If you are putting your church budget together, it is safe to say you are wrestling with the problems associated with compensation. Challenges like avoiding wage stagnation, providing benefits (an ever-increasing piece of the budget), and finding funds to add new staff. On top of all that, compensation is typically the most expensive portion of the budget pie. Budgeting requires understanding how much is too much and what elements make up total compensation to maintain a healthy church budget.
The Composition of Compensation
When determining your church’s compensation percentages, it’s helpful to identify the elements that define compensation. Leaving one of these elements out or adding something else in will skew your results.
- Salary – The category salary refers to all types of periodic payments to employees, hourly and salary alike. Just because it is a church, it doesn’t mean it is exempt from FLSA (Fair Labor Standards Act). More importantly, a church should desire to remain above reproach and pay its employees for the work performed. Scripture is clear on this topic (Deuteronomy 24:15, Matthew 10:10, Luke 10:7, 1Timothy 5:18).
- Housing – Pastors may designate a portion of their income as housing, be sure to include the amount allocated to housing as part of total compensation when creating the budget. To find out more about pastor housing allowances, Church Law & Tax has excellent information to help you through this.
- Taxes – Budget for the employer portion of FICA for all non-housing salary amounts.
- Benefits – It is not a secret, the cost of health care continues to skyrocket. The budget must include the employer portion of medical, dental, vision, short-term disability, long-term disability, and life insurance costs. Helpful Tip: coordinate your policies to align with the church’s fiscal year to avoid mid-year estimates to upcoming increases in benefit costs.
- Retirement – Retirement is separate from other benefits to draw attention to the need for churches to contribute to retirement. Some pastors opt-out of social security and are dependent solely on IRAs for their retirement. Do not reduce or cut this line item from the budget and strongly encourage employees to participate in the plan.
Healthy Church Percentages
Like you, I’m pretty suspect anytime there is a statement that starts with the claim, “a healthy church has …” But, there is value in understanding best practices. It’s possible that comparing your church’s percentages may highlight areas that need addressing. There is an entire post dedicated to church budget percentages, but the focus of this post is on compensation. Best practices for churches show that total compensation should range between 45-55% of the entire budget. An established church without a mortgage typically has accumulated more employees over time and might push or even exceed the limits of this compensation range and still be healthy. While a church plant, or a church saddled with a mortgage payment, or a church navigating a transition, may not be able to sustain a high percentage of compensation and needs to scale back. Understanding your church’s unique position will go a long way to help clarify the percentage spent on compensation.
Determining the amount of the church budget to dedicate to compensation is a stressful and time-consuming process. And it should be because it is so important. Rember to consider these costs:
- Merit or COLA (Cost Of Living Adjustments) helps retain valuable employees and avoid wage stagnation
- The employer portion of the increased cost to benefits
- The cost of adding a new position must include salaries, housing, taxes, benefits, and retirement
All are essential when deciding if the church’s finances can support an increase in compensation. Bear in mind this is a guide, and each church and its circumstances are factors to consider. Using these basic steps will help the financial team wrestle the compensation to the mat and finally pin it down.