Record-setting inflation, declining attendance, and decreasing donations make operating a church more challenging than ever. Churches cannot have an initial public offering (IPO) to sell stock in the church, create a new product line to increase sales, or raise prices on their services. For churches to survive financially in post-Christian America requires an even higher level of stewardship (resource management) than ever before. Creating a church budget is the best way to allocate limited financial resources and ensure the church funds the mission, vision, and values. For many churches, compensation is the most significant expense on their budget. Determining how much of the overall operating budget to distribute to pay salaries, housing, taxes, and benefits can be a touchy subject. In this regard, churches need to take a page from their for-profit counterparts and use key performance indicators (KPIs) to determine if their church is spending an appropriate and healthy amount on compensation. While there are many qualitative and quantitative metrics to measure the health of a church, the following two KPIs are the best place to start when it comes to measuring compensation.
Compensation to Total Budget
The first KPI to evaluate when it comes to compensation costs is the percentage spent on total compensation compared to the total budget. Include salaries, housing allowance (for pastors), taxes, and benefits (including retirement). Church budgeting experts agree that a healthy church should spend between 45% – 55% of the budget on compensation costs. Because that’s such a significant percentage of the budget, it’s essential to understand what makes up these costs. And, as with any guide, there are exceptions. Typically newer churches, like church plants, spend less, while more established churches tend to increase staff and give pay increases as time passes, creating higher-than-average compensation costs. Using this KPI helps to determine, at a high level, if a church is within a healthy range. It’s up to the church’s financial team to discover why it’s on the high or low side of the scale and if corrective action is required.
Staff to Congregation Ratio
The second KPI can provide insight into the compensation to the total budget KPI; it compares the number of full-time equivalent (FTE) staff to the size of the congregation. Accurately calculating this KPI requires knowing how many FTEs the church employs as well as the church’s average weekly attendance. For churches unfamiliar with calculating FTE, it helps to understand that a full-time employee works 2,080 (40 hrs. a week x 52 weeks) hours per year. To determine a church’s FTEs, sum the annual hours of all employees and divide the total by 2,080. Then divide the church’s average weekly attendance by the number FTEs to determine the ratio. For example, a church with an average weekly attendance of 250 and 5 FTEs has a 50:1 ratio. Experts agree that a healthy church ratio should be around 75:1. That means the example church with a 50:1 ratio is overstaffed and should evaluate the growth trend and potential of the church.
Operating a church has never been more important than now, and its mission is far too critical. Using KPIs to evaluate the compensation costs of a church provides essential insights allowing churches to build solid budgets and impact the world.