How to read an income disclosure statement
Most income disclosures are written to be technically accurate and practically confusing. A short guide to the terms, the traps, and the one number to look for.
Start with the denominator
Every percentage in an income disclosure statement is a fraction, and the part that matters is the bottom half. Some companies count every person who signed an agreement. Others count only "active" participants, and define "active" as someone who placed an order or was paid in the period. The second definition can remove a majority of participants before any percentage is calculated.
The Federal Trade Commission's staff review of 70 statements found that leaving out unpaid participants was one of the most common patterns.[^1] When a statement does this, the share of people "earning" any amount is overstated by construction.
Gross is not net
Disclosures almost always report what the company paid out. They rarely say what participants paid in. Product purchases required to stay qualified, starter kits, back-office fees, event tickets and travel all come out of the same pocket. A participant shown as earning $600 in a year may have spent more than that to qualify.
Median beats average
An average is pulled upward by a small number of large earners. A median is the amount the person in the middle earned, and it is the single most useful figure a disclosure can contain. If a statement only publishes averages by rank, the overall median usually cannot be recovered.
| Term | Meaning | Why it matters |
|---|---|---|
| Average (mean) | Total payouts divided by participants counted | Skewed by top earners |
| Median | Earnings of the middle participant | Represents a typical participant |
| Active participant | Company-defined; often "placed an order" | Shrinks the denominator |
| Annualized | Monthly figure multiplied by twelve | Assumes twelve identical months |
The period trap
Some statements report monthly earnings for participants "who were active that month". Multiplying such a number by twelve assumes the participant was active and paid in every month, which is rarely stated. Annual figures for everyone who participated at any point in the year are the only ones that compare cleanly across companies.
What to do with all this
Read the footnotes first. They contain the definitions. Then find the denominator, check whether a median is reported, and look for any mention of expenses. If two of the three are missing, treat the headline percentages as marketing rather than data. The FTC's business guidance for multi-level marketers describes the kinds of claims the agency considers misleading, and it is a useful companion when reading any disclosure.[^2]
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Sources
- FTC staff report analyzes 70 MLM income disclosure statements · Federal Trade Commission
- Multi-Level Marketing Businesses and Pyramid Schemes · Federal Trade Commission