What Is Contingent Compensation, Back End Compensation, or Participation?

As you may have already seen in your entertainment industry agreements, for the services rendered, talent usually can expect to receive an advance or a fixed flat fee that is a guaranteed and, at times, can also receive contingent compensation.  The “fixed fee” is the typical fee that you would expect to receive for the services you perform. But what is this “contingent compensation” that is not guaranteed where you may or may not ever receive any fees pursuant to the “contingent compensation” provision you have negotiated?  Why is that despite having language in your agreement discussing a payment, there is a possibility that you may not receive anything pursuant to such provision?

How much a participant in back-end compensation gets paid after the motion picture or a television project is released and exploited usually depends on two (2) factors:
(a) on how well such motion picture or a television project performs financially and
(b) how such contingent compensation is defined in their agreement.  How a project ultimately performs is more or less out of your hands but, at times, you may have some leverage to negotiate how your contingent compensation is defined.  Here, we begin to explore the different definitions of contingent compensation and how they are generally defined.

In producing content, in addition to raising the financing, having the suitable talent agreements, i.e. director, actor, writer, and producer agreements is a decisive factor in determining whether your project is produced. Having the right talent involved with your project will have a direct influence on whether or not you raise the financing that you need.  Often, talent, especially in the independent world of making content, agrees to a lesser guaranteed “up front” fee for a chance to participate in the project’s profits on the “back end,” that is after the project is released and is commercially exploited. Talent will take a risk with their up-front compensation usually when there are not enough funds in the budget of the project to pay their “quote” or their usual fee. Such talent is usually taking a risk by assuming that the project will be profitable and that she will be able to participate or share in the profits, if any.  This will, consequently, determine how much of the profits of the project are left for the producers as such participation is typically calculated from producer’s share of the profits not from the financier’s share.

There are unlimited different ways to structure and define these agreements for participations. The agreements for profit participation will differ greatly depending on the experience, clout, and the particular “buzz” around the parties and the project.  Although, sometimes, despite the leverage of the talent, they will take much less not only in their upfront fees but also in the profit participation so that the project can be made on a tight budget.  As a profit participant, there are two different basic kinds of participation definitions that you can expect, i.e. either a net profit participation or a gross profit participation in the revenues generated.  Gross profit participation or a contingent compensation calculated based on a percentage of first dollar gross receipts is the highest level of participation that you may be able to negotiate. With this structure, the participant receives a percentage of gross revenue from the first dollar received by the producer or the studio and the participant’s payment of contingent compensation is not entirely dependent on the financial success of the project. But this definition is usually reserved for only a select number of participants (A-list talent).  More commonly, contingent payment is based on a percentage of gross receipts of the project less a defined and negotiated number of deductions for costs, expenses, and fees. While contingent compensation provisions and definitions vary vastly in how they are defined, they all tend to revolve around the “break-even” point. Generally, this is the time when the costs and expenses associated with making, distributing, and releasing the project equals the revenues that it has generated, thus the project has “broken even”. Even these “break-even” points are specifically defined and described for each participant and subject to negotiation.  Finally, keep in mind that after you have finalized your agreements with pages of exhibits and negotiated the various definitions, sometimes “creative” accounting practices of producers, studios, and distribution companies may make it hard to receive any contingent compensation. Despite and because of the risky nature of “contingent compensation”, it is important to consult with your entertainment attorney when negotiating your agreement.

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