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 crucial 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 double the amount simultaneously, which ultimately conclusions in a reduction in revenue compared to sales. Conversely, the term "false expense inclusion" denotes the booking of expenses that have not been spent, leading to a corresponding reduction in revenue to be distributed. Furthermore, the omission of sales constitutes a form of illicit accounting. In some instances, revenue is generated in the artist's absence. To illustrate, 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 to split the profits after deducting expenses from sales. Furthermore, the management company receives the revenue from the artist's activities from 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 revenues. Consequently, when the artist begins to generate revenues, 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 plus interest expenses on the company's bank loans, for example, incurred for business purposes other than the management of the idol group. The standard artist contract does not include indirect expenses in the settlement. However, the company may contain indirect expenses in the settlement through a supplemental agreement of the main contract, should it so desire.
2. Sliding Scales of Distribution
In a capitalist system, money is the primary objective; however, devaluating human effort and labor has numerous consequences. Despite generating revenues by an artist, the management company acknowledges the inherent risk of investing in the artist's debut. It then rationalizes the non-distribution of revenues to the artist until the break-even point has been reached and all expenses have been recouped. Nevertheless, there have been numerous insists for an increase in the artist's share of revenue, beyond the break-even point, by a modest percentage annually. This is intended 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 undergoes an increase over the designated period, whereas in other cases, it experiences a decrease. This is the consequence of 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 to a moral mindset, yet there are additional factors to consider in a current profits distribution system. Management companies assume financial risks and make investments before an artist's initial commercial release. Consequently, when an artist generates revenues following their debut, the company is justified in utilizing these revenues 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 the above examples occurring. The underlying cause of most accounting irregularities is that the company is the primary recipient of revenues, rather than the artist. To avert this structural cause, it is feasible to aggregate all revenues generated by the artist's endeavors in a joint bank 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 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, maintaining 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 just that the profits of the idol star, which are the result of considerable effort, should be distributed accurately and fairly.
* 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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