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Lesson 8 Developing an Effective Ethics program
Why Herbalife’s Multilevel Compensation Plan been Accused of Being a Pyramid Scheme
Some scholars have accused Herbalife’s payment model of being a pyramid scheme severally. Despite Herbalife’s long-term success, William Ackman and his organization spent an entire year examining the company and determined that it was a pyramid scheme. The businessperson and his organization proposed to expose the company as fraudulent because his firm had invested $1 billion in Herbalife’s products (Coughlan, 2012). The billionaire made a three-hour presentation comprising 342 slides. In the presentation, the billionaire asserted that the majority of Herbalife’s contractors were incurring losses. Moreover, Herbalife was paying more money than their actual sales and approximately one percent of the company’s clients were earning most of the revenue (Coughlan, 2012). Furthermore, the billionaire accused Herbalife of falsifying its accounting statements even though there was no sufficient proof of the allegation.
The Differences between a Legitimate Business Model and Pyramid Scheme
The most significant difference between a legitimate business and a pyramid scheme is the product offering. While a legitimate business earns money mostly from selling products directly to consumers a pyramid scheme gains from compensating top-level individuals with registration fees from those at the bottom of the pyramid (Hayes, 2021). Pyramid scheme’s primary characteristics include huge sums of money, grand promises, with minimal effort that often misleads most individuals. Legitimate or direct sales business models create a vibrant market by offering high-quality, competitive services and products, which provides sustainable revenue for investors (Justice, 2019). Legitimate businesses are transparent in their financial and company information along with their product or service offerings. The end-user of the product or service is the ultimate buyer and requires sellers to hold some inventory. Moreover, most legitimate businesses have a buyback policy that protects against inventory loading. The sale of products or services through either direct or indirect sales is the primary compensation for legitimate businesses (Lilyquist, 2020). Legitimate businesses use their time to persuade and convince consumers to buy their products or services while allowing them time to decide whether to buy or not.
On the other hand, pyramid schemes promise large compensation using little effort. The schemes operate by convincing people that they can earn a considerable amount of money for just recruiting individuals into the pyramid (Hayes, 2021). Most pyramid schemes do not have tangible products to trade and if products are available, they have little value. These schemes convince people to buy massive amounts of their products that they cannot resell with ease and they do not have buyback policies resulting in inventory loading (Hayes, 2021). They consume people to register immediately by inferring that the opportunity will close soon. The main compensation for pyramid schemes is headhunting fees for recruitment where they compensate high-level members with money from low-level members.
How Herbalife Demonstrated Social Responsibility
The success of Herbalife’s business model is because of its superb products and customer service. Even though many of their contractors do not have physical stores location, they make direct sales from their homes. Moreover, the company has strict organizational legal requirements and policies that contractors must follow. These requirements include sales methods, product information, social media, and lead generation among others. The World Federation of Direct Selling Association (WFDSA) governs and guides Herbalife’s trade policies (Coughlan, 2012). The Association supports ethical practices in direct selling worldwide by advocating and building solid relationships with consumers, government, and academia. The company also adheres to the Direct Selling Association (DSA) code of ethics and acknowledges a competitive and ethical approach to direct selling. As such, Herbalife’s business model policies and regulations on earnings reporting, training, paying fees, inventory loading confidentiality, and business ethics demonstrate the company’s social responsibility.
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