seen for a non-MLM is about 9%. I doubled that for safety to arrive at a cutoff of 18%. From Herbalife’s compensation plan:
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(Image 1 of an Herbalife compensation plan text excerpt with proprietary terms highlighted.)

The excerpt above translates to yet another clause in Herbalife’s plan that dooms participants from the beginning: If one of the people you recruit buys-in to the opportunity as a “Supervisor” you only get your commission if you have been loading enough Herbalife inventory for yourself that month. No wonder the meaning of this excerpt is cloaked in proprietary terms. It dooms participants to inventory loading from the start. It gets much better.
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(Image 2 of an Herbalife compensation plan text excerpt with proprietary terms highlighted.)

MLM compensation plan sample above: 80 words, 27 proprietary words, PD = 33.75% Translation:

Participants need to buy as much product as their recruits or lose commissions on those recruits and the people they recruit. This design causes an upward ripple effect of inventory loading. For the graph below, compensation plan excerpts were chosen at random from five MLMs and five non-MLMs:
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(Image by Jonathan Brand)

The five companies on the left side are multilevel marketing companies of the Direst Selling Association (DSA). The five to the right, are not.

I really like this measure as it reminds me of how much time I spent in a couple of early cases de-coding the vocabulary. This is clearly all part of controlling the story telling. The higher the PD metric the less the ability to compare the MLM experience to any non-MLM experience… I have not seen use of the metric before and I hope it gets noticed.

Dr. William Keep
I encourage readers and investors, especially HLF longs, to produce an excerpt from a non-MLM compensation plan where PD > 18%. I believe this metric can be useful in identifying non-sustainable business models.
"I believe this metric can be useful in identifying non-sustainable business models."

I concur.

Awesome research, Jonathan!