What They'll Never Tell You About the Music Business

by Peter M Thall

  PROVISIONS THAT SURVIVE TERMINATION

  Provisions that survive the end of the agreement should be carefully considered because they may have an impact on future employment. For example, there may be promises made regarding company policies (for example, secrecy; see the section on confidentiality, this page) that the employee will have to adhere to even long after the contract expires. For the most part, termination will have a deleterious effect on unvested stock options. Unvested options customarily expire on termination except for senior executives with some leverage. Companies are loath to extend or alter the terms of options—and it is not due to malice that they behave like this. There are considerable negative accounting consequences for a company that varies the terms of options for employees, especially if the modifications are unevenly applied.

  If termination occurs without cause, or in the ordinary course of the expiration of the term of the agreement, it is possible to negotiate an immediate vesting.

  Employees who share in profits or have the right to receive royalties may find that their own right to audit the company expires upon termination even though they have not yet received accountings reflecting monies earned during the term. And in some cases, monies are earned and payable after the term, even though the audit clause that would have been the basis of verifying the accountings may have been negated by the effect of termination. Similarly, profit shares and royalties may be payable only through the end of the contract term, and the language providing for this result may be so obscure as to be easily missed by someone reviewing the contract. (See below, under “A&R Incentive Plans.”)

  VACATIONS

  Sometimes, or for some people, it is awkward to highlight vacation issues when negotiating an employment agreement. Work, compensation for work, and productivity are considered to be the real focus of the contract, and nonwork and holiday issues are not. Nevertheless, everyone (including the person you are negotiating with) considers this to be a legitimate area to discuss and the specific needs of each employee should be addressed. If one is uncomfortable allocating a block of valuable negotiating time to nonwork issues, the negotiating position can easily be presented in writing (and in detail, with recommended contract language) by the employee’s attorney.

  One area of concern is vacation accumulated by employees who don’t take their vacation time—either because they are the most dedicated or the most neurotic employees the company has. Many companies have rules that require that vacation time must be taken during the year in which the vacation time accrues. The more structured the corporation, the more likely it is that it will have rules that affect everyone’s options—no matter how highly placed the employee.

  There are many and varied solutions to the problem. One that is becoming popular is the right to be permitted to take time off equivalent to two years’ vacation allowances. In other words, the vacation time accumulated over two years can be joined into one long holiday. This practically amounts to a sabbatical and is understandably very appealing to prospective employees. Another solution is simply to allow the employee to take the vacation time in cash. However, while this relieves the corporation from having to replace the employee for the period of the vacation, or to do without his or her services for that period, the result may be an exhausted employee, which could threaten productivity, so many companies have a policy against that option.

  One final vacation hint: Depending on how the unused vacation time can be rolled over from year to year, some senior executives use the vacation provision as an uncategorized slush fund that will be paid out on termination without (or even with) cause. Senior executives may not use the four or five weeks allotted to them, and such an employee who accumulates unused weeks (for example, two weeks a year for four years), will have additional severance on termination commensurate with the unused vacation weeks. Companies do not like this, but if the rollover practice of the company permits it, why not try for it?

  RELEASE AND SETTLEMENT

  In today’s volatile employment market, more and more employees are switching companies, and want the right to do so written into their contracts. Employers, on the other hand, have anticipated that they themselves might very well wish to terminate these contracts early. Many companies have been faced with issues (for example, sex and age discrimination) that not only generate unanticipated costs to the company, but whose resolution may add to the cost of termination beyond the contractual requirements. As a result, many companies have begun to insert into their employment agreements provisions that are somewhat different from their traditional termination provisions (especially those affecting termination without cause or for good reason). More and more companies are requiring that a release agreement “in company’s standard form” be executed and delivered at the point when the employee leaves the company. These documents include a release from any and all claims, including discrimination claims, that the employee may have relating to his or her employment and its termination. Failure to sign such a standard release agreement upon termination can result in the forfeiture by the employee of everything from the employee’s right to receive salary through to the end of the term of the contract, to benefits attached to employment such as medical benefits, and even prenegotiated severance-pay provisions, and this is true even when the standard form release is not referenced in the original agreement.

  EMPLOYMENT ISSUES SPECIFIC TO THE MUSIC INDUSTRY

  Most industries do not face the same kinds of issues that arise when a music business executive is in the negotiating stage of an employment agreement. First and foremost is the issue of how to calculate compensation payable to those who sign artists or writers to the companies that employ them. (The issue of incentive is generally applicable to all industries, but provisions dealing with incentives for A&R executives are specific to the music industry.) Second, music industry companies have historically not been as “corporate”—as structured and as rule driven—as other, more traditional companies. (With consolidation in the record industry, this is beginning to change.) Third, there is often an urgency in placing an executive in a position quickly lest the chance to present him or her at a high-profile industry event passes while the lawyers and human resources personnel are haggling over details. Also, many executive employees in the music industry are not your usual three-piece-suit types; their raisons d’être are creative, and they themselves are likely to chafe at the stratified regulations that bind employees in companies in other industries. Indeed, more and more often, former high-profile celebrities from the creative world are being hired by record and music publishing companies, giving rise to the same kind of problems that a television network has in dealing with its talent: other commitments. Finally, the nature of their work requires that certain unique provisions be included—for example, those pertaining to fan mail—that are not an issue in other types of companies.

  A&R Incentive Plans

  There are a variety of ways—or incentive plans—to calculate compensation payable to those who sign artists or writers to the companies that employ them. Most companies have their own incentive plans, and most of these have specific provisions affecting the termination of benefits. Suffice it to say that the best result one can obtain in an A&R incentive plan is that the financial interest that the employee may acquire in a given artist’s recordings or songs continues after the termination of employment. This result is rarely obtained. But as with many other positions taken by employers, there are many variations on the theme, and an employer who wants to accommodate the employee may be receptive to one or more of these.

  Before addressing the amount of compensation traditionally offered to A&R executives, I first want to point out that it is important to be specific in identifying the particular artists and sound carriers (for example, records, DVDs, etc.) as to which said compensation is payable. For example, if an A&R executive is the first to notice an artist; goes to a number of that artist’s showcases; participates over a period of time in discussions of material,
instrumentation, selection of a manager, strategies to interest the senior record company executives, etc.; and ultimately is responsible for persuading the senior executives to sign the artist, that exec is likely to be considered qualified for the A&R incentive plan.

  But what if an obscure artist already has a record released in Europe (think: Macarena, Chant)? Even if the A&R person “discovers” the record, identifies the artist, takes the steps necessary for the US record company affiliate to sign the artist or merely to release the record, and works the record and the artist in the United States as if he or she had gone through all of the other processes described above, that person still may not qualify for the A&R incentive plan unless the language of the plan is flexible enough to include this particular circumstance. The same concern is present when an A&R executive is successful in persuading an artist who has been previously discovered by another label to come aboard the executive’s own company. Many plans exempt from coverage any artist who appeared on another label, or any artist whose records have sold, say, 250,000 or more copies on another label. (One might call this provision a disincentive.)

  Unfortunately, many of these plans are written in stone; that is, they are not negotiable. The person negotiating for the record company will usually say that the A&R person has to trust that his or her superiors will “do the right thing” in situations other than the standard ones. So much for creative lawyering. I do not know whether this attitude is a function of orders from on high or merely of laziness on the part of the company’s staff assigned to draft modifications in language, but it is prevalent, certainly among the majors.

  The A&R exec trying to establish whether he or she is entitled to an incentive royalty on a particular artist or record is usually left only with the language of the company’s standard incentive plan to resolve any questions, and I heartily recommend that every A&R person, before signing the employment agreement, read it very carefully, keeping in mind any “fluke” situations from his or her own past—or even the historical past. For example, ABBA was the direct outgrowth of the two Bs (Björn and Benny), whose single “Ring, Ring the Telephone” was going nowhere on a now-defunct label, Playboy Records. If the inducement plan for the A&R person at Atlantic who convinced the label to sign an agreement under which ABBA would spend their entire careers included language requiring that he or she had to have “discovered” the artist, the A&R person would not have been entitled to any participation in the group’s success. Another remarkable turn of events (positive for the new label and horribly negative for the old) occurred when Elton John’s first single was going nowhere on Bell Records, the predecessor of Arista Records. A few entreaties and a few more dollars and one of the largest-selling artists of the 20th century switched to UNI (MCA, now Universal), and the rest is history. As in the ABBA example, under similar language John’s A&R person at UNI would not qualify for compensation. Now isn’t that ridiculous?

  Sometimes the preamble of the incentive plan itself gives some hint as to how a conflict about identifying artists or records that qualify for a royalty can be resolved. Following is an excerpt from one major label’s A&R incentive plan.

  This plan is designed to meet the following objectives all of which are intended to support eligible A&R positions:

  1. To reward eligible A&R employees for their contributions in maximizing roster development, recording and sales of BMG Classics’ product.

  2. To assist in attracting and retaining qualified A&R employees.

  While this language may be in conflict with the exact language of the royalty provision, which most likely speaks in terms of acts “first signed or discovered” by the A&R person, a court could easily fit a Macarena, a Chant, an ABBA, or an Elton John into the definition if sufficient ambiguity were present to allow it to do so.

  VARIATIONS OF ROYALTY CALCULATIONS

  The royalty payable to the A&R person (often referred to as an “override”) is customarily established at one rate for the United States and one-half of that for the rest of the world. A 1% to 1.5% royalty rate is fairly standard. This is usually calculated on the same basis as is that of the applicable artist signed by or served by the A&R person, and customarily amounts to from $0.09 to $0.12 cents. Here are some other variations:

  • Sometimes the royalty is attributable only to recordings sold in the United States or in a territory somewhat less than the entire world.

  • Sometimes the royalty will be capped at a certain amount of money (for example, an amount equivalent to the A&R person’s salary).

  • Sometimes the royalty is payable from record one after recoupment of the recording costs at the artist’s net (that is, lower) rate.

  • Sometimes the royalty is payable from record one after recoupment of the recording costs at the combined artist and producer rate (a faster rate of recoupment).

  • Sometimes the royalty is payable prospectively from the point that the company has recouped the recording costs at the artist’s net royalty rate.

  • Sometimes the royalty is payable prospectively from the point that the company has recouped the recording costs at the combined artist and producer’s rate.

  • Sometimes the royalty is payable in the manner described in the four bulleted items immediately preceding this one, but instead of recouping only the recording costs, all (or many) costs attributable to a particular album (including video, marketing, promotion, touring, and other costs) are recouped at one rate or another as noted above.

  • Sometimes the royalty is payable after a portion of the A&R person’s salary is recouped—that is, as if a portion of the A&R person’s salary is an “advance.”

  • Most often, the royalty is payable only until the expiration of the term of the A&R person’s employment agreement or, alternatively, the royalty is payable (sometimes in a diminishing amount) over a period of years (one, two, or three) after expiration of the term of the A&R person’s employment.

  • Sometimes, though rarely, the royalty is payable after the expiration of the term (at least for a while) of the A&R person’s employment agreement, if the employment expires on its own terms or is terminated without cause. Sometimes, also rarely, the royalty is payable after the expiration of the term (at least for a while) of the A&R person’s employment agreement, if the A&R person terminates the agreement for good reason. The clauses pertaining to collection of royalties after termination can be extremely important, and the A&R person, and his or her representative, must review all such provisions carefully.

  • Sometimes the royalty is payable with respect to all of the recordings made by the artist whom the A&R person signed or serviced.

  • Sometimes the royalty is payable with respect to all of the recordings made by the artist whom the A&R person signed or serviced, with the exception of recordings made pursuant to a renegotiation.

  • Sometimes the royalty is payable with respect to all of the recordings made by the artist whom the A&R person signed or serviced, with the exception of recordings made pursuant to an extension agreement.

  • Sometimes the royalty is no longer payable if the A&R person dies or is disabled during the term. Sometimes it is.

  • Sometimes the A&R person’s contract requires that special credit provisions be provided on records (that is, “A&R’d” by that person) and the royalty is payable only on records containing this credit.

  • Most often, the royalty is payable only on USNRC albums (United States net sales through normal retail channels—that is, not for sales outside of the United States). Thus the royalty is not paid on singles, midpriced records, budget records, records sold through record clubs, records sold via armed forces PXs, premium sales, educational and institutional means, licensed uses, governmental distribution and mail order; and tracks derived from full-length CDs sold as part of compilations. (Note that sometimes a reduced royalty will be paid for records sold in some, but not all, of these categories.) Such a provision could bar the A&R person from receiving a share of DPD sales
, today’s fastest-growing format, and conceivably the preferred format for most “record” sales in the future.

  • Sometimes the royalty is paid not only on USNRC, but on sales outside of the United States as well, excluding ancillary sales. Sometimes the royalty is paid not only on USNRC, but on all sales outside of the United States as well, including ancillary sales.

  • Sometimes the royalty is paid at the same rates as the artist’s royalties are calculated; sometimes it is paid at an arbitrary “half rate.”

  • Sometimes, the royalty is paid only while the artist is in the “black.” This has the effect of the A&R person’s royalties being retained by the record company once the artist, not the A&R person, has commenced recording of a subsequent record or has been charged with video, tour support, more independent promotion costs, or even taken an advance, and has placed his royalty account “in the red” all over again.

  • Sometimes royalties payable with respect to one artist whose recording costs are recouped are withheld by the record company because another artist or artists as to whose records the A&R person is entitled to receive royalties is in an unrecouped status. In other words, the accounts are cross-collateralized. This is, of course, a disaster in most situations for the A&R person.

  • Sometimes (and this variation is an especially hard one to take) the A&R person is a producer of the artist’s recordings as well and the contract reduces the producer’s royalty by the amount that the A&R person would have received pursuant to the A&R royalty provisions.