I lived in South Africa for well over a decade, but I grew up the American Midwest – and I have always taken music seriously. I’ve explored everything from country music to rap, and a lot of independent music. So, at Christmas lunch last year, when one friend said to another, “Rodriguez is coming to South Africa again,” and everyone at the table gasped in excitement, I was caught off guard. Little did I know that the story behind this recording artist would teach me about the importance of royalty accounting.

“Who is Rodriguez?” I asked, assuming he was a minor South African musician.

“What?” Shocked and slightly horrified faces stared back at me. “You don’t know Rodriguez?”

As is turns out, Sixto Rodriguez is a Detroit-based folk singer who released a couple of albums in the early 70s. Few people in the States have ever heard of him; fewer still bought the music when it was originally released. But in South Africa, this guy was bigger than Elvis or the Rolling Stones. His songs were anthems for entire generations. He was a superstar – and he never knew it.

Why? Because he never received the royalty payments he was due, nor did he understnand the importance of royalty accouting.

And that means he stopped making music. Only when a handful of South Africans tracked him down in the late 1990s did he discover his legendary status. As the Oscar-winning documentary Searching for Sugarman explored, it seems likely that this obscure ex-musician living barely above the breadline is owed millions in back royalty payments.

Royalties and the Basics of Royalty Accounting

 Payments to songwriters often take the form of royalties. These payments occur when songwriters do not have the means to produce and distribute their own music. Even if they could distribute their music on their own, it is understandably difficult for a single entity to keep track of a song’s sales and the amount of radio play it receives. Record companies tend to take over this role. Because the sales of any song are so variable, songwriters get a cut based on the total income earned. Hance the imortance of royalty accoutning.

These are not ad hoc payments based on what the record company feels like sharing; instead, legal contracts bind the relevant parties and strictly govern royalty payments. These agreements outline the who, what, when, where, why and how of any royalty system. Depending on the industry, these are largely standard, with specifics changing according to individual needs. Contracts cover every aspect of payments, such as whether payments are distributed monthly or quarterly and whether payments are based on gross or net revenues. With all the challenges involved in tracking sales across the globe and the importance of royalty accounting, these contracts must include specifics.

There are several different accounting methods for determining royalty payments. Although agreements between parties largely determine payments, every industry tends to work with one consistent accounting and payment disbursal method. Payments due to a songwriter, author, or other intellectual property owner are usually calculated according to one of the following systems:

Gross Revenue Payment – The amount due to the songwriter is a percentage of the total income before taking any other expenses into account.

Net Revenue Payment – Songwriters receive a check based on the income earned after expenses. For example, in the publishing world, writers are paid according to sales of a title only after the cost of printing and marketing have been paid.

Price Per Unit Payment – These are flat amounts paid for a song or a book within a specific format. Songwriters are often due a flat rate amount for each CD sold, and a different amount every time a song is played on the radio.

Minimum Rent Payments – This means a minimum amount is paid per month, even if no sales are made. If sales exceed the minimum, a greater amount may be paid.

Accounting Columns and Considerations

 Any royalty agreement or rights contract will include the method of accounting and an outline of all the considerations that would augment or detract from payment. Some examples are:

Royalty Advances – These payments are given to an artist before they are actually earned, meaning that the artist’s percentage of sales then goes towards this amount until the amount is paid off.

Monthly Royalty Expense – Typically, royalty payments accumulate over a few months. Record companies account for the payments owed to their artists by listing monthly royalty expenses within their royalty accounting program.

Subsidiary Rights Income – Not all record companies operate internationally, so they often license companies based in other countries to produce and/or distribute music on their behalf. Payments from these subsidiaries must be included within the accounting.

Author’s Charges – These count against royalty payments and include things like proofreading expenses, indexing, or perhaps the photo shoot a production house paid for to market an artist.

Reserves – These are amounts held back at the author’s or publisher’s discretion to insure against future sales.

Joint Accounting – This occurs when there are disparate sales between multiple albums or books created by the same songwriter or author. Although individual titles are often accounted individually, it is sometimes more economical to merge the accounts.

These days most of this accounting, from the type of payment used to the date of payment, is fully automated. Depending on the size of the companies involved, it can be run by a single person or an entire department. Many of these processes are now online, so artists can check their figures and sales on their own. The main thing is that all parties are comfortable with the system, the disbursement of payments, and understand the importance of royalty accounting.

So What About Rodriguez?

 As the documentary Searching for Sugarman started to gain a following, a new generation became interested in Rodriguez’s music. His albums have been re-released and are available on iTunes – and, for the first time, he has started receiving royalty payments for his music. But what about all those licensed releases sold in South Africa years ago?

The South African distributors sent checks to the Rodriguez’s record company, and the checks were cashed – only, Rodriguez never received his cut. When he first came to South Africa and realized the extent of his popularity, he didn’t want to know about the money from old sales. But after 15 years of consideration, he is now pursuing the case in court. After all, someone was earning – just not him. Now it is a matter of forensic royalty accounting and examining the royalty agreements and contracts that were initially put in place.

After diving into the world of Rodriguez, I am sold. His music is brilliant, and his story is really quite powerful. The other night, I enjoyed an informal dinner at a friend’s house and, for the first time, I recognized a Rodriguez song playing. The album “Cold Fact” is all I want for Christmas – and fortunately, Rodriguez will now get his royalty payment from my enjoyment. Hopefully one day he will get all the money owed him for old South African sales. At the very least, his story should provide a warning to production houses who want to hide sales from their artists or to artists who really don’t understand the importance of royalty accounting.