Joseph Hwang
* This part constitutes a continuation of “K-pop Industry: Profits Share System between the Artist and Management Company - Part 1.”
1. Settlement
The most crucial aspect is the resolution of the financial dispute. This is because the artist and the management company are required to divide the profits generated by the artist under the terms of the contract. Given the lack of specificity in the legal framework regarding this aspect and the prevalence of the standard artist-exclusive agreement among artists and management companies, it is vital to ensure that the settlement aligns with the commitments made at the time of contract signing and is mutually agreed upon to prevent disputes.
Previously, the most prevalent issues in the settlement were “double counting of expenses” and “false inclusion of expenses.” The term “double counting of expenses” refers to the practice of booking expenses that have already been incurred on two separate occasions or inflating them to twice the amount, ultimately resulting in a reduction in profit compared to sales. Conversely, the term “false expense inclusion” denotes the booking of expenses that have not been incurred, leading to a corresponding reduction in revenue available for distribution. Furthermore, the omission of sales constitutes a form of illicit accounting. In some instances, revenue is generated in the artist’s absence. For illustration, one might cite record sales or copyright license revenue. When dealing with a collecting organization, it is more difficult to engage in collusive practices due to the presence of public oversight. However, when dealing with a private company, there are fewer restrictions, and it is not uncommon for management companies to retain royalties without informing the artists involved. These schemes have a common foundation: the revenue-sharing structure between the artist and the management company is based on an exclusive artist management agreement that splits the profits after deducting expenses from sales. Additionally, the management company receives revenue from the artist’s activities through a third party and shares the profits with them.
Let us examine the payment process in greater detail to support a more comprehensive understanding. The management company is responsible for receiving revenue generated from the artist’s activities and rights. Following the settlement of expenses, the management company deducts the sum of expenditures and costs from the revenues. If the profit is positive, the artist and the management company share the profit according to the contractual share rate. In the event of a deficit, distribution is not applicable. It is important to note the existence of a significant practice in the settlement. Before the artist’s debut, the management company is responsible for covering the costs associated with the artist’s education, training, and living expenses. The underlying premise is that the management company assumes the financial risk and expends funds before generating revenue. Consequently, when the artist begins to generate revenue, they are first reimbursed for their initial outlay and then entitled to a share of the revenues under the agreed-upon distribution percentage, once they have reached a point of financial equilibrium. It is within the company’s prerogative to retain the funds until the management company has deducted all expenses incurred before the artist’s debut.
The company can engage in fraudulent activity and misappropriate funds from the artist to achieve equilibrium. If a company has two K-pop idol groups and one manager is responsible for managing both groups, it would be reasonable to calculate and expense the manager’s salary at half the rate for each group. However, the company could double the deductible expense by claiming the manager’s salary as the same expense for both idol groups. Moreover, a company may include expenses and costs in the settlement that are not directly related to the artist’s activities. These may include interest expenses on the company’s bank loans, incurred for business purposes other than the management of the idol group, for example. The standard artist contract does not include indirect expenses in the settlement. However, the company may include indirect expenses in the settlement through a supplemental agreement to the main contract, should it so desire.
2. Sliding Scales of Distribution
In a capitalist system, money is the primary objective; however, devaluing human effort and labor has numerous consequences. Despite generating revenue as an artist, the management company acknowledges the inherent risk of investing in the artist’s debut. It then rationalizes the non-distribution of revenue to the artist until the break-even point is reached and all expenses have been recouped. Nevertheless, numerous requests have been made for an increase in the artist’s share of revenue, beyond the break-even point, by a modest percentage annually. This aims to acknowledge the value of the artist’s efforts and labor. Such a system of incremental compensation is referred to as a sliding scale. In certain instances, the sliding scale increases over the designated period, while in other cases, it decreases. This results from allowing for depreciation over time. The passage of time is a significant element in the valuation process. It is not uncommon for artists to experience fluctuations in value over time. Some may appreciate, while others may depreciate.
Although a sliding scale may be a reasonable approach for the artist, management companies are adept at devising strategies to offset any perceived losses. To illustrate, they may commence with a lower sliding rate or inflate the cost of breaking even. As an artist’s contract nears its expiration date, management companies may shift their focus and resources toward new talent, investing in the debut of the next generation of K-pop idols. The K-pop market is a capitalist industry.
3. Preventative Measures
The primary method for deterring accounting fraud is to intensify a moral mindset; however, there are additional factors to consider in the current profit distribution system. Management companies assume financial risks and make investments before an artist’s initial commercial release. Consequently, when an artist generates revenue following their debut, the company is justified in utilizing this revenue to recoup its expenses until it reaches a point of equilibrium, after which it may distribute the profits to the artist. If artists are not permitted to opt out of settlement methods that prioritize company expenses, then the system must be supplemented to reduce the likelihood of these occurrences. The underlying cause of most accounting irregularities is that the company is the primary recipient of revenue rather than the artist. To avert this structural issue, it is feasible to aggregate all revenue generated by the artist’s endeavors into a joint escrow account opened by the artist and the company. Subsequently, the proceeds can be disbursed to their respective bank accounts once the artist’s accounting materials have been reviewed and the results agreed upon.
An alternative approach would be to have a trusted third party collect revenues and distribute the profits on behalf of all parties; although this would entail a fee. The revenues would only be distributed if the artist and the company agreed to this arrangement. In the case of Hollywood movies in the United States, a separate money collector must be designated, the same system as that employed by an investment company funding a film.
While legislation represents a fundamental minimum, a moral mindset is arguably the most crucial element in any economy. However, given the insufficiency of a coherent system in this industry, it is challenging to anticipate optimal outcomes. The probability of a K-pop idol trainee achieving significant success and global recognition is relatively low. Nevertheless, the process of training and debuting is lengthy and arduous, and it is only right that the profits of the idol star, resulting from considerable effort, are distributed fairly and accurately.
* Series Articles
Part 1.
https://www.musicbusiness.co.kr/2024/09/k-pop-industry-profits-share-system.html
Part 2.
https://www.musicbusiness.co.kr/2024/09/k-pop-industry-profits-share-system_01072806606.html
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