Annualizing earnings is common tactic when inflating income in income disclosure statements. The disclosures make this even more misleading by not including the months where a participant didn’t earn anything. This means it significantly overestimates earnings. Below is an example of exactly how annualized earnings show big numbers in income disclosure statements.
Disclosures do not include $0 months
Alice, gets a $3000 check and a $20 check and no other checks that year. Bob, earns a $10 and no other checks. These income disclosure statements would report the ‘average monthly earnings’ as $1010, because they don’t include the months where Alice and Bob didn’t recieve checks.
Income disclosure reports: ($3000 + $20 + $10) / 3 = $1010
However, Alice and Bob think of there average monthly income as the money they made that year divided by 12. This includes the months where they recieved $0. For Alice, that’s right around $250, and Bob makes around 83 cents.
Alice reports: ($3020 / 12) = $251.66
Bob reports: ($10 / 12) = $83.33
All together ($3030 / 24) = $126.25
The monthly average reported by the disclosure for both of them is $1010. When you add in all of the months they made $0 the average drops to $126.25. The income disclosure report shows an ‘average monthly earning’ that is 8x what Alice and Bob expected.
Annualizing the average monthly earnings
We can also check out the ‘average annual earnings.’ These are especially important when thinking about if you can replace a full-time job. To calculate the annual averages most companies multiply the monthly average by 12. This estimates that each participant would earn the average amount each month. However, just multiplying by 12 makes things even more off.
In our example, the income disclosure reports that the average annual income would be: $12,120. The disclosure reports four times more than the top earner (Alice) even recieved.
We would expect that the annual average would be an average of the amount each participant was paid that year. Alice was paid $3020 and Bob $10, with the average between them being $1,515.
The income disclosure reports $12,120 average annual earnings where Alice and Bob would expect $1,515. That’s eight times as much as they’d expect.
Why does this matter?
People generally think of average as representing an estimate that is in the middle, sometimes more, sometimes less. They expect some people make more than the average amount, and some people less. Most people think they can make around the average.
However, it’s possible that no one makes anywhere close to the annualized average. In our example, Alice and Bob didn’t make anywhere near that amount. In all cases the averages shown in the disclosure are larger than the truth when the income disclosure doesn’t include $0 months.
The averages are super misleading and can cause people to make bad financial decisions because the numbers indicate they will make more money than they really will.
Is this even legal?
The Federal Trade Commission is a regulatory agency that enforces laws governing things like unfair competition, and other consumer protections. The FTC explained this practice of inflating earnings in their complaint against AdvoCare. In this lawsuit they alleged AdvoCare was violating laws against false advertising and accused the company of being an illegal pyramid scheme.
The income ranges on AdvoCare’s income disclosure statement were reported as “annual average income” but were actually annualized earnings based only on pay periods where Distributors earned checks. For example, if a Distributor participated in AdvoCare for a full year and earned just one check, AdvoCare multiplied the check by the number of pay periods in the year to calculate the annual average income. One year of income consisting of one $100 check would thereby count as $2,400 in average annual income. The company printed these purported income disclosures onto posters and sold them to Distributors to use as sales aids.FTC’s AdvoCare Complaint 2019
The FTC and AdvoCare settled for a $150M fine because AdvoCare was operating an illegal pyramid scheme. Hopefully, this result will get companies to be less misleading in their income disclosure statements. But this isn’t the only misleading tactic used by network and multi-level marketing companies.
Is it just AdvoCare?
Nope! One or both of these tactics show up in just about every income disclosure we’ve looked at. Check them out here.
Stella and Dot use thes tactics and actually do not disclose the monthly averages. Stella & Dot IDS for 2018
Plexus has restructured its latest disclosure statements, but consultants still post old figures on social media and reference the previous disclosure statements. The charts show ‘annualized averages’ or a different time period that has been scaled to annual (probably monthly averages). The fine print is often lost when consultants post on facebook and twitter.