The Engineer's Zero Royalty: An Analysis of Systemic Causes and the Design of a Hybrid Compensation Model

 Abstract: This article analyzes the "engineer's zero royalty" phenomenon—the systemic absence of direct, long-term financial benefits for creating engineers from the commercial use of their developments, in contrast to compensation models in other creative fields. It examines the economic, legal, and cultural foundations of this issue, including the principal-agent problem, the historical specifics of patent law for work-for-hire inventions, and the phenomenon of "systemic anonymity of the creator." As a solution, the article proposes a shift from the binary "employee/entrepreneur" model to a hybrid compensation system that includes dynamic royalties with vesting, conditional rewards tied to product KPIs, and equity participation through options. The implementation of such a model is viewed as a strategic imperative for stimulating innovation and enhancing economic competitiveness.

Keywords: engineering labor, royalties, intellectual property, work-for-hire invention, service invention, principal-agent problem, hybrid compensation model, stock options, vesting, innovation economy, human capital.

Pavel Samuta Professional mechanical engineer (development) MEng. R&D. Kompas 3d, SolidWorks, hardware, technical director, entrepreneur, design for B2B, B2G.

Introduction

We live in a world that is the direct result of engineering thought: from the critical infrastructure that sustains life to the digital platforms that shape the global economy. The value of these creations is fundamental. Yet, a paradox arises: while the creators of musical, literary, and artistic works receive income for decades through a system of royalties, the engineer—the architect of the material and systemic world—is, in the vast majority of cases, limited to a fixed salary.

By the "engineer's zero royalty," we mean the absence of a direct, long-term financial link between the creating engineer and the commercial success of their creation, developed within an employment relationship. This article aims to deconstruct this phenomenon, identify its systemic causes, and propose the framework for a fair and effective hybrid compensation model.

1. Theoretical Foundations of the Problem

1.1. The Principal-Agent Problem in an Innovative Environment

At the core of the current situation lies the classic economic principal-agent problem.

• The Principal (the employing company) aims to maximize profit from an innovation while minimizing costs.
• The Agent (the design engineer) seeks to obtain fair compensation commensurate with their contribution to the value created.

The fixed-salary employment contract is the historically established solution to this problem in favor of the principal. The employer "buys out" the entire future potential of the agent's intellectual labor for a predetermined sum, assuming the risks but also capturing all the excess profits from a successful innovation.

1.2. Systemic Anonymity of the Creator (SAC) and Asymmetry of Value Assessment

The problem is exacerbated by two interconnected phenomena:

1. Systemic Anonymity of the Creator (SAC): The individual creative contribution of the engineer dissolves into the final product or company brand. Media and marketing cultivate the image of the "visionary founder," leaving the team that made the vision a reality in the shadows. As Vyacheslav Yakovlev, CEO of Kubanzheldormash, notes, the focus is on the one who "is the last to deliver the 'folder' with the result," while the actual creators remain in the background.
2. Asymmetry of Value Assessment: A contribution with a long-term, multiplicative effect (e.g., the development of a core technology) is economically valued less than a contribution with easily traceable and repeatable monetization (e.g., a song stream). The value of a bridge or an algorithm is capitalized at the moment of implementation, whereas the value of a music track is capitalized with each playback. The copyright system was historically designed for the latter model.

2. Historical, Legal, and Cultural Determinants

The current state of affairs is not accidental; it is based on a solid foundation.

2.1. The Legal Dichotomy: Copyright vs. Patent Law

The key reason lies in the differences in legal regulation.

• Copyright law (e.g., Article 1259 of the RF Civil Code) protects the form of expression (text, graphic image). A technical drawing, as a graphic work, is protected by copyright: it cannot be copied and distributed. However, this right does not protect the technical idea, concept, or functionality depicted in the drawing. As with a culinary recipe, the text is protected, but not the right to prepare the dish.
• Patent law protects the essence of a technical solution (an invention, a utility model), granting a monopoly on its use. However, legislation concerning "work-for-hire inventions" (or "service inventions," created within the scope of an employment contract) historically assigns all rights to obtain a patent and the resulting income to the employer.

Thus, copyright does not provide the engineer with financial leverage, while patent law, which could, works for the company within the context of employment.

2.2. Economic Inertia and the Political Context

The established system is a legacy of the industrial era, where physical capital (factories, machinery) was considered the main factor of production, and engineering labor was viewed as a resource, part of the production process. Today, in an era dominated by intellectual capital, this model becomes a brake on development.

The severity of the problem is also highlighted at the state level. A speech by Dmitry Medvedev pointed to the intolerable situation where "the labor of a courier... begins to be valued more than the labor of an engineer." This was called a "diagnosis of a disease" and a matter of "national security," requiring the creation of conditions where the engineer becomes "the most respected and highly paid specialist in the country."

3. Designing a Hybrid Compensation Model: Moving Beyond the Binary Choice

The current system forces engineers into a false binary choice: being a salaried employee or an independent entrepreneur bearing all risks. We need to design a "third option"—a hybrid model where an engineer, as an employee, retains the right to a share in the long-term commercial success of their creation.

This model is built on the principle of "Skin in the Game," where compensation is inextricably linked to contribution and long-term accountability. It aims to bridge the gap between the interests of the creator and the investor. An engineer who bears no risks is like a captain sleeping through a storm. Here's how we can integrate the "Skin in the Game" principle into an engineering royalty model, transforming a passive executor into a responsible product co-owner:

3.1. Key Components of the Hybrid Model

1. Vesting Period: More Than Just Time, a Contribution to Product Survival The problem with current vesting is that it's often formal; years at a company don't always equate to real contribution. Our solution is to tie the "maturation" of royalties to critical milestones in the product's life cycle: 25% of rights after MVP and initial sales; 50% after reaching break-even; 100% after achieving an ROI of 150% or more. This approach means the engineer has a deep interest not just in "serving their time," but in bringing the product to stability. Leaving before break-even, for example, would mean losing 75% of future payments.
2. Deferred Payments with "Clawback" Simply delaying payments offers weak protection against risks. Our solution involves accruing royalties immediately, but 50% are paid with a 2-3 year freeze. If the product incurs losses during this period due to technical debt or architectural errors, part of those funds are withheld into a support fund. Similarly, if the engineer leaves, they lose the frozen share (except for force majeure). For instance, if an engineer received $100K in royalties, $50K would be paid immediately, and $50K held in an "insurance" fund. If a year later a critical vulnerability in their code is discovered, costing $30K to repair, their final payout from the frozen fund would be $20K.
3. Dynamic Royalty: Profit × Responsibility Coefficient We propose a formula for payouts: Payment = (Profit × % royalty) × K, where K is the risk multiplier: K=1.5 if the engineer handles technical support; K=0.7 if the product is outsourced; K=0 if the engineer resigns before release. The philosophy here is clear: the more the creator distances themselves from the product, the more their share shrinks. Responsibility equals reward.
4. Hybrid "Royalty + Reverse Options" (Pain Sharing) The mechanism for this involves the engineer receiving a standard percentage royalty. Additionally, they would purchase company stock options at a 30-50% discount, but with conditions: the right to sell only after 4 years, and if the product becomes unprofitable, the discount is annulled, meaning they pay full price for the shares (or lose the option). The result of this hybrid approach is a double benefit (royalties + stock appreciation) if the product is successful, but financial losses (overpayment for depreciated shares) if it fails.
5. "Three Wheels" System (Balance of Interests) The meaning of this system is that the engineer: bears operational risks (through the K-coefficient); shares market risks (through options); is linked to the product financially and reputationally. This model addresses three key problems: "Left for competitors with ready technology" leads to loss of frozen payments and annulment of options. "Incurred technical debt and disappeared" means the clawback mechanism compensates for refactoring losses. "Works half-heartedly" means a falling K-coefficient reduces royalties.

3.2. Practical Aspects of Implementation

Implementing a hybrid model requires a combination of legal and organizational steps:

• Legal Framework: This involves utilizing option agreements and contracts with clearly defined vesting terms and royalty calculation formulas.
• Transparent Contribution Calculation: We'd develop a system for evaluating contributions based on task complexity, architectural impact, and peer-review. For example, using the formula: EAC = (Net Product Profit) × (Engineer's Contribution Coefficient) × (Participation Percentage), where EAC (Engineering Added Capital) is the engineer's share.
• Pilot Projects: We'd introduce the model on one or more flagship projects to refine the mechanics.

Historical Prototype: Venetian Shipbuilders (14th Century)

A compelling historical example is the Venetian shipbuilders. The creators of galleys received a percentage of the spoils but were obligated to: sail on the first raid (vesting!); repair the ship at their own expense if it rotted prematurely (clawback!). This model contributed to Venice dominating the seas for 400 years.

Conclusion

The "engineer's zero royalty" problem is a systemic barrier to innovative development. It is rooted in outdated legal, economic, and cultural paradigms that devalue the long-term contributions of technology creators. Modern realities demand a transition from the archaic "salary for time" model to a fair and stimulating hybrid compensation system.

Implementing mechanisms like dynamic royalties, conditional rewards, and stock options is not merely an act of restoring justice. It is a strategic investment in human capital. Such a model transforms the engineer from an anonymous resource into a full-fledged partner, directly invested in the long-term quality, reliability, and commercial success of their creation. Ultimately, this is a necessary condition for retaining talent, improving the quality of engineering solutions, and ensuring a nation's technological sovereignty.

Ver RU