January 4, 2016
Deciphering a royalty statement to determine whether your royalties Are being accurately reported can be frustrating for both first time and veteran authors. Royalty calculations should be relatively straightforward. That is, the contractually agreed-upon royalty rate for the Work, multiplied by the earnings received by the publisher. However, add in escalation clauses, varying rates for different sales categories or channels, coauthorship, packaged products, e-books, custom editions, high discount sales, best-seller bonuses, agreed-upon deductions, returns for reserves, specific definitions of earnings, etc., and the calculation of royalties becomes much more complex.
Deconstructing a royalty statement
Royalty statements can range from one to hundreds of pages per reporting period. Many publishers provide a summary in addition to the detailed figures. The simplified example below illustrates a royalty statement for one ISBN during one reporting period— i.e., the contractually agreed-upon time frame for the accumulation and payment of royalties. Reporting periods can range from a month to a year, but are typically six months or a year. Publisher’s payment terms also vary, but three months after the end of the reporting period is typical. Thus, an author who receives royalties on an annual basis, with a royalty check issued three months after the end of the reporting period, will receive a royalty statement for sales from three to 15 months earlier. It is important to keep these time frames in mind when reviewing statements. Royalty statements contain a number of different areas. First, the Category of each sale should be noted. This should provide information about where a book was sold. Category descriptions might also denote certain types of sales, such as hardcover or trade paperback versions of the work. Ideally, there should be separate categories reported for any type of sale that has a specific royalty rate attached to it. But categories on royalty statements can be confusing to authors. The named categories on a particular publisher’s royalty reports reflect that publisher’s internal reporting structures and systems, so these categories will differ by publisher. For example, one publisher may not distinguish Canadian sales from export sales. Another will report Canadian sales as a separate and distinct category. The next area of focus is Net Units, which represent the total number of units sold less any copies returned during the reporting period. Some publishers will also report gross units and returned units.
Net Units generally represent royalty-bearing units that have been sold, and to which a royalty should be applied. Royalty statements often contain a cumulative or Life-to-Date amount for Net Units of a particular ISBN. This represents the total number of copies of a book sold since publication. Adding the Net Units on the current royalty statement to the Life to Date figure contained on the immediately preceding royalty statement should equal Life to Date units on the current royalty statement.
Net Revenue represents the dollars received for sales of Net Units by the publisher. Most royalty agreements apply the royalty rate to Net Revenue; however, this is not always the case as there could be royalties due under the contract based upon gross revenue (sales dollars before returns) or some amount per unit. Similar to unit reporting, some publishers will provide information related to gross sales dollars and related returns in dollars. It is also important to know the price on which the royalties are based, as it can vary by the type of book (textbooks, fiction or nonfiction). Publishers may pay royalties based upon list price, invoice price or actual net receipts collected by the publisher.
The Royalty Rate is the contractual rate agreed to by the author and the publisher for various types of sales of books and other materials. When reviewing a royalty statement, it is important to check the underlying publishing agreement to ensure that these rates are correct. Errors can easily occur if the correct royalty rates are not applied within the publisher’s accounting systems. For example, a book may have an escalation clause, but if there is a lack of a reliable mechanism within the accounting system to trigger a higher rate after a certain sales volume of books has been reached, the assigned royalty rate and resulting payments to the author will be incorrect.
The Author’s Share is the amount of royalty attributable to the author when a coauthorship agreement exists. This figure should be straightforward, but again, should be checked, as coauthorship agreements often change and mistakes can occur with respect to updates within the publisher’s system.
The Royalty Earned in the Current Period can be computed as: Net Revenue multiplied by Royalty Rate multiplied by Author’s Share. Yet the Royalty earned in the Current Period may not match the amount of the royalty payment. To understand that, one must consider the Balance Forward and Deductions.
The Balance Forward is the amount due or owed from the previous reporting period. There are myriad reasons for a Balance Forward, reflecting a remainder of an advance that has not been fully earned, a recalculation of royalties earned during a previous reporting period or a balance due because a payment was not sent to the author in the previous period. To understand what the Balance Forward amount is comprised of, the previous reporting period’s royalty statement must be reviewed.
Deductions reduce the amount payable on royalty statements. These deductions are contractually driven and may include charges for items like permissions fees, indexing or research. Some publishers do not include descriptions of these charges on their royalty statements, which can make it difficult for authors to evaluate the appropriateness of particular deductions.
Aside from the mechanics of royalty statements, the question for many authors remains—“Are the royalty statements accurate?” The difficulty in addressing this question is that royalty statements do not include all of the information needed to determine the accuracy of royalty payments. In order to test the veracity of royalty statements, authors need more detailed information than can possibly be contained on a royalty statement. Specifically:
- Inventory information related to the printing and ultimate sale or disposal of books;
- Information related to the sale and distribution of e-books or other electronic content;
- Underlying sales and return records;
- Publisher’s list of all ISBNs associated with an author and indication as to whether each is royalty vs. non-royalty bearing, and
- Sub-rights agreements and records of monies received for these contracts.
Requests to publishers for a brief walk-through of their specific royalty statement format can provide authors with the knowledge needed to better understand their statements. If authors have specific questions related to a royalty statement, they can and should seek additional documentation from their publishers.