Let’s look at an example: Suppose an artist’s “all-in” royalty (artist & producer combined) is 60-cents a record, and the producer’s royalty is 10-cents a record. Assume the producer gets a $10,000 advance and that the recording costs (including the producer’s advances) are $120,000. If the producer is paid from record one, and the album sells 150,000 units, the producer will get $15,000 in royalties (10-cents x 150,000 units). Since he already got a $10,000 advance, this is deducted, and he gets the balance of $5,000.

Units Sold	150,000
Producer Royalty	x $.10
	$15,000
Less Advance	- $10,000
Net Payable	$5,000

So as not to mislead you, you should know that it’s extremely difficult for even superstar producers to be paid from record one.

Hot Producers
Hot producers can get a royalty that is retroactive to record one after recoupment of recording costs at the combined rate. What this means in English is that (a) before recording costs are recouped, the producer gets no royalties at all; (b) once the recording costs are recouped, the producer gets paid from record one “retroactively” (meaning the company goes back and pays on sales previously made that didn’t bear royalties at the time of sale.); and (c) the recording costs are recouped at the artist’s “all-in” rate (the combined artist & producer rate). This is easier to see with numbers:

Assume the same facts as in the first example. By changing the deal so that the producer is paid retroactively, however, the producer makes less. This is because, at 150,000 units, the artist will have only recouped a total of $90,000 ($0.60 x 150,000=$90,000), which is short of the $120,000 recording costs. Thus, the recording costs have not been recouped, and the producer is not entitled to any royalties. So, instead of the additional $5,000 paid in the first example, the producer gets nothing (except, of course, the $10,000 advance).

If that album later sells another 50,000 copies (a total of 200,000 units), the recording costs are now recouped (200,000 x $0.60 = $120,000 in costs), which means the producer gets paid for all 200,000 units ($20,000, which is $0.10 x 200,000 units), less, of course, the $10,000 advance. At this stage, note that the producer is in the exactly same position as if he or she had been paid from the first record sold.

Most Producers
Most producers are paid retroactively after recoupment of recording costs at the net rate. This means that, instead of recouping at the combined producer & artist (all-in) rate, the recoupment is only at the artist’s rate after deducting the producer (i.e. the all-in rate “net” of the producer’s royalty). In our same example, this would mean $0.60 less the $0.10 producer’s royalty, or $0.50. Thus, under this example at 200,000 units, the producer still doesn’t get any royalties, because $0.50 x 200,000 equals only $100,000 which is short of the $120,000 needed to recoup the recording costs.

In this case, the producer wouldn’t get his record one royalties until the artist sells a total of 240,000 units ($0.50 x 240,000 =$120,000). Once this sales level is reached, the producer is paid retroactively ($24,000, which is $0.10 x 240,000), less the $10,000 advance. At this point, re is no difference between this deal and the deals under the first two examples.

Other Royalty Computations
Except for the record one aspect, producers’ royalties are customarily calculated in exactly the same way as the artists’ (except for home video). This means they get the same packaging deductions, the same “free goods” reduction, and, the same proportionate reduction for foreign, budget, mid-priced, CDs, etc. For example, if an artist gets 75% of his or her U.S. rate in England, the producer will get 75% of his or her U.S. producer rate in England.

Home Video Royalties
For home video devices, producers generally get half of their otherwise applicable rate. The theory is that the Master is only half of the product (the video portion is the other half).

Who Hires the Producer?
Until about ten years ago, record companies routinely hired the producers. However, one day they woke up and found their in-house lawyers spending so much time negotiating producer deals that it was costing them a fortune. So they hit on the brilliant idea that the artist should hire the producer, which has not only shifted the paperwork burden to the artist, but has also shifted the financial burden to you. Let’s analyze the issues separately.

The question of who does the paperwork to hire a producer is really a question of whether you or the record company bear the legal fees for negotiating the producer’s deal. Can you guess which arrangement is better for you? Can you also guess which one is very hard to come by?

Who Pays the Producer?
Remember, in an all-in deal, you are responsible for the producer’s royalties, regardless of who actually contracts with him or her. This is a much more serious issue than it may appear at first glance because the producer may be entitled to royalties before you are recouped under your deal with the record company. This means you could owe money to the producer at a time when the record company doesn’t owe you anything. This means you could have to write a check to the producer from your own pocket. This is not a good thing. Let’s take another look at the example we gave in our last issue:

Units Sold	150,000
Producer Royalty	x $.10
	$15,000
Less Advance	- $10,000
Net Payable	$5,000

Notice that the producer is owed $5,000, but 150,000 units times the artist’s $0.60 rate comes to only $90,000, meaning that the $120,000 recording costs have not yet been recouped. Now remember we talked about how the artist is responsible for paying the producer’s royalties in an all-in deal. If you put these two points together, you’ll see how the artist is obligated to pay $5,000 to the producer, but the artist is getting no money because he or she is unrecouped. A major bummer.

And the situation can get much worse. Watch this Parade of Horribles: The artist may have received substantial advances in which the producer did not share. For example, if the artist spent $120,000 on recording costs (as in our example), and got another $100,000 as an advance, the artist won’t get any monies until both the recording costs and the $100,000 advance are recouped. Meanwhile, the producer, who didn’t share in the advance, is owed royalties.

So what happens in real life? Any producer who has the slightest idea of what he/she is doing will insist on the record company paying his/her royalties. Any artist who has the slightest idea of what he/she is doing will insist on the record company paying the producer’s royalties. Any record company that knows what it’s doing (and they all do), will avoid this obligation like the plague.

It’s simple enough to get the record company to pay the producer after the artist is recouped. This is because there are royalties from which it can deduct the producer’s royalties. This is also relatively meaningless because the artist then has the money anyway. But it’s when the artist doesn’t have the money that this issue is critical.

If you have a reasonable amount of bargaining power, you can get the record company to pay the producer and treat the payments as additional advances under your deal. This makes you further unrecouped, but it’s vastly superior to taking the money from your own pocket. If the company does agree, it will insist on approving the producer’s deal, so that the amount it has to pay while you’re unrecouped can’t get out of hand. Also, as your bargaining power declines, the sources from which the record company will get these monies back increases geometrically–not only will the company want to take it back from your royalties, but it will also want to take it from:

This album’s budget–meaning they’ll hold back part of the money until either (a) the producer earns it or (b) you flop so bad it becomes obvious the producer will never get it.

Your Mechanical Royalties–the royalties an artist is paid by his record company for records sold.

The next album’s budget–assuming there is a next album.

Some record companies attempted to take first-born children, but this practice died out in the late Sixties.

If you don’t have much bargaining power, you’re going to end up giving the company whatever it wants in exchange for an agreement to pay these royalties. Whatever it is, though, it beats the hell out of writing a check or selling your prized squeegee collection, so I suggest you take it. But don’t let them know I said so until after you fight valiantly.

From “All You Need To Know About The Music Business” by Donald S. Passman. ©1991, 1994, 1997 by Donald S. Passman. Reprinted by permission of Simon & Schuster, Inc.