Royalties are the amount paid to authors by publishers for exploitation of their books. While authors may receive advances against future royalties, it is the royalty rate that determines how much an author ultimately earns on a book (unless the advance does not earn out, meaning calculated royalties do no equal or exceed the amount advanced to the author).
Royalties are determined by taking the list price of a book and multiplying it by the number of units sold/shipped (Gross Revenue). Reserves for returns (or actual returns, depending on the length of time the book has been on shelves) and other revenue deductions are subtracted from the Gross Revenue amount to create a Net Revenue amount. The contractual royalty rate is then applied to the Net Revenue -- that is the amount due the author. Before actual payments are made, the amount of the advance is subtracted from the royalties due. The publisher wants to recoup their financial outlay before paying more money to the author.
Royalty rates differ from contract to contract and author to author, though most publishing houses start with a specific set of parameters. Royalties can range from 6% of net to 15% of net. Electronic Publishers have been known to pay royalties as high as 50% on their sales, in part due to lower overhead costs, lower manufacturing and shipping costs, lower advances, and lack of returns of electronic product.
Royalty amounts can also vary depending on the type of exploitation a product has. A hardcover release earns a different royalty than a paperback novel. Electronic or audiobooks are accounted for at different rates; likewise, sales through clubs, such as Harlequin's Reader Service book club, receive the lowest possible contractual rates. Ancillary sales tend to command lower rates than standard venues, such as hardback or paperback sales.
Traditionally, publishers follow a twice-yearly reporting model, issuing Royalty Statements either 60 or 90 days after December 31 and June 30. The frequency of statements (and associated payments) and required days to report is detailed in an author's agreement with the publisher.