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Not for the faint of heart: The art of truly understanding your royalty statement

A royalty statement should be simple to understand, right? “Show me my sales and my royalty rate, perform a simple mathematical calculation, and — boom! There’s my royalty check!” But how often have you looked at your publisher’s royalty statement and muttered, “I have no idea where these numbers are coming from,” and spent hours trying to understand the calculations? Or perhaps you’ve become so frustrated that you simply gave up, took the royalty check out of the envelope, cashed it, and threw the rest of the statement in the recycling bin, reassuring yourself that the amount must be correct if it’s this complicated.

Calculating royalties has become increasingly complicated for many titles. As publishers develop new ways to reach students and drive sell-through, the standard print textbook model has become a thing of the past. Print is being replaced by new technology tools, accelerating on an annual basis. At the same time, publisher’s systems used for calculating royalties and generating statements simply have not kept pace with new digital product and business models. Consequently, trying to determine if your royalty statement is correct has become an even greater challenge than ever. In this post, we will provide an overview of some key areas to focus on when reviewing your royalty statement. In future posts, we will take a deeper dive into specific areas for scrutiny.

Let’s start with the most common elements most authors need to understand when evaluating royalty statements. The simplest check you can perform on your royalty statement is to verify your advances. First, make sure your contract classifies your pre-publication payment as an advance that can be recoverable from future royalty earnings (if not, it will be called a grant). Since these are payments made separately from your regular royalty payments, it should be easy to know how much you were paid for an advance, that it’s applied to the correct edition, and that it is the same amount stated in your publishing agreement. Another “advance” you can easily validate is publisher’s payments made on your behalf for third-party permissions, supplemental writer’s fees, or art rendering. Now, if you did not pay for these directly but are contractually obligated to absorb the cost, then the publisher is entitled to offset such payments as advances against your royalty earnings. Again, check against your contract that the publisher is permitted to recover such costs.

A more challenging review occurs when reviewing royalty rates and contract shares or royalty splits with co-authors. These royalty rates and contract shares (co-author percentages) should tie back to the royalty section in your author agreement(s). As many authors have multiple agreements plus addendums, care should be taken to ensure that the proper rates were applied to specific texts. Royalty statements will break out various sale types for you so that you can easily validate back to your agreement/addendum (e.g., domestic, retail, trade, international, foreign language, subrights). Your contract description should tie back to the description of the sales type on your royalty statement. Given the age of many contracts and recent changes in product models, some of the sales descriptions will only loosely tie back to the contract description, however, so you’ll have to scrutinize both descriptions closely, for it can make a significant difference on the rate applied and the resulting earnings.

Even more complicated is the verification of “tiered” or escalating royalty rates. In theory, it should be straightforward: An author’s royalty rate increases when the publisher sells more copies, usually at some specific net unit target. However, the calculation on a royalty statement is not always clear as to what products were used to escalate to the next royalty rate. A discussion with your publisher may be needed for clarification.

With the onset of the digital age, many more publishers are investing in new technology and new online platforms for delivering educational content. Every new product or product derivative requires a unique ISBN for its online content. Therefore, it is crucial to carefully review royalty statements for products you haven’t seen before. Communication with your publisher is vital to understanding how the publisher is selling/promoting your content and then determining how your royalty earnings were calculated from that new form of content.

These are just a few of the most important things to keep in mind when reviewing your royalty statement. Yes, it will take a lot of your time to sit down and review, especially if your statement is several pages long or contains dozens of ISBNs, but the reward of knowing and understanding your statement will far outweigh the additional time invested. Understanding these key basic areas will give you confidence in your royalty statement and your publisher.

Juli Saitz will also be presenting two TAA webinars next Spring (free for members):

The Anatomy of a Royalty Audit (Jan. 24)
Royalty Disputes: Legal Strategies in Pursuit of Information and Payments Due (with David Slarskey) (March 7)

And this session at the 2018 TAA Conference in Santa Fe in June:

Royalties: Past, Present and Future

Juli SaitzJuli Saitz, CPA, is a senior managing director at Ankura, based in New York. She has extensive experience serving clients who require assistance with contract and royalty expertise, including textbook authors and multinational corporation licensors. She is known for both developing and implementing royalty compliance programs and performing audits of licensees around the world, and has helped authors and corporate clients recover millions of dollars asserting their audit rights related to licensed copyrights, trademarks, and patents. She is focused on the shift in the publishing industry to electronic content delivery methods and adaptive learning platforms. Saitz has served as a damages expert in matters involving royalty disputes in the publishing industry.

Richard WesslerRichard Wessler is a senior director at Ankura, based in New York. He has more than 20 years of experience in the higher education publishing market in matters related to author royalty calculations, intellectual property compliance, and accounting/finance analysis and reporting.