Recoupment in Recording Contracts

Recoupment in Recording Contracts

Record deals: how recoupments in recording contracts affect royalty payments made from record sales
A record deal may seem like the Holy Grail to an artist but most record deals contain a number of details which have flow on effects to what and how the artist will actually get paid.  

Because the devil can sometimes be found in the detail, a clear understanding of all aspects of a deal is crucial.  And this is especially true when it comes to the  types of royalties, the way in which  royalties on record sales are calculated  and any costs which are deducted before any payments are made (i.e. recoupments).

In this article we deal with recoupments.

Recoupments
Before a recording artist receives any royalty payments, they will have to effectively repay various expenses and costs to the record company.  These are generally called recoupments.

There are many costs involved in recording and getting an album to market.  It is crucial for a recording artist to understand what is recoupable and what effect this will have on any royalty payments. In essence just about everything maybe recoupable.  Whilst the growth of digital sales and the decline of physical/retail sales does mean that some of the costs of producing, marketing and distributing an album have reduced, it  doesn't change the fact that there are many other costs which still remain and can be recouped (i.e. deducted) from royalty payments.  Some examples of other costs include expenses incurred by the record company across publicity, mastering, advertising, marketing, and Artwork.  Although every cost is potentially recoupable, in practice not all expenses are recouped under every agreement and by every company, but most expenses and all advances are. The right questions need to be asked and clear exceptions need to be identified during negotiations. 

Sample recoupment clauses from “real-life” record contracts

Example 1:
“The advances specified in this agreement, all recording costs, all sums paid to or on behalf of the artist including but not limited to, tour support payments, travel, producers costs  (if any), company staff costs directly attributable to the artist or any payments whatsoever (other than royalties, mechanical royalties, Film Costs* and Website Development* and Maintenance Costs*) are an advance against and are to be first deducted from any royalties (other than mechanical royalties) and fees payable under this agreement and no royalties accruing to the Artist’s royalty account from the exploitation of any of the Recordings are payable to the Artist until all  advances have been fully recouped in full by the Company.”

This translates to:  you don’t get any royalty payments until all the money spent on your album and its promotion has been recovered by the company. The “*” items in this agreement are dealt with in a separate clause limiting the recoupment to 50% which is becoming customary for film and website costs. 

Example 2:
“The artist is solely responsible for all the cost and fees involved in the recording, production,  manufacture, marketing of any albums, or releases under this agreement and any payments made by the company are fully recoupable by the company before any royalties are paid to the artist.” 

This also translates to: until everything has been paid for, there will be no royalty payments or in plain English – there is no such thing as a free lunch. 

A simple example of how recoupments affect a royalty payment calculation, based on the following scenario:

•    CD sales are at the Australian Gold level (i.e. 35,000 sold) 
•    The wholesale price of a CD in this example is $15.00 including GST
•    Packaging costs are 20% 
•    Royalties are calculated at 15% of the wholesale price – GST – packaging costs
•    Recoupments are $100,000 and this is not a high figure for an album.  

The effective calculation to determine what payment would be made to the artist now looks this this:

35,000 sales x $15.00        $525,000
Deduct GST                     ($47,727.27)
Subtotal                                   $477,272.73
Less 20% CD packaging  ($95,454.54)
Sub total                           $381,818.19
15 point Royalty               $57,272.72

Less Recoupments           ($ 100,000)
        
Artist Royalty Payment     $ - 42,727.15

In summary, the above is a very basic calculation and in real-world practice these calculations are often more complex but you get the idea…… $525,000 in album sales can diminish very easily, being a gold selling artist doesn't always translate into earning big dollars and when we say it’s crucial you understand the details of your record deal – we mean it.

The example we've used doesn't take into account whether the artist received a cash advance; or whether they need to pay the producer a royalty; their manager a percentage of the earnings (usually around 15%-20%); the session musicians or, in the case of a band, pay the band members.  Our example also does not include any of the particularities under 360 or multiple rights deals (we will touch on those in a later article). 

As you can see, record deals are not always the holy grail of earning a decent income as a professional musician.  Whilst album or record sales do contribute to earnings, in reality many artists find a significant part of their income is earned through performances.  And in the cycle of the music business, an active approach to touring and performing can deliver immediate income as well as helping to drive album sales more than any other marketing activity.  

---