The Value of a Written Compensation Plan
By Rollie Dimos | Compensation & Payroll
Before the start of any new year, many churches go through the process to update their budgets, plan their event calendar, and formulate their sermon series. The planning meetings, discussions, and thought behind the scenes are lengthy, intentional and well-planned. But oftentimes, when it comes to compensation, decisions are made with less thought and less intention. Many times, the discussion only involves increasing the current wage by a few percent.
A well-crafted compensation package will provide ministry staff with a fair wage and other benefits that adequately compensates them for the services they provide. In order to do that, the discussions around compensation should be just as intentional as the ones around the sermon series or financial budget.
The apostle Paul reminds us to “respect those who labor among you and are over you in the Lord and admonish you, and to esteem them very highly in love because of their work” (1 Thessalonians 5:12-13, ESV). One way to show respect for the spiritual leaders in the church, including pastors and staff, is through a well-balanced and fair compensation plan.
Developing a fair wage is only one component of a healthy compensation package. Besides the cash components that constitute wages, there are other types of benefits to consider like health insurance, retirement contributions and vacation days. Here are some common components of a quality compensation package:
|Salary / hourly wage||Health insurance|
|Housing allowance for ministers||Retirement contributions|
|Auto allowance||Mileage reimbursement|
|Cell phone allowance||Use of business-owned vehicle|
|Vacation & Sick days|
Many of these benefits can be provided to staff as non-taxable fringe benefits. Depending on how the compensation package is structured, there can be significant tax savings for your church employees.
Developing the Compensation Package
As you develop your compensation package, keep these six steps in mind.
- Start with wages and determine your total cash compensation. Compensation studies and consultants can give you a starting point and provide balance and assurance to the process. Don’t forget that budget realities will be an important factor in this process.
- Approve a housing or parsonage allowance for ministers. An allowance doesn’t result in additional cash for the minister but is a benefit that reduces the minister’s federal tax liability.
- Determine additional benefits that you will provide. Two core benefits that I would recommend include health insurance and retirement contributions. Other benefits can include dental, vision, life, disability, moving expenses and health saving account contributions.
- Consider a generous vacation and sabbatical leave policy. Ministry is physically and emotionally challenging, so it’s vitally important to provide paid vacation time each year for relaxation and spiritual renewal.
- Identify other ministry expenses that will be provided or reimbursed. These business expenses may include reimbursing business travel costs (mileage, lodging and meals), the purchase of books, magazines, and digital subscriptions for study and sermon preparation, church provided cell phones, and education reimbursement.
- Benchmark your compensation package with other churches. There are several resources that can help you determine what a fair wage is for specific roles and positions in your church. One excellent resource is ChurchSalary.com.
Documenting the Compensation Package
To ensure that all employees are clear about their wages, benefits and total compensation, I recommend that all staff compensation packages are documented in written form. This written summary should include all wages and benefits that are included in the respective staff members’ compensation package.
This summary can be reviewed and approved by the board at the beginning of the year or whenever changes to the employee’s wages are made. A written compensation package will help reduce any confusion or conflict and provide some accountability over payroll.
Not documenting your compensation packages can have significant consequences. Consider the following confusion that took place at a church because the compensation package was not documented properly:
Example: The church board had just hired a new pastor and tasked the treasurer to formulate the compensation package. The treasurer suggested the total salary expense should be a maximum of $50,000 which consisted of a $30,000 salary and up to $20,000 to reimburse the pastor for health insurance and out-of-pocket deductibles. The church board also offered to let the pastor live in the church-owned parsonage rent-free, and the church would pay for all utilities and maintenance. The church figured the annual value of living in the parsonage rent-free would be around $8,000. With the church board’s approval, the treasurer typed up a simple document that said:
$20,000 health insurance premiums and deductibles
$8,000 parsonage allowance
Unfortunately, this simple document was misunderstood, and 12 months later the pastor asked the board why he hadn’t received $58,000 in cash wages, while the board responded that they only agreed to $30,000 plus reimbursements for actual health insurance expenses. People took sides and feelings were hurt. The tension caused the treasurer to resign, and the pastor ended his first year at this church marked by confusion and mistrust.
Make it a priority this year to be intentional about compensation planning. Follow these best practices to create a healthy and fair compensation package for your staff. Be sure to put this in writing to formalize your decisions. A well-documented summary will ensure that there are no misunderstandings when staff members are hired and will help document leadership’s intent when memories fade.