About Royalty Statements
If you are a professional creator, the provisions in your contract that go to how much you get paid may be the ones you care about most. If you have succeeded in negotiating changes in your contract that will produce more income for you—for example, you increased the percentage of royalties, or you decreased the amount set aside for “reserves for returns” —make sure the changes in the contract are reflected in the royalty statement! If the first version of the contract you were shown was a “standard form,” chances are the royalty statement form is standard, too, and therefore tracks the first version of the contract. If the royalty statement isn’t modified to incorporate the changes made to the contract, then what you actually get paid may not correspond to the terms you negotiated.
Many contracts, especially in publishing, provide for twice yearly accounting periods, and for payment of royalties within a certain time from the close of each accounting period. You should receive a royalty statement and check twice a year, too. If you don’t, then ask.
Many royalty statements base the royalties on the net amount received. This amount does not necessarily correspond to the list price of the number of units sold. Some units may be given away (for example, for promotional purposes) or at a discount; the royalty statement should disclose how many units are not counted among the royalty-generating units. To get an idea of how your work is selling, and as a check against your royalty statement, you might look up your work’s sales from sources such as Amazon.com.
Your royalty statement may have an entry for miscellaneous or assorted other deductions. These can include things like charges for preparing the book’s index, or charges for making changes to the book’s page proofs. Such charges may not be warranted, for example, if the contract provides that the publisher will prepare the index at its expense. Similarly, now that even hardcopies are prepared from digital files, page proof changes may be less costly than the amount charged. You should look carefully at the deductions, and ask for an explanation.
Many royalty statements include reserves for returns; the publisher sells a certain number of copies to a retailer, but anticipates that the retailer will return some copies unsold. the royalty statement should show how many copies were in fact returned. Reserves for returns can be a trap, so you might try to keep the reserve small, or eliminate it altogether. For example, where the work is distributed only in digital format, there are no “returns,” so there should be no “reserve for returns” either.
If you received an advance, the contract will generally provide that you must earn back the advance before you begin receiving royalties. You will want to pay attention to how the contract calculates the earning back of the advance, and how those sums are reflected on the royalty statement. If, for example, your contract is for multiple works, does it require that the advance be earned back on all the works before you receive royalties for any of them? (This is called “cross collateralization.”) That could mean, if you have one very successful work, and one not-so-successful work, that you will not receive any royalties from the first work for a long time (if ever, depending on how long it takes the second work to earn back its advance). For more information specific to cross collateralization in the record business, see the contract clause critique of The Future of Music Coalition.