Measuring Pay-for-Performance Incentives – In the Church

When UNC Kenan-Flagler Assistant Professor of Finance Christopher A. Parsons was pursuing his Ph.D. in 2007, he discovered that he and his Ph.D. advisor, Jay Hartzell, had something in common: their fathers were both ministers. As they discussed this further, Parsons learned that Hartzell’s dad, a Methodist minister, earned considerably less than his own father, a Baptist minister.

The discussions between Parsons and Hartzell, Associate Professor of Finance at the McCombs School of Business at the University of Texas at Austin, led the two scholars to team up with New York University Professor of Finance and Business Transformation David L. Yermack on a research effort which examined the compensation and productivity of 2,000-plus Methodist ministers in Oklahoma across a 43-year span. As it turns out, Hartzell’s father was able to provide the researchers with access to paper documents on compensation for Methodist ministers dating back to the early 1960s which they then digitized for analysis.

What they discovered in their research, published in the Feb. 2010 Journal of Labor Economics, is that while church elders don’t intentionally construct pay-for-performance criteria for pastors, financial incentives do seem to matter, even for preachers who are spiritually motivated.
Church elders will assess and determine a pastor’s compensation at the end of each year. When the church does well financially, say through higher-than-expected donations from their parishioners, the pastor seems to be rewarded.

By the Numbers
For instance, when a new parishioner joins a church, a minister’s annual compensation rises by just under $15 (in 2008 dollars). On average, pastors receive 3 percent of the incremental revenues which result from rises in membership.

“But there’s no codified pay-for-performance contracts that are structured for ministers,” notes Parsons.

“It’s an area where you wouldn’t expect to see a large incentive based on monetary pay,” says Parsons.

Another finding that Parsons and his teammates discovered in their research, which spanned 2,201 ministers from 727 United Methodist churches in the state of Oklahoma from 1961 to 2003, is that churches seem to be far more aware about the impact of financial incentives on performance that’s consistent with economic theory in other industries.

Parsons offers an analogy between two used car salesmen who are located in different cities. In one city, located, say, in the northern Midwest, the region is hit by cold weather and constant snow for the better part of a month. Meanwhile, the other used car salesman works for a dealer in San Diego where tranquil weather is fairly constant and customers are regularly on the lot.

“You don’t want to penalize the salesman (in the north) when bad weather is out of his control,” says Parsons. The same type of rationale applies to the CEO of an oil company. “If oil prices rise dramatically, that’s out of his control,” notes Parsons. “Why should his compensation be largely tied to something like that that’s out of his control?,” he asks.

As it turns out, churches in oil-sensitive parishes in Oklahoma apply similar logic. Churches whose parishioners are financially sensitive to dramatic swings in oil prices are able to filter out performance changes that have nothing to do with the pastor. This means that if a church thrives in boom times or suffers when oil prices spike, it typically does not impact compensation for ministers in affected parishes, says Parsons. To that end, ministers also aren’t punished financially if their flock dwindles due to the deaths of parishioners, another factor that’s outside of their control.

“Churches seem to understand this and they don’t incent ministers when churches grow for reasons that are out of their control and vice versa,” says Parsons. “Churches are smart. They seem to behave with more economic theory than many corporations do.”

Parsons says the data collected from the ministers’ compensation also enabled him and his team to track whether a particular minister has moved from one church to the next and then track their compensation performance to determine “whether or not they’re a rock star,” he says. “Some pastors might be dynamite in connecting with college kids but they wouldn’t necessarily do well in a rural setting with an older congregation,” he adds.

The Rise and Fall
Likewise, just as the compensation for a Methodist minister will increase as new parishioners and revenues are added to the church’s coffers, a minister’s pay tends to fall approximately $7 for each parishioner who leaves a congregation, Parsons discovered in his research. He says he’s currently working on a new research project which will examine how these types of disincentives may impact a church’s performance.

Parsons and his fellow researchers did not examine the percentage of a minister’s compensation that pay-for-performance represents since pastors at churches with smaller congregations typically earn less than ministers with higher numbers of worshippers. Plus, a minister at a larger church would have to grow his or her congregation significantly to have the same impact as a pastor at a smaller church who was able to grow his congregation in a particular year.

“What we looked at was the variation of pastor pay as a measure of a church’s performance,” says Parsons. “One measure was giving. One of the things we looked at was whether pastors got paid more during years that parishioners gave more. We found that occurred but it wasn’t as strong a financial incentive as adding bodies to the parish,” he adds.

Segmenting the Flock
Another interesting finding from Parsons’ research is how pay-for-performance compensation for Methodist ministers varies based on the type of parishioner who joins a church. For instance, Methodist ministers are rewarded more for recruiting a Methodist who came from another Methodist church and less for a parishioner who converts from another denomination, such as a Catholic or a Lutheran or someone who wasn’t previously a Christian.

“It’s surprising that ministers would have compensation tied to those intra-denominational transfers,” says Parsons. “It’s a little easier to understand when we’re talking about local churches setting pay. If I’m a Methodist church, who are the people who are easiest to recruit? The Methodists down the street -- they don’t have to change denominations, just churches,” he adds.

And while churches don’t create contracts for ministers where they’re incented to “steal” parishioners from other churches, “at a local level, it’s difficult to keep churches from competing,” Parsons says.

Looking back on the findings, Parsons says he found it a revealing exercise, not just in terms of what he and his team discovered about pay-for-performance in a religious setting, but also in terms of how churches, like other non-profits, do big business. Non-profits, says Parsons, represents a group that’s under-researched.

Says Parsons, “Understanding how non-profits are organized and how agents are compensated and incentivized is important.”

[This article has been reproduced with permission from research from the UNC Kenan-Flagler Business School: http://www.kenan-flagler.unc.edu/]