The Cash Breakeven Game

In the obscure world of Hollywood contracts, two kinds of money are paid to actors, directors and other movie participants. First there is what is called “fixed compensation” and it is money that is paid out, just like any other wage, when the person completes his or her job. The second kind of money is called “contingent compensation.” This payout depends on how well the film does. It is not paid until the cash breakeven point is reached.

The percentage a movie participant is supposed to receive is generated by this contractual definition. This is true whether it is based on gross or net points and the percentage can vary from individual to individual. In some contracts, instead of the star receiving a large fixed compensation, the cash breakeven point is set at one dollar. This means his or her pay starts immediately after the print and advertising costs are reimbursed.

Usually, however, the cash breakeven point is set high enough for the studio to recover its production costs.

The cash breakeven definition varies from film to film. It is also not unusual for different participants in the same film to have different cash breakeven points. Cash breakeven points are not decided by any set rules except for Hollywood’s Golden Rule which tacitly states “he who has the gold makes the rules.” Therefore stars will contentiously negotiate their claim to how much cash flow they will personally generate to the film.

There are a handful of stars that are in such high demand that they can dictate their own cash breakeven. Usually these points are a closely guarded secret, but consider the golden terms Arnold Schwarzenegger received for Terminator 3. Under typical Hollywood contracts, studios credit the film with a video royalty which equals 20 percent of the sales from video and DVD sales.

That means only $4 million of sales from a total $20 million of sales from DVDs is counted towards the cash breakeven. Schwarzenegger’s contract, however, guaranteed that he could count all the money from DVDs and video, less their actual costs, toward reaching his cash breakeven.  This, of course, came at the expense of other movie participants with higher cash breakeven points, but that is the Hollywood contractual game of cash breakeven. The most powerful player is awarded the lowest cash breakeven. The less powerful end up with a higher cash breakeven.

The person with the lowest cash breakeven is the first to be paid. The problem is that the money that is paid out first is added to the cost side of the production, which means every other participant is pushed further and further from their cash breakeven point and therefore is delayed in when they will get paid. This means that the less powerful in Hollywood, including many writers, may never qualify for their contingent compensation.