Producer Agreements

Under the terms of the typical record producer agreement, the producer is paid a cash advance by the record label – that is, unless the label is very small and can’t afford to pay producer
advances.

The record label will also be obligated to pay royalties on future record sales to the producer, subject to certain conditions (described below). However, the record label will be entitled to first
recoup (deduct) from those royalties the amount of the advance originally paid to the producer. Any remaining amount will then be paid to the producer.

For example, if the advance is $25,000 and the producer’s royalties eventually add up to $60,000, then the producer will later receive an additional $35,000 (i.e. $60,000 minus the original $25,000 advance).

Note to Independent/Unsigned Artists: In many instances, an unsigned independent artist, rather than a record company, will be hiring a record producer. In that situation, the terms of the
agreement will be very similar to the terms of contracts between record companies and producers. And so, if you’re an independent artist about to enter into a contract with a producer, you are in effect operating as your own record company, and so, the terms discussed below, applicable to record companies, will generally apply equally to you as the artist/label.

Record Producer Agreements: Who Signs the Deal?

In the case of signed artists, it may be either the record company who contracts with the record producer, or it may be the artist who does so. The answer will depend on the terms of the artist’s
recording contract with a record company.

If the Record Company Is Signing the Deal with the Producer. If the producer agreement is between the producer and the record company, the record company will generally require a
“Letter of Direction” from the artist, authorizing the record company to pay a certain designated advance and royalty directly to the producer.

Depending on what approval rights are contained in the recording agreement between the artist and the record company, the record company may be contractually required to obtain the artist’s written approval as to the selection of the producer, as well as the terms of the producer agreement. From an artist’s perspective, it’s very important to have this right of approval, since a
“sweetheart deal” between a record company and a producer can sometimes have very negative financial repercussions for the artist.

If a Signed Artist Is Signing the Deal with the Producer. If the producer agreement is between the producer and the artist, the record company will often (but not always) have the
right to approve or reject the producer.

Also, the record company will typically require the producer to sign a side agreement directly with the record company (sometimes called a “Producer Declaration”). This document will say
that if there’s any conflict between the terms of the agreement between the artist and producer, and the recording agreement between the artist and the label, the terms of the recording
agreement will supersede and preempt the producer agreement. This permits the record company to, in effect, override any provisions in the producer agreement which are contrary to the label’s normal policies, and to avoid any contractual obligations not already contained in the artist’s recording contract with the label.

Record Business 101: If you’re a producer, you want to do everything possible, before you start producing a record, to try to get the record company to agree in writing to pay your producer
royalties to you DIRECTLY, rather than you having to collect your producer royalties from the artist.

First of all, the artist may very possibly not have the money to pay you when your producer royalties become due. Secondly, even if the artist “directs” the record company to pay you directly, such directions are not binding on the record company and so the record company may refuse to do so.

Getting a record company to pay you directly will require not only a “Letter of Direction” signed by the artist, but also a document signed by the record company agreeing to pay you directly.

Record Producer Agreements: The Basics

The basic provisions of record producer agreements are as follows:

Payment of Recording Costs and Ownership of Masters. The record company is obligated to pay the approved recording costs. Often there’s an itemized recording budget attached to the producer agreement. The record company will own all masters and will normally have approval rights over the masters. This gives the label the right to reject any masters which are not
technically or commercially satisfactory.

If the producer owns the studio where the project is going to be produced, the producer will usually submit a recording budget for the estimated studio fees and the miscellaneous recording
costs (e.g., session musicians). These expenses will usually be referred to in the producer agreement but generally will not be considered as part of the advance to the producer.

Payment of an Advance to the Producer. The agreement will provide for the producer to be paid a certain cash advance. This advance will be recoupable from the producer’s future
royalties, as shown in the example above.

Producer Royalties. Usually the producer royalty is in the range of 3% to 4% of the wholesale price (“PPD Price”) retail price of records sold. For hot producers, the royalty is often higher.

Incidentally, until recent years, producers were paid 3 to 4% of the RETAIL price (subject to certain deductions), not the wholesale price. And, because the wholesale price is significantly
less than the retail price, producers are now often being paid less in dollars-and- cents (for each record sold) than they were under the retail price royalty formula.

The “All-In” Concept. In most instances, the band’s recording agreement with the record company will provide for an “all-in” ‘artist plus producer’ royalty rate. For example, if there’s an
“all-in” artist/producer combined royalty of 14% of the wholesale price of records sold, then if the producer royalty is 3%, the artist will receive the remaining 11%. This remaining percentage payable to the artist is usually called the “Net Artist Rate.” (Incidentally, sometimes, particularly in the case of country music recording agreements, the royalty rate provided for in the recording contract is an “artist only” royalty, and not an “all in” (artist plus producer) royalty rate. In that situation, the artist’s royalty rate isn’t directly affected by what the producer’s royalty rate is.

Producer agreements and recording agreements usually provide that no royalties will be paid to the producer until all recording costs have been recouped at the so-called “Net Artist Rate.”
Using the example from above, if the producer royalty is 3% and the “all in” artist plus producer royalty is 14%, then the “Net Artist Rate” is 11%. Once the amount of artist royalties, (calculated
at the “Net Artist Rate”) equal the total recording costs, the producer will be entitled to be paid royalties. The “artist royalties calculated at the net artist rate” will not actually be paid to the
artist; this calculation is merely an accounting process and is only done to determine the point at which producer royalties must be paid.

Example: Let’s say, to make it simple, that the total recording costs are $125,000 and that the 11% “Net Artist Rate” equals $1 for each record sold. Once 125,000 records are sold, the recording costs will have been recouped by the record company (at the Net Artist Rate of $1 per each record sold). Producer royalties will then be owed to the producer at that point. Under the terms of most record producer agreements, those producer royalties will be calculated on a “record one” basis.

“Record One.” The term “record one” is often used in producer agreements. It means that once the recording costs are recouped at the Net Artist Rate, the producer will be paid
retroactively for all records sold, beginning with the very first record sold. Again, this is referred to as being paid “from record one.”

This concept has very important ramifications for both the artist and producer. Producers are typically paid from “record one,” but artists are not. So, using the above example, once 125,000 records are sold, the producer is paid for all records back to the very first record, but under the terms of the typical record deal, the artist would be paid artist royalties on only those records sold after those first 125,000 records. In other words, the artist, using the sample numbers listed above, would not be paid artist royalties on those first 125,000 records. Therefore, as a practical matter, the producer typically gets a bigger piece of the total artist/producer royalty pie than their respective royalty rates would suggest.

Here’s a (somewhat oversimplified) example how all this works: Let’s say a producer is paid a $20,000 advance, and that the producer’s royalty rate equates to 25 cents for each record sold. If,
using the sample numbers above, 125,000 records are sold (such that the $125,000 in recording costs are recouped at the $1/record “Net Artist Rate”), the producer is owed $31,250 (125,000
multiplied by 25 cents for each record) for those 125,000 records. But since the record company is entitled to recoup the original $20,000 producer advance from the producer’s royalties, the
record company must pay the producer only another $11,250 for those 125,000 records (the $31,250 in total producer royalties up to that date, minus the producer’s original $20,000 advance).

For all records sold after those first 125,000 records, the producer in that scenario will continue to receive additional producer royalties at the rate of 25 cents for each such record sold.

“Pass Through” Clause. Most producer agreements contain a clause, often referred to as the “pass through clause,” which provides that the producer’s royalties will be calculated on the
same terms as the artist’s royalties. For example, if the artist’s recording agreement with the label says that the artist will not be paid on “free goods” and will be paid a lower royalty rate on foreign sales, then the producer’s royalty will be adjusted in the same way. This kind of clause can have very negative consequences for a producer who is producing an artist who has signed
an especially sub-standard record deal.

Tricky Issues Concerning Recoupment. There can be some fairly tricky issues connected with the recoupment clauses in producer contracts. For example, the producer will want to make sure that the definition of “recording costs” in the producer agreement excludes any cash advances paid to the artist.

In general, the producer will want to have the term “recording costs” defined as narrowly as possible. The narrower the definition of “recording costs,” the lower the total dollar amount of recoupable recording costs there will be. And the lower the recording costs, the sooner those costs will be recouped by the record company, and therefore, the sooner the producer royalties must be paid.

The Producer’s Audit Rights. If the producer agreement is between the producer and recording company, the producer will normally have the right to audit the record company’s books.

However, if the producer agreement is between the producer and artist, the producer will not have the right to audit the record label’s books. Therefore the producer will sometimes request a
clause in the producer-artist agreement allowing the producer to compel the artist to audit the label’s books on behalf of the artist and producer jointly.

Producer Credits. Usually the producer agreement will state, sometimes very specifically, how the producer credit will read on record artwork and in any print ads.

“Re-Recording Restriction.” Generally the producer agreement will prohibit the producer from using any song from the project in another recording project (with a different artist) within a specific period of time, usually two or three years.

The Financial Realities of Record Company Recoupment

As mentioned above, producer royalties become payable once the record company has recouped the recording costs at the “Net Artist Rate.” As a practical matter, these calculations are
“Hollywood accounting” and have little or nothing to do with the financial realities of the situation. In many (if not most) instances, the record company will have “broken even” from sales of the record long before it has, for accounting purposes, “recouped recording costs at the “Net Artist Rate.”