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One of the main reasons why we built WorkingLit is to make royalty time suck less. Paying royalties is one of the more complicated tasks on a publisher’s plate, and we wanted to help simplify and clarify the process so you can send out a growing number of royalty statements every year without prematurely aging as a result.

Part of what makes royalties complicated is that you likely pay multiple royalties to each author, even if they only have one book—and these royalties almost never earn out at the same rate. Different publishers have developed different ways of handling this. A common method, in which multiple formats or titles earn separate royalties against a single balance is called “compound royalties.”

Compound royalties is the standard term for this practice, introduced by the Authors Guild, but we’ve also heard it called “basketing,” “cross-collateralization,” and “joint accounting.” Whatever you call it, we find it very difficult to explain, both to authors and ourselves, but we’re going to do our best here so we can all learn and level up together. And we’ll introduce some more terminology that we can maybe all use together

There are two main ways that royalties can be grouped together. None of these are particularly better than the others, but when you’re wrapping your head around your royalty system, understanding which one you do is key. And the one that you choose should be based on your contract, rather than what is simplest. Or in the case when you are writing the contract, then you get to ensure it’s the simplest!

Author-Oriented Compound Royalties

Say you publish your company’s first book. You pay the author a modest advance on royalties and sales are good. After the first year, they earn out the advance, sales continue strong in both paper and ebook formats, perhaps supplemented by foreign and audio licenses, and you start paying them royalties regularly.

Buoyed by this success, the author writes another book and you decide to go for it. You sign a new contract together and pay them another advance while the editorial team gets to work.

But now it’s time to send out royalty statements again, and you’re left with a dilemma. Your author now has two contracts, one for an actively selling book and one for a book that hasn’t yet been announced. Their statement might look something like this (though undoubtedly with much fewer round numbers):

Author A: Book One
Paperback: $100 owed
Ebook: $50 owed
Total owed: $150

Author B: Book Two
Paperback: -$500 owed (the negative number reflecting the new advance that has not yet begun to earn out)
Ebook: $0 owed
Total owed: $-500

You’ve got two potential scenarios here:

Non-compound royalties: You pay the author $150 owed for the first book
Author-oriented compound royalties: You provide a “total owed” amount of -$350 on the statement and wait for total sales to earn out the Book Two advance. You are using compound royalties with the author as the uniting factor here—every royalty on this individual’s statement is grouped together. You can see why the Author’s Guild frowns upon compound royalties: they want their clients to earn as much as possible. However, there are many cases where a compound royalty works out in the best interest of the author, such as when they have many small licenses earning out to a substantial check that wouldn’t have paid out yet individually.

Title-oriented compound royalties

Another example: An author only has one book, but not all the formats of that book are selling at an equal rate. For instance, maybe you pay them a net-profit royalty (where expenses are deducted before royalties are calculated), and one format just isn’t earning out. Their statement might look like this:

Author B: Book One
Paperback: $100 owed
Ebook: -$150 owed (with the negative number reflecting the portion of the ebook conversion cost that has not yet been recouped by ebook sales)
Total owed for this title (with compounding royalties): -$50

Author B: Book Two
Paperback: $20
Ebook: $10
Total owed for this title: $30

Non-compounding royalties: You pay this author $120. (The royalties for each book AND each format are calculated and owed separately.)
Author-oriented compounding royalties: Your statement reads “total amount owed: -$20” (the sum of the amounts owed for all titles by that author)
Title-oriented compounding royalties: You pay the author $30 (You pay the positive amount owed for Book Two)

Other publishers handle royalties differently. Some publishers compound sub-rights sales for a title (eg, if you sell an audiobook or international publishing license), and others treat those separately. We know one publisher who has compounding royalties for each contract, so the royalties for all of the titles in a multi-book series would be grouped together, but other books for that author outside the series would be treated separately on royalty statements.

The challenge of handling payments for compounding royalties

Microcosm, like many publishers, treats all an author’s royalties together in one lump, with a grand total on each statement that adds up the total owed, positive or negative, across all formats of all books. It’s a compound royalty where the royalties are grouped by author.

Our big project right now is building compound royalty functionality into WorkingLit, and our first challenge has been to explain it to ourselves so that we can create a system that is as simple and clear as possible while allowing for the myriad ways that publishers handle royalties.

One of our thorniest questions is how to apply royalty payments when royalties are compounded. To return to our first example:

Author A: Book One
Paperback: $100 owed
Ebook: $50 owed
Total owed: $150

Microcosm’s long-time standard practice is to write the author a check for $150 and apply the full payment to whichever title and product option is owed the most. So after applying that payment, their statement would look like this:

Author A: Book One (post-royalty payment)
Paperback: -$50 owed
Ebook: $50 owed
Total owed: $0

The total is always zero after the royalty is paid, but there is always at least one product that looks like it’s in the hole, and others that seem like they’re never moving much. Author confusion abounds, and we can see why. We’d like to make the whole system feel cleaner from the ground up in WorkingLit, so that an author’s statement will always look something like this after that same $150 check goes out:

Book One
Paperback: $0 owed
Ebook: $0 owed
Total owed: $0

So refreshing and clear, right? We’re not entirely sure how to do that without causing greater problems but we’re working on it.

Our question for you, dear reader, is this: How does your company handle compounding royalties? Do you use them? How do you group them? What do you call them? How do you talk about them in your contracts? What is included and what isn’t? How do you apply payments?