Twenty More Questions for Artists: Record producer agreements, Part 2: Recoupable vs. Nonrecoupable Payments and All-in vs. Net Artist Rate

Please note: This is an installment in a multi-part post.  Each post has information relevant to prior posts, so until we get to the “Final” there will be more information to come. See also More Questions for Artists: Record Producer Agreements, Part 1, Part 2, Part 3, Part 4, Part 5. Part 6 , Part 7, Part 8 , Part 9, Part 10, Part 11, Part 12 and Part 13  Watch this space for further installments, or subscribe to the RSS feed.  A post with all the current parts in one post is available here, and see also “Artist Management Agreements” on the Semaphore Music blog.

5. Recoupable vs. Nonrecoupable Payments: Before the producer royalty is payable, you have to agree with the producer what payments are recoupable and from where. (For a primer on recoupability, see the Artist Glossary.) Remember—if it’s an advance, it’s recoupable from somebody’s money, and one way or another, if you’re the artist and there’s an advance, it’s usually recoupable from yours. If you don’t like that, there’s still time to get out and try another line of work. In the case of producer royalties, there’s usually only two kinds of payments that get recouped: advances and also what I call the “bad boy payments”, such as unexcused overbudget, indemnity claims (like for uncleared samples or outright lying) or union penalties for late or no filing of session reports.

So leaving aside bad boy payments, the producer royalty will only be payable after the producer has earned enough money to recoup their advance. But when do you start counting the producer royalty to apply against the advance? This will be discussed in the producer royalty section below, but remember I said math was required.

In the recording budget plus advance, it’s easy to tell what the advance is because you will say what it is in the contract. If you are paying a recording fund, a “keep the change” deal, it’s not so obvious.

In the example we used of the $50,000 recording fund, we anticipated that the recording budget (that you still prepare regardless of whether it’s a recording fund) will be $30,000 leaving the producer with $20,000 “in pocket.” So for purposes of recouping the producer advance, you will agree with the producer that of the $50,000, there will be a “deemed” advance of $20,000. If the producer can deliver a $30,000 record for $25,000, then the actual “in pocket” payment to the producer is $25,000 and the producer’s deemed advance is only $20,000. This is good for the producer. For a number of reasons, that doesn’t usually happen. So the more accurate you are with your recording budget the more likely you are to have the “deemed” advance be fair or slightly overstated.

The reciprocal of the “deemed” advance is the “deemed” recording budget—the other part of the recording fund. That will be necessary to calculate when the producer royalty is payable.

6. Producer Royalty Rates, All-In Royalty Rates and Net Artist Rates:  In the section we will distinguish the producer royalty rate from the artist royalty rate. Prior to the mid 1970s or so, record companies typically engaged the producer or the producer worked as an employee of the record company (also called “staff producers”). By 1980 or so, there were very few staff producers. While you run into the occasional staff producer in the contemporary music business, they are increasingly rare, and producers are hired by the artist.

Producers became “independent” meaning that they were not on the record company payroll and were hired on a project basis by the artist. When producers worked for the record company, the label paid the producer both fixed and contingent compensation. The label would also pay the artist a royalty, but the two royalty rates were not combined. This meant that the producer royalty and the artist royalty were both typically lower than those rates have been for a while.

However, just like the “recording fund” is an “all in” concept, the artist royalty is also an “all in” rate, meaning that it is inclusive of the producer royalty, and that the record company limits its royalty exposure by capping the artist royalty rate. For example, if the “all in” artist royalty rate is 15% and the producer royalty rate is 4%, the “net artist rate” is 11%. If you look at the artist’s recording agreement, you won’t see a reference to the “net artist rate” as a general rule, only a reference to the “all in” royalty rate. Remember that royalty rates apply to what could be called royalty base price sales, meaning a sale for which the record company designates a wholesale price, like a compact disc or a digital download. (Whether a digital download has a wholesale price is controversial, but that controversy is beyond the scope of this article.) If a recording is licensed in a motion picture, that income is not derived from a royalty base price sale—at least not for our purposes–because the license fee is negotiated for a motion picture master use license. In these instances, the producer receives a percentage of the artist’s share of income for the license fee determined by the proportionate share of the producer royalty rate to the all-in artist royalty rate.

In our example of a producer royalty of 4% and an all-in artist royalty of 15%, the producer’s share of license fees would be 4/15ths of the artist’s share of the fee, or 26-2/3%.

So another way of looking at the producer royalty is that it is based on a percentage of the artist’s share of income, in this case 26-2/3%. You could just as easily say that the producer always gets that share of the artist’s income from recordings (as opposed to publishing, merchandising or touring), but by convention and industry practice we do it the other way around and say that the producer gets a producer royalty rate of 4%, the all-in rate is 15% and the net artist rate is 11%.

Next Installment: Recoupment to Record One, Flat Fee payments, SoundExchange royalties, Credit, Joint or Multiple Producers