Don’t Get Caught in the Royalty Net

By Susan Spann

My last guest post here at the RMFW blog took an overview look at publishing rights, with a focus on the “Big Four” – Exclusivity, Geography, Translation, and Formats.

Today, we’re taking a look at royalties – specifically, at royalty calculation and the contract language which bases an author’s royalties on “gross” or “net” sales proceeds.

Royalties are the money an author receives from a publisher on sales of the author’s work.

The amount of the royalty usually varies by format, with typical percentages averaging 9-10% on hardcover sales, 8-9% on trade paperbacks, 5-6% on mass market (sometimes also called “rack sized”) paperbacks, and 25% on ebooks.*

Many contracts also contain “escalation clauses,” which increase the percentages once sales pass a stated numerical threshold.

When the author receives an advance, the publisher pays the author a lump-sum payment (sometimes in several installments) which is credited against the royalties due on future sales. When authors receive an advance, the author receives no royalty checks until the author’s royalties on actual sales (less returns) exceeds the advance amount. 

At first glance, royalty calculation seems pretty simple: sales price multiplied by the royalty percentage equals royalty due … right?

Not exactly. You need to read (and understand) the fine print in your contract.

Publishing contracts calculate royalties in one of two ways:

Gross royalty calculation (sometimes phrased as calculation on “list price” or “price received”) means the author’s share of sales is based on amounts the publisher receives, with no deductions (except for returns, severe discount sales, and review copies, as well as a couple of other standard situations where royalties are never–or almost never–due). A gross royalty clause calls for calculation of the author’s royalties based on the publisher’s list price or the money the publisher receives on sales, without deductions for publishing costs or other costs incurred by the publisher. This is the best form of royalty for the author, and the one an author should try to insist on.

Net royalty calculation means that the author’s share of royalties is based on some amount less than what the publisher actually receives. The contract language will use the word “net” or specify that the publisher can deduct certain sums or expenses from the sales proceeds before calculating the author’s share. In cases where the publisher insists on net royalty calculation, the author must insist that the contract specify exactly what expenses the publisher can (and cannot) deduct before calculating the royalties due to the author. Unspecified “net royalty” clauses are dangerous for the author, because the publisher can reduce receipts (and therefore the author’s royalties) by deducting all kinds of costs that the publisher should normally bear.

Remember: in traditional publishing situations, the publisher–and the publisher alone–bears the costs of producing, distributing, and marketing the books. The author does not and should not share those costs.

The language to watch for reads: “Publisher will pay Author X% of Publisher’s net receipts (or net profits) on sales of the Work.”

Paraphrases of this language are equally bad.

When a contract uses the word “net,” or allows the publisher to deduct sums other than taxes and shipping added to the purchase price (meaning taxes and shipping paid by the purchaser over and above the price of the books) authors should, at a minimum, be wary. If changing the contract to gross royalties isn’t an option, and the author still wants to go through with the deal (there are reasons to make such a choice, but only after consultation with a trusted agent or attorney) the author must ensure that “net” is thoroughly and specifically defined and that publisher deductions are based upon “actual, documented” costs – not estimates or undocumented “costs.”

Not all net royalty contracts represent blatant attempts to defraud the author – some reputable publishers do use them – but authors must be very careful about agreeing to royalties based on net, and should never do so without professional advice.

One final word about the term “net” – in recent months, I’ve seen a couple of publishers’ contracts which use the word “net” but define the term in a way that actually represents a gross royalty calculation. Unless you’re well-versed in publishing legalese, you might not be able to tell the difference.

The best way to ensure your rights are properly protected? Find an agent or an attorney you trust and never sign a contract without professional review and advice.

*(Note: these numbers hold if you’re published by a New York publishing house. Digital-only presses, POD publishers, and small independent houses may (and usually do) vary.)

Have questions about this or other publishing legal issues? Please feel free to ask in the comments – I’m glad to help!

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 Susan Spann is a publishing attorney and author from Sacramento, California. Her debut mystery novel, CLAWS OF THE CAT (Minotaur Books, July 2013), is the first in a series featuring ninja detective Hiro Hattori. The sequel, BLADE OF THE SAMURAI, will release on July 15, 2014. Susan blogs about writing, publishing law and seahorses at http://www.SusanSpann.com. Find her on Twitter @SusanSpann or on Facebook.