by Jeffrey and Todd Brabec
Returned Recordings and the Artist's Royalties

In every recording contract the artist and the record company agree that royalties will be paid only on recordings that are actually sold or distributed to the general public, not on records that are manufactured and shipped but eventually returned.

For example, if 100,000 albums are shipped but only 20,000 are actually sold at the retail level, with the remainder being returned for credit, the artist will only be paid on the 20,000 exclusively (less additional free or discounted units). If for some reason a performer is overpaid because the record company's accounts indicated more sales than eventually occurred, the record company will always have the right to deduct such "excess royalties" from future sales due the artist and, in some cases, demand immediate reimbursement.

Reserve Funds and Anticipated Returns

Recognizing that there are always going to be returns (regardless of the artist) and that unsold recordings may continue to come back for years after the initial release date of an album, single, or EP, record companies normally withhold a certain percentage of an artist's royalties in anticipation of such returns.

These withheld royalties are referred to as "reserves" and are designed to ensure that the record company will not overpay an artist based on the initial sales figures from its distributors instead of actual sales to the general public.

For example, if a record company ships 300,000 albums to its distributors, who then sell those albums to a number of retail stores, the initial sales figures to the record company will indicate that all 300,000 records have been sold. Let us also assume that during the following 12 to 18 months 150,000 of those albums are returned to the company for credit since they could not be sold. If the record company had based its royalty computations on the original sales figures from its distributors, it would have already remitted royalties to the recording artist on a full 300,000 albums sold, resulting in an overpayment on 150,000 albums—a costly mistake for artists making $1 to $2 per album.

Reserve Fund Holdback Percentages

Under the reserve clause provisions, therefore, the record company is allowed to hold back a certain percentage of the artist's royalties to protect itself against large numbers of returns. In effect, the company is paying only on recordings that have actually been sold to the public and not those that it anticipates will be returned for credit.

There are many times no stated limits as to how much the record company is thus allowed to hold back. Each company has a different policy, usually with lower percentages for established artists and higher percentages for newer groups. Some companies even hold as much as 50% of an artist's royalties pending a final accounting as to how many records have actually been sold. The vast majority of companies, however, have lower reserve percentages, which range from 20% to 40% depending on the past track record of the artist.

Different configurations may have different reserve percentages because of the history of returns for that particular type of recording. For example, the reserve percentage on a long-playing album may be 25% to 30%, but on singles and EPs the reserve may be 30% to 40%.

Liquidating the Reserve Fund

The reserve fund can pose real problems for many recording artists, since it substantially reduces the artist's initial royalty payments and postpones the date when he or she will finally be paid all royalties due. In addition, if a company's reserve percentage is much higher than the actual number of returns (for example, a 50% royalty holdback where only 25% of the CDs and tapes are actually returned), the artist might be penalized unjustifiably. Since most reserve clauses are open ended, many artists try to negotiate a limit on the amount of time that a record company can withhold such reserved royalties.

For example, some agreements guarantee that the company will liquidate the reserve within a "reasonable amount of time." Other contracts are more specific and put an actual time limit of from 12 to 24 months for a complete accounting of any monies being held in anticipation of returns. Still others will actually recite the record company's current reserve policy (for example, "no withholding in excess of 35% of all recordings sold and paid for") or, in the alternative, provide a returns history for a particular recorded configuration at the artist's request so that all parties know what to expect. And others will base the reserve for a particular album on the actual return percentage of the prior album plus an additional "safety net" percentage (e.g., 30% + 5% = 35% reserve).

© 2005 Jeff Brabec, Todd Brabec

This article is based on information contained in the new, revised paperback edition of the book "Music, Money, And Success: The Insider's Guide To Making Money In The Music Industry" written by Jeffrey Brabec and Todd Brabec (Published by Schirmer Trade Books/Music Sales).

See How TAXI Works

"Thanks for creating and maintaining this great organization!"
— Dwight Nichols,
TAXI Member

"I must recommend it to anyone I think is serious about songwriting."
— Lole Usoalii,
TAXI Member

"You stand behind and assist your members with their songs' best interests at heart."
— Rob Belanger,
TAXI Member

"With help from you guys, the music is pouring out and I'm having such fun! Thanks!"
— Willie McCulloch,
TAXI Member