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Royalty Calculations in Book Contracts

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PUBLISHED JULY 1996

by Ivan Hoffman, Publishing Attorney —


Ivan Hoffman

We often hear about book royalties in a fashion that is illusory. To discuss a royalty rate without at the same time discussing the basis for the rate’s calculation is like comparing apples to oranges. To banter about numbers like 8%, 9%, 17% or such is only one part of a significantly more complex issue. In theory, a publisher can pay a writer a royalty rate of say… 96% and the publisher can still make tons of money and the writer nearly none at all.

Moreover, all royalty recipients face the same issues. It is not merely the writer that must pay attention but the publisher as well for there may be occasions when the publisher is on the receiving end of a royalty arrangement, such as in a licensing deal, a foreign sub-publishing deal or the like. But for the sake of simplicity in this article, let me focus on the royalty provisions between a writer and a publisher in a traditional book publishing agreement.

The significant question to ask is: “Upon what figure is the percentage royalty rate to be calculated?” In other words, by what number do we multiply the royalty rate? Examples range from “net monies received by publisher,””gross cash receipts,””the suggested retail list price,””wholesale price,” and perhaps other variations on that theme.

In other words, we must initially distinguish the term “royalty rate” from the term “royalty.” The first refers to a percentage figure that is multiplied by some other figure; the second refers to the actual dollar and cent amount for each version of the book that sells and is not returned. The first sounds nice but it is the second that you take to the bank. Or not.


Gross vs. Net

In some instances, the author may be paid a percentage royalty rate based upon some calculation of income received by the publisher. This figure may be a gross or a net income amount but merely reciting either gross or net in the agreement does not provide enough information. The devil, as they say, is in the details.

Both the author and publisher must take some care to define how the base figures are calculated. What deductions, if any, are allowed before the rate percentage is applied? If the percentage rate is paid upon “net,” a specified list of deductions from “gross” should be spelled out in the agreement.

What items may the publisher deduct before multiplying the author’s rate against that amount? Are advances received by the publisher included? If so, what if the publisher makes a deal for several books and receives a non-allocated advance on all those books? Does the author share in that? Or is the author’s share based only on income received from “sales” as opposed to “all income” received by the publisher? Are sums received by the publisher to reimburse it for fees incurred in the transaction deductible before the author’s rate is calculated? These fees may include licensing fees or fees paid to agents in other countries or even in the United States for special markets. And what if the licensing is done through a company “owned and controlled” by the publisher or in other words a separate division of the publisher? Are those fees deductible?


Retail vs. Wholesale

Another form of calculation is when the royalty rate is multiplied by either the “suggested retail list price,” the “wholesale price,” or something else related to either. A royalty rate that is based upon the suggested retail list price will often be significantly lower than one based upon a wholesale calculation. Which formulation is used depends upon the publisher’s accounting practices. For example, a contract from a publisher that bases its calculations on the suggested retail list price for a book that has a suggested retail list price of $9.95 may provide a royalty rate of maybe 8-10% to the author. The author then ends up with somewhere between 80 cents to a dollar a book. However, the author may end up with the same dollar and cent royalty if another publisher were to account to the author on the basis of a wholesale price if the author’s royalty rate was between 13 to 16%, assuming that the wholesale price is 60% of the suggested retail list price.

A calculation that is based upon the wholesale price is very similar to the formula in which the royalty rate is based upon the income received by the publisher. Both are based upon actual receipts, if in a loose way.


Other Calculations

There are, of course, other issues raised in royalty clauses. These issues range from differing rates on different editions (hard vs. soft cover versions, trade vs. mass market editions, mail order sales, etc.), foreign sales, discounts and cut outs, licensing arrangements, escalating rates based upon escalating sales, reserves against returns, and so on. These are beyond the scope of this article since I have wanted to cover only the differences between the term “royalty rate” and “royalty.”


Conclusion

In sum, both the author and the publisher should be aware of the subtleties involved in negotiating the royalty clauses in publishing agreements. The ultimate resolution of these issues will depend, like so much else, on the relative bargaining positions of the parties. For the author in demand, the results may be one thing. For the first-time author, it can be another thing entirely.

And in any conversation between authors regarding their deals, merely announcing their royalty rate is not likely to determine who will pick up dinner.


Ivan Hoffman is an international publishing attorney and a published writer and author. He practices in the Los Angeles area. You may reach him at ivanlove@earthlink.net.

This article is not intended as a substitute for legal advice. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. You should consult with an attorney familiar with the issues and the laws. No portion of this article may be copied, re-transmitted, re-posted, duplicated, or otherwise used without the express written approval of the author.

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