Church Budget: Salary Increases

By now, most church leaders know that compensation is typically one of the most significant portions of the budget pie. The typical, healthy church spends somewhere between 45%-55% on compensation costs. For clarity purposes, compensation includes:

• Salaries (exempt and non-exempt).
• Housing (for qualified pastors).
• Taxes
• Benefits like insurance and retirement

Sadly, churches and non-profits are often caught in the ongoing cycle of wage stagnation, meaning wages have had little to no growth over time. Skyrocketing inflation only compounds the meager increases for employees. For the employer, it means finding creative ways to increase pay to keep the best talent while operating while maintaining healthy margins to avoid an unsustainable negative cash flow. 

Types of Increases

There are three typical ways in which an organization can increase the wages of an employee, each with its own unique benefit:

• COLA (Cost Of Living Adjustment): A COLA increase is a set percentage allotted to all employees in the budget to offset the inflationary financial conditions. The typical range for a COLA is around 3%, but it may need to be even more in times of high inflation. A COLA increase is a permanent employee compensation change affecting future budgets.
• Performance-Based Increase: Churches desiring to retain top performers should reward staff performing at a high level with performance-based or merit increases. Performance-based increases are often on top of COLA increases. Like the COLA, performance-based increases are permanent employee compensation changes and impact future budgets.
• Bonus: Sometimes, an organization wants to recognize an employee’s outstanding work with a specific amount of money. This money is in addition to their regular wages. However, a bonus is not ongoing and has no future budget implications. A bonus is a great way to reward top performers without committing to future compensation obligations.

How To Budget Increases

Creating a church budget is a serious effort that requires time, collaboration, and leadership. Compensation is usually the most significant piece of the budget pie and requires extra care and attention to detail to get it right. The financial team must intentionally determine compensation increases for the upcoming fiscal year as part of the budgeting process; neglecting this step may push the organization’s top performers out the door. Churches must retain their human resources to accomplish their mission, and budgeting salary increases demonstrate the value the organization places on the people doing the work of the ministry.

Once the financial team or committee determines how much to allocate toward compensation increases, it’s time to apply it to employee pay to validate the new compensation totals match the approved increase.

Here are a few tips to ensure accuracy and apply simple logic to each increase type, starting with the easiest.

• Bonus: The financial team or committee determines the amount(s) of the bonus and people that the organization wants to recognize and add it to the specific employee’s pay in the budget. Validate the increase(s) in compensation align with the total provided by the financial team.
• COLA: Using the COLA percentage determined by the financial team for the upcoming fiscal year, enter the percentage of change for all employees. For exempt employees, multiply the COLA percentage by the sum of the salary and housing amounts. For non-exempt employees, multiply the COLA percentage by the hourly rate.
• Performance-based: Applying the determined amount to a Bonus or COLA is straightforward, but the performance-based is trickier. Once the church has completed the annual performance evaluations, assign each employee their rating on a spreadsheet and determine the average score. Then, use the average score to determine the increase percentage per score. Here’s an overly simplified example using a 3% increase with a rating scale of 1 – 10, where the average evaluation score is 6.5:

Rating Scale Example:

Here’s what it looks like when applied to the employees:

Inflation is taking a toll on employees and employers alike. Strategic churches must continue to fight the urge to keep wages stagnant by intentionally budgeting cost of living (COLA increases. On top of the COLA, churches wanting to retain their top performers must determine if a bonus or merit increase fits their current financial situation.