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 and Part 12.  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.

7.  Recoupment to Record One

Producer royalties are typically payable after the recording costs for the tracks that the producer works on are recouped, because the recording costs are an advance by the record company to the artist, or the artist has raised the money some other way such as through the artist’s own funds.  Let’s stay with the record company example because most producer agreements are based on that standard.  (We’ll go over some new ideas for how to structure these deals later, but you should know what the standard deal is for comparison

Producers want to be paid on every record sold.  Fair enough, they did the work, they should get paid.  But—if the producer is paid
out of the artist’s royalties, and the recording costs are also recouped from he artist royalties, then how do you allocate the artist royalty income to ecoupment of costs and pay the poducer?

There are probably several ways that this could have been done, but the way that the industry typically does it is to create an
artificial recoupment rate net of producer royalty obligations until the recording costs are recouped, and then calculate the producer’s royalty retroactively to the first record sold (or “record one”).  So you hear this catechism: The producer
royalty is payable retroactively to record one at the net artist rate, subject to recoupment of the producer advance.

So what does this really mean?  (This is where the math comes in.)

Let’s say that each royalty point is equal to 10¢ and use our 4% producer royalty rate, 15% all-in artist royalty rate and 11%
net artist rate example.  We will also assume this is album-only sales at one price point for purposes of illustration.

All-in artist rate     = $1.50 (15 points at 10¢ a point)

Net artist rate         = $1.10

Producer rate          = $0.40

Recording Costs      = $30,000

Producer Advance   = $20,000

Units to recoup recording costs at net artist rate:  $30,000/$1.10 = 27,273 units

The album will recoup $30,000 of recording costs at 27,273 units.  So far, the producer has not been paid a royalty, but his royalty is accruing and will only become payable, if ever, at 27,273 units.  If the record sells fewer units and is cut out and is not licensed, i.e., never earns another penny, the producer will never be paid a royalty (but was paid his advance which he gets to keep–producer reps, remember to say the advance is “nonreturnable but recoupable”.  An advance, remember, is a pre-payment of royalties).

Because the producer is paid retroactively to record one, the producer will then be due a royalty payment on 27,273 units, or
$10,909.20 (27,273 units x .40 producer royalty).  Because the producer has already received $20,000 as a deemed advance in our example, the producer’s account has a negative balance of $20,000 before the application of the retroactive royalty payment.

After the producer is credited with $10,909.20, the producer still has a negative balance of $9,090.80.  If sales continue to occur, the artist will still credit the producer’s account  with nonpayable, but earned, royalties up to $9,090.80.  After the producer advance has been recouped, the artist will then have to come out of pocket to pay the producer a royalty as sales continue to occur because the producer is entitled to be paid or credited with a royalty on all units.

In our example, in order for the balance of the producer advance to be fully recouped after application of the retroactive payment, the record would need to sell an additional $9,090.80/.40 = 22,727 records because once the retroactive payment has occurred, the producer is credited with the producer royalty rate for each sale on a go forward basis (or “prospectively”).  Note, when we say “need” that should not imply an obligation to sell a particular number of records.

(This assumes there were no more recoupable costs that accrued and were debited after the retroactive payment was credited–the “net artist rate” calculation is not used once the recoupable costs have been recouped.)  You will often see language in a producer agreement that says something like “the producer’s royalty will be paid retroactively to the first record sold after recoupment of recording costs at the net artist rate and prospectively thereafter”.

These calculations are usually done at the end of an accounting period.  So if your producer is accounted to on a semi-annual basis, your label (or you as an artist) would compare the royalty-bearing sales that accrued during that period with the recoupable costs and then make the appropriate credit.

Remember: There are essentially two recoupment calculations going on here.  The first is recoupment of costs (usually the total recording costs for the recordings produced by the producer).  This recoupment calculation is at the “net artist rate”, meaning the all-in rate less the producer royalty in our example.  (We will come back to this later, as it may also be reduced for mixers or by the total royalty load for all producers and mixers, although this is a negotiation point.)

The net artist rate is usually much higher than the producer royalty, and applies because the record company will typically recoup recording costs from the artist–the available royalty to recoup recording costs is not the all-in rate but the net rate because of the artist’s obligation to pay the producer a share of the artist’s royalty.

The second calculation is the recoupment of the advance to the producer.  Recoupment of the producer advance only occurs after recording costs are recouped.

The producer advance is then recouped by crediting the producer account with the producer royalty for units sold.  The first credit comes in the form of the retroactive payment, and further prospective credits are due in the form of sales at the producer royalty rate.  The first credit can also be thought of as holding a reserve against the artist’s future payment obligation to the producer that only becomes payable once the artist is recouped on recording costs.

The easiest way to do this to prepare your producer accounting statements is to set up an “informational worksheet” in Excel that calculates the recoupment point each accounting period.  So in our example, you would set up the account with a negative balance of $30,000 and use the “net artist rate” as a recoupment rate or $1.10 multiplied by a running total of sales that had accrued at the end of an accounting period.  If that account shows a positive balance, you will know that you must credit the producer with the retroactive payment, and it will also tell you the number of units to credit prospectively.  You can provide the informational worksheet to the producer as a royalty statement that shows the current recoupment status of the account.  If you or your accountant is using a royalty accounting software package, this issue will be dealt with in the application.  If you are doing it by hand, this is the least fun part of hiring a producer.

For example:

12/31

Sales:                                 12,000

Recoupment rate:              $1.10

Recoupable costs:         -$30,000  (at start of period)

Units to recoupment:      -27,273   (at start of period)

Contribution:                  +12,000   (sales this period)

Units to recoupment:      -15,273   (at end of period)

Adjusted recoupable:     -16,800   (at end of period)

_________________________________________

6/30

Sales:                                 +22,000

Recoupment rate:                 $1.10

Recoupable costs:             -16,800  (at start of period)

Units to recoupment:        -15,273   (at start of period)

Contribution:                   +22,000   (sales this period)  Note:  22,000 is higher than the units to recoupment carried over from      12/31.  This tells you that you need to make the retroactive calculation in a different worksheet set up to deal with the producer royalty.

There are many workarounds for making these calculations, and you should consult with your royalty and tax advisor to make sure you are doing it in a way they are comfortable with.