Clergy, steal some sheep

From the HBR Daily Stat:

Financial incentives have a significant impact on ministers’ efforts and their levels of service to parishioners, according to a study … that looked at more than 2,000 Methodist pastors in Oklahoma.

These ministers are paid nearly 3% of the incremental revenue that comes when a new member joins a church. Thus, when a member joins, a minister’s annual compensation increases by just under $15; when a member leaves, the minister’s pay falls by about $7.

Source: Is a Higher Calling Enough? Incentive Compensation in the Church, Jay C. Hartzell, University of Texas at Austin – Department of Finance; Christopher A. Parsons, University of North Carolina (UNC) at Chapel Hill; David Yermack, New York University – Stern School of Business, February 8, 2010, Journal of Labor Economics, Forthcoming

From the abstract:

We study the compensation and productivity of more than 2,000 Methodist ministers in a 43-year panel data set. The church appears to use pay-for-performance incentives for its clergy, as their compensation follows a sharing rule by which pastors receive approximately 3% of the incremental revenue from membership increases. Ministers receive the strongest rewards for attracting new parishioners who switch from other congregations within their denomination. Monetary incentives are weaker in settings where ministers have less control over their measured performance.

From the paper:

Are clergy motivated the same as CEOs?

Based upon the stream of donations associated with a typical church member, we argue that ministers’ incentives operate as a type of sharing rule, by which a pastor is paid close to 3 percent of the incremental revenue that typically accrues to a church when a new member joins. These effects translate to a pay elasticity with respect to membership of approximately 0.35, virtually identical to the pay-firm size elasticity found for corporate CEOs (Baker, Jensen and Murphy, 1988). This equivalence suggests either that ministers have lower intrinsic motivation than we believe (and therefore need CEO-like incentives), or that CEOs’ work gives them substantial internal satisfaction that is typically ignored (Carlin and Gervais, 2009).

Sheep stealing

This compensation policy, which is administered at the congregation level, leads to a collective action problem for the church as a whole, because the community of Methodist clergy are rewarded for poaching members from one another’s flocks. This practice of “sheep stealing” is well recognized and frequently lamented in religious circles (see, for example, Chadwick, 2001).

When performance is difficult to measure

When a pastor’s private effort and measurable output are weakly correlated, then a risk averse minister will reduce effort (e.g., Holmstrom (1979) and Banker and Datar (1989)) because an additional unit of effort has a certain cost but an uncertain outcome. Incentive contracts should therefore reduce an agent’s exposure to factors that are beyond his control. … some regions of Oklahoma are particularly exposed to oil prices. For churches that lie in such oil-sensitive areas, church attendance (and the local economy) fluctuates with oil prices, exogenous shocks that impose risk upon the minister. We find that pay-for-performance in churches that are particularly sensitive to oil prices is significantly lower than in churches without such exposure. Together, these results provide support for one of the most standard predictions of agency theory, but one that is often difficult to test cleanly.

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