Residual payment

From CEOpedia | Management online

Residual payments are payments or a stream of payments received after the provision of services or delivery of a product / good. For example, an artist may receive residual payment for a song created a long time ago because other payments are very often involved in the production of entertainment. Movies and music goods can generate profits long after they were created[1].

Residual pension

The residual payment is to ensure that an employee and his family receive at least as much in regular retirement and survivor benefits as the employee paid in retirement taxes. The residual payment is the only type of benefit that may be paid on the basis of less than 10 years. It is paid when it appears that no further benefits, based in whole or in part, will be payable under either the Retirement Social Security Act. However, a widow or parent who will be eligible for monthly survivor benefits at some time in the future may waive rights to these future benefits in order to make the residual payment available immediately.

The residual payment is made to a beneficiary designer by the employee or if none has been designated to his widow (or widower ) if she was living with him at the time of his death, children, grandchildren, parents, brothers, and sisters, or estate, in that order. The amount paid is equal to the railroad retirement taxes paid by the employee, plus an allowance in lieu of interest and minus the total of:

  • regular retirement benefits paid employee and huswife under the Retirement Act,
  • The portion of retirement benefits paid to the employee and his family under the Social Security Act that was attributable to his earnings, and
  • survivor benefits paid on the employee's death under either the Retirement or the Social Security Act.

Most residual payments are made to survivors of non retired employees. This is because annuities to a retired employee and his wife usually amount ti much more than the employee paid in taxes so that no residual payment is due after his death. Also, a large proportion of widows of retired employees receive survivor annuities, and these payments are also deducted from the gross residual amount.

Attribution of residual payment

The residual payment is attributed to the passive income obtained from previous divestiture. For example, insurance representatives usually receive an initial percentage for the sale and current residual payments, as long as the customer still meets the monthly premium requirements. In the same way, book authors usually receive up-front remuneration as well as residual payments, as long as consumers buy their books[2].

Principle of operation of the residual payment

The forms of payment differ, which depends on whether the consumer pays for the service and for the customers they still pay for the service, or if they buy a supplementary product. The sum, usually expressed as a percentage of monthly, six-month or twelve-month sales revenue, must meet the previously mentioned or indicated requirements. For the author of the book, it often means a sale that exceeds the predetermined basic / base amount. In the case of an actor, residual payments apply if the previously recorded performance is reused or in a different way than originally intended[3].

Examples of Residual payment

  • Royalties: Authors, songwriters, and other creators of intellectual property receive royalties for the use of their works. A royalty is a payment made to an individual or company based on usage or sales of the product.
  • Commission: A commission is a fee paid to a salesperson or representative for selling a product or service. Commission is most commonly paid on sales, but can be paid on other activities such as referrals or leads.
  • Performance-related Bonus: Performance-related bonuses are payments made to employees or contractors based on the performance of their services. This can be based on a variety of factors such as meeting deadlines, achieving goals, or exceeding expectations.
  • Residual Income: Residual income is income generated from an ongoing activity, such as rental income from a rental property or dividends from investments. This type of income can provide an ongoing source of income for an individual or business.

Advantages of Residual payment

Residual payments offer many advantages to those who receive them. Here are some of the most notable:

  • Residual payments offer a steady and consistent stream of income. This is especially beneficial for those who work in creative fields such as music, film, or writing, as their works may generate payments for years after the initial sale.
  • Residual payments are also beneficial for those who have invested in a product or service and are expecting a return. This is because residual payments are often tied to the success of a product or service, allowing investors to benefit from its success.
  • Finally, residual payments can help to maintain a sense of stability for those who receive them. This is because the payments are often set up to be paid out at regular intervals, allowing the recipient to plan their finances more effectively.

Limitations of Residual payment

Residual payments can be an effective way to generate income in the long term, however, they come with some limitations that should be taken into consideration. These include:

  • The amount of residual payment is usually fixed and not adjustable, meaning that it is difficult to increase the income generated by the residual payments.
  • The payment may be unpredictable as it depends on external factors, such as the success of a movie or song.
  • Residual payments may not be as large as other forms of payment, such as upfront payments.
  • They may take a long time to arrive, as they are often based on a long-term contract that may take months or years to complete.
  • The payment may be subject to taxation, depending on the country and the type of payment.
  • There is a risk that the payment may not be received at all if the contract is not properly written or enforced.

Other approaches related to Residual payment

Residual payments can also be related to other approaches, including:

  • Royalties - Royalties are payments for the use of certain intellectual property rights such as trademarks, copyrights, patents, etc. They are typically paid to the intellectual property owner who is entitled to a share of the profits generated by the use of their property.
  • Licensing - Licensing is an agreement between two parties, where a licensor grants the licensee the right to use certain intellectual property or goods in exchange for payment. The licensee pays a fee or royalty to the licensor, which is usually a percentage of the revenues generated by the use of the intellectual property or goods.
  • Subscription Model - A subscription model is a business model in which a customer pays a recurring fee in exchange for access to a product or service. This type of model is often used for software, streaming services and online content.

In summary, residual payments are payments or a stream of payments received after the provision of services or delivery of a product / good. Other approaches related to residual payments include royalties, licensing, and subscription models.


Residual payment — recommended articles
Staged payments — Full service leasing — Working interests — Contract hire — Depreciation vs. amortization — Prepaid rent — Patronage Dividend — Service lease — Grant date

References

Footnotes

  1. ↑ United States Railroad Retirement Board (1967), p.12
  2. ↑ Rutledge A. (e.)(2010), p.121
  3. ↑ Alavi R. (e.)(2019)

Author: Andżelika Kędzior

 

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