Usually, a producer is paid by the hour, by the number of master recordings completed, or a flat fee. He or she probably will ask for a royalty from the sale of the record as well. If you agree to such an arrangement, you’ll have to account to the producer and make regular royalty payments, based on record sales. These issues must be agreed upon in advance and laid out in a written contract. As always, it is recommend to consult with an entertainment attorney to provide guidance in drafting and/or negotiating this contract.
The producer’s up-front fee will vary (usually from $250 to $10,000 per song), based on his or her experience and success, your artist’s level of success, and the number of songs to be recorded. The fee also can be influenced by whether the label is a local, national independent, or major record company. “Producers of tracks,” discussed in the previous chapter, will receive an additional royalty, because they create the original music to which artists add vocals. Ultimately, the producer you and the artist select will depend on the artist’s musical style and naturally, on the budget.
Aside from his or her fee, the producer, like the artist, will receive a record royalty. Traditionally this was based on the same way the artist was paid, which was a percentage of the record’s sales price, multiplied by the number of CDs or downloads sold. The record royalty to the artist is around 15% to 16% of the sales price of the audio product. The record royalty for a producer is usually between 3% to 4% of the record’s sales price or 20% to 25% of the artist's royalties. On a CD that sells for $10.98, the producer’s royalty would be about 33 cents for each copy sold and for a digital download of an album priced at $9.98 the producer receives 30 cents. However, this 3% record royalty (or “three points,” as it’s called in the record industry) comes out of the artist’s royalties and is not an expense incurred by the record label.
How does this work? If the recording agreement says the artist is to receive a royalty of 15% of the retail price for each record sold, the artist actually will get only receive 12%, or “twelve points.” The three points paid to the producer will be taken out of the artist’s 15 royalty points and paid to the producer. A record contract will refer to this payment system as “all-in.” It means the label will pay a total of 15 royalty points (or however many points are agreed upon), and no more. All royalties paid to producers or anyone else will be deducted from the artist’s 15% royalties.
Today, because of the drop in sales price of all audio products and the varying ways music makes money, record labels are moving to calculate the royalties of an artist on a percentage of what the label actually receives when an audio product is sold and not based on a sales price. Thus the artist's royalty rate may be higher such as 15%to 20% of the wholesale price paid to the label. It becomes easier to actually calculate the producer's royalty by just stating the producer is paid 20% to 25% of the artist's royalties than stating the producer is paid 3% to 4% of the suggested retail list price when the artist is not being paid a royalty based on that royalty business model. Even in the scenario described above when the artist is paid based on the sales price, the producer was still making 20% to 25% of the artist's royalty (3% of 15%=20% or 4% of 16%=25%). Since the producer's royalties are a percentage of the artist's royalties, it is just easier to contract this way. This reduces the mystery of what the producer (and artist) are to be paid from the sales of audio products.
If the producer assists in writing or arranging the artist’s music, he or she will receive a mechanical royalty in addition to the record royalty. As described more thoroughly in the chapter, The mechanical royalty, is paid by the record company to songwriters for the right to record their songs. Some producers, namely “producers of tracks” who compose the music, are entitled to 50% ownership of the song, and thus, 50% of the mechanical royalties also referred to as the publishing rights to the song. The record company would pay the other 50% of the royalty to the other songwriter(s), usually the writer(s) of the lyrics. If the artist is the sole songwriter then normally the producer would not share in the mechanical royalties if the producer does not contribute to he songwriting. However, because some producer's assistance in crafting an arrangement of a song written by an artist into a hit song, a producer may still ask for a percentage of the publishing income, which is the money made by the song apart from the money made from the recording.
As you can imagine, this system can get complicated if a label or artist uses several producers for the recording. An entertainment attorney should probably be consulted to determine the best way to structure the contract when there are more than one producer. In all cases, it is important to have a written agreement to make it clear what rights the producer will have and what royalties the producer will get paid. When there is no written contract, this can cause arguments, which can lead to lawsuits. Therefore, the best time to complete a contract is before the producer ever begins any production services.
This blog entry is an excerpt from the book titled Music Business Made Simple:Start An Independent Record Label that can be purchased at this link: Music Business Made Simple.
MusicContracts.com has a version of the contracts described above on the website at the following link: Music Production Contracts