Paying the Leader

Trusted ministries use compensation-setting practices that model integrity.

 

 

by Dan Busby

 

The compensation of a ministry’s top leader is often a topic of key interest inside and outside the ministry.

No issue attracts more criticism, media attention, and interest of government regulators than this issue.

Jesus told us where to
invest our lives. It's not
that He's against wealth
or having possessions,
but His purpose was to
teach us our temporary
stewardship responsibility.
He's the owner, and
we're involved in our
stewardship role for a
limited time period
.
Richard F. Capin

Most ministry leaders work for the glory of God and are not greedy for gain (Titus 1:7). Most Christ-centered ministries pay their leaders reasonably and follow sound practices in establishing compensation and fringe benefits. But it only takes a few instances of abuse in setting compensation of a top leader for all ministries to get a bad rap.

What actions call compensation-setting into question? Here are four examples:

  1. Lack of independence. One of the worst examples of compensation-setting abuse is when the individuals who approve the compensation of the top leader are not independent. Let’s say an enormously high compensation package is approved, but the individuals that approve the compensation are all relatives of the top leader or they are all staff members who are subordinates of the top leader. That sends shrill storm signals.
  2. Lack of comparability. Another bone-headed compensation decision is when outlandish comparative com­pensation data is used to try to justify a top leader’s compensation. In the 2007 to 2010 investigation of six media ministries conducted by Senator Charles Grassley, it was revealed that one ministry “took into consideration the compensation of for-profit CEOs and media personalities like Oprah Winfrey, Britney Spears, Madonna, Rosie O’Donnell, and David Letterman.” Considering that the minister also received income from book royalties and consulting fees, the consulting company recommended that the minister’s total compensation be set at $2 million.[1]
  3. Failure to approve all compensation elements. Another instance of poor compensation-setting is when the governing board approves some, but not all, of the compensation elements. Let’s say that the governing board approves gross pay but fails to consider the amount of fringe benefits, some of which might be extensive.
  4. Board has no knowledge of the leader’s compensation. Another horrible failure in compensation-setting is when the governing board has no knowledge of the top leader’s compensation and does not have a way to easily obtain this information. This is an example of an ill-informed board and of very poor governance.
For may ministries,
the concern is about
getting the top leader's
compensation up
to a reasonable or
competitive level.
In only a few situations
is there a concern about
paying too much.

Under federal law, compensation of leaders is limited to what is reasonable. While “reasonable” compensation depends on the facts of each situation, it generally means the amount that would be paid to other leaders providing similar services at similar organizations. The IRS may impose tax penalties on those who receive excessive compen­sation and on those who approve excessive compensation in certain circumstances. Additionally, some states are adopting specific limits on the compensation of charity leaders.

Follow six basic steps to ensure that the compensation process is handled with integrity:

  1. Adopt a compensation philosophy. The first step in the compensation-setting process is adopting a philosophy of compensating the top leader. This philosophy should be based on the ministry’s unique mission, strategy, and values.
  2. Make independent decisions. The ministry’s top leader should not have any part in his or her compensation-setting process. Not only should the top leader not vote on his or her own compensation, the leader should be recused from both the discussion and the vote—this includes the leader absenting himself or herself from the meeting.

As an additional step of independence in the decision-making process, individuals serving on the board (or an authorized committee of the board) making the decision regarding total compensation and those participating in the decision-making process should not

Simply the leader's
presence in the board
room when his or her
compensation is being
set may inappropriately
influence the decision.
  • be related to the person whose compensation is being addressed,
  • be subordinate to the person whose compensation is being set,
  • be a person whose compensation is determined in a manner that involves input or decision-making by the person whose compensation is being set, or
  • otherwise have a conflict of interest.
  1. Disclose compensation paid to family members. The ministry’s board should be notified of the compensation and fringe benefits paid to any member of the top leader’s family who is employed by the ministry or a related organization. Reporting of family members’ compensation to the board is important to demonstrate transparency and integrity in the compensation-setting process.
  2. Gather comparable compensation data. Periodically obtaining comparable data provides important input as the board considers the top leader’s compensation and fringe benefits. The comparability data should be for functionally comparable positions and for ministries as similar as possible to the ministry for which the compensation is being set.
  3. Use compensation-setting criteria. In addition to considering comparability data, the ministry should take into consideration the skills, talents, education, experience, performance, and knowledge of the person whose compensation is being set.
  4. Document compensation decisions. It is essential that the board or committee making the com­pensation decision contemporaneously document its decision regarding total compensation, gross salary, and fringe benefits. If the established compensation exceeds what is supported by comparability data, the rationale for this decision should be clearly indicated.

The details of compensation decision may be recorded in the board minutes or in a separate document. If recorded in a separate document, the board minutes should at least generally reference the decision.

For an excellent review of compensation-setting issues, see ECFA’s Standard 6 and ECFA’s Policy for Excellence in Compensation-Setting and Related-Party Transactions,[2] Church Finance, by Michael E.Batts and Richard R. Hammar,[3] Zondervan Church and Nonprofit Tax & Financial Guide,[4] and Enhancing Accountability for the Religious and Nonprofit Sector.[5]

When it comes to compensation, leaders should “keep in mind always that the ultimate Master you’re serving is Christ” (Col. 3:23). And, ministry boards must focus on faithful administration before God and man (2 Cor. 8:20–21).

Through the compensation-setting process, trusted ministries strongly demonstrate excellence and integrity.

 

  Questions   for reflection
 
  1. Does the ministry board to which you relate place adequate emphasis on the compensation-setting process for the ministry’s top leader?
  2. Do compensation decisions impacting the ministry’s top leader model independence as to who makes the decisions and appropriate comparability in determining amounts?
  3. How could the ministry improve the compensation-setting process to protect its Christian witness?

 

 

[1] Theresa Pattara and Sean Barnett, “Review of Media-Based Ministries.” Memo to Senator Charles E. Grassley, January 6, 2011, 44, ReligiousPolicyCommission.org: religiouspolicycommission.org/ Content/SFC-Staff-Memo-to-Grassley. This memo gave rise to the formation of the Commission on Accountability and Policy for Religious Organizations and the issuance of the Commission’s first report in December 2012 concerning, in part, executive compensation of ministry leaders. See Commission on Accountability and Policy for Religious Organizations, Enhancing Accountability for the Religious and Broader Nonprofit Sector.

[2] ECFA’s Standard 6—Compensation-Setting and Related-Party Transactions. ECFA: www.ECFA.org/Content/Comment6a.

[3] Michael E. Batts and Richard R. Hammar, Church Finance (Carol Stream, Ill.: Christianity Today, 2015), 132–40.

[4] Dan Busby, J. Michael Martin, and John Van Drunen, Church and Nonprofit Tax & Financial Guide (Grand Rapids, Mich.: Zondervan, 2015), 57–82.

[5] Commission on Accountability and Policy for Religious Organizations, Enhancing Accountability for the Religious and Broader Nonprofit Sector, 7–20.

 

From TRUST: The Firm Foundation for Kingdom Fruitfulness, ECFAPress, 2015, www.ECFA.org/KnowledgeCenter


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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