The FTC just hit two top leaders with a $4M fine. Here's what you should know.

Shock waves echoed across the direct sales channel. News that Advocare, one of direct sales reputable brands, converted their multi-level compensation structure to a single-level pay plan reverberated across the channel. How could this happen? Even the thought forced sales leaders to reconsider their future and corporate teams to wonder how this would impact their plans and strategies. What would happen to their field?

As it turns out, the FTC, after investigation and finding alleged infringements, strongly advised Advocare to change their compensation structure and this past week finally levied a hefty $150M fine. Pretty heavy, but more importantly something fairly unprecedented happened--two top leaders (two couples) were hit with a $4M deferred fine. Again, shock and awe. Worry. Frustration. Insecurity. If this could happen to them, it could happen to anyone, right?

Well, yes it could, but those brands and companies that stay focused on customers and brands should be safe if they follow these few guidelines.

Stay focused on brand and product

There are two ways to build a business in the direct sales channel--building a customer base and recruiting and helping others to do the same. The danger presents itself when companies or the field focus their efforts (training, incentives, recognition, etc) all on the latter--recruiting. When businesses are talking more about comp plan than they are about product or brand, that's a red flag. When a leader shows you the duplication model of 3-9-27-81-243 and so forth, that's a red flag. It's those organizations that focus on the percent of payout, the cars you can earn, the sheer number of ways to earn, and/or the recruiting bonuses that should send shivers down your spine.

It's especially bad when these types of organizations use unsavory selling tactics to recruit. In his book, Influence, Robert Cialdini outlined six methods for helping individuals take action in the sales process. These include reciprocity, fear of loss, authority, likability, commitment, and social proof. Although these can be effective in selling products and services, they can also be used in malicious recruiting and selling tactics. Of these, fear of loss was specifically mentioned by the FTC. If you find a rep or a corporation is using statements comparing the business to the next Google, Starbucks, or Airbnb, stay clear. If you hear, "This is going to blow up, get in while you can," roll your eyes and move on. If a leader tells you that you've got to get in now so they can "build underneath you," please run.

On the other hand, when you see leaders and corporations that are focused on selling, launching, and using social media to demonstrate and discuss features/benefits of products (not compensation), you should take heart. When you see leaders who train their teams on how to sell products by creating more brand awareness, greater interest, and higher conversions, have confidence. When you see companies and teams, working towards retaining customers and creating brand loyalists, you know your safe. When products and brands are at the core, when the needs of the customer are what is driving the company and the field, you've found something worthwhile.

Never make income claims

Never, ever, ever make income claims. I don't care if they are explicit or implicit. Don't do it. I remember in my early days in the channel attending recruiting events at which a leader would ask prospective reps to head to the back of the room to see photocopies of earnings statements. Barf, right? It made me sick. There is no reason ever to discuss or share how much income you're earning. Leave the income out of it and that includes the implied income, as well. What do I mean by that? Don't post pictures of your car, your new home, your vacation, your private helicopter ride, your Disney cruise, your new shoes or even your new handbag, and definitely don't say things like, "Thanks (Company X) for giving me (said benefit)." The FTC is watching. In fact, in this case, they cited for the first time hashtags ( (including #LouisVuitton) as income claims. They're watching not only what the company is saying, but what the reps are saying, too.

Along the lines of income claims, the FTC mentioned "ordinary Joe" stories or rags-to-riches stories used in recruiting efforts as deceptive. Why? Based on all company income disclosures the "average Joe" (or Jane) doesn't earn significant income in direct sales. Hence, the individual who is claiming to be an average Jane is probably an outlier in the channel. Avoid the rags-to-riches or average Joe/Jane stories and wherever possible add a link in for the company's income disclosure.

Never annualize income. In other words, for some it is a tendency to take one month's income and multiply it by 12, implying an annual income. Again, this is a forbidden income claim. It gives the impression of potentially greater earnings than what is really possible. Just don't go there.

Month End... you know what I'm talking about

It doesn't matter if you work in software sales or product sales, month end is always a rush for reps to push for their goals. However, in the direct sales channel, this time becomes problematic if it includes bonus buying, filling buckets, or buying rank. In other words, if you are or a leader is coaching to buy up product to qualify for a title or bonus, bad news. Legitimate product sales and customer orders are perfectly fine, but when you are coaching or being coached to qualify legs, you're in mirky waters. Don't go there. This was explicitly cited by the FTC.

Leader-led Incentive Trips/Retreats

What's wrong with recognizing your team? What's wrong with showing your runners that you love them? Nothing. Well, let me qualify that. Nothing as long as it's focused on the right behaviors. If you're recognizing team members for recruiting efforts, then the FTC has issue with it. Again, if it's focused on customers and product sales, it appears you're on good ground.

Front-loading

The FTC also cited large kit purchases. Allegedly, there were enrollment kit sales of $1200-2400. These large initial orders are usually coupled with bonuses for upfront title qualifications. For the new recruit, however, they make it that much more difficult to breakeven on their initial investment. Don't get caught up in front-loading.

Customer to Rep Ratio

The biggest sign that a company is more geared towards product/brand is the ratio of their customers to sales representatives. For example, a company focused on customer and product would have 60-80% of revenue coming from true product sales. Companies focused on recruiting and team building have 15-25% of sales from customers. Healthy revenue is that which comes from stable, loyal customers. The higher the percentage the revenue coming from true customers, the more healthy the company is.

Is the FTC going to force all companies to a single-level compensation plan?

Now, listen, don't freak out. Because of this Advocare case, there's been a lot of swirl from leaders asking the question, "Is the company going to take away my team?" In my opinion, (and this is my non-legal opinion) to say it simply, no. It's not that there is anything inherently wrong with have a structure to a sales team. You'll find levels in sales structures of all types of industries--from insurance, to software, to cars. They all have levels, and it's perfectly fine. That is, as long as the sales team stays focused on the right behaviors. The same is true in the direct sales channel (again, in my opinion). As long as we stay focused on the right behaviors, we're in good territory.

In the end, just be smart. If it feels gross, it probably is. Focus on products and brand. Avoid income claims of all sorts, including those sneaky ones in hashtags (#bestlifeever). Don't coach to or engage in buying title or filling buckets. If you create incentive trips to reward your team, keep them focused on product sales and customer acquisition. Lastly, don't push new enrollments to make giant purchases to qualify for special bonuses or titles. Keep it simple.

After reviewing the FTC complaints against Advocare, is there anything I missed? Any other guidelines you'd include for companies, leaders, or reps? I'd love to hear your thoughts.