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Question:
Our senior leadership team wants to focus on compensation this quarter. Currently, our raises and bonuses are tied to performance. Can you help me to understand the HR best practices for raises based on performance vs. raises based on market?

Answer: 
It sounds like your senior leadership team prefers to place an emphasis on performance when it comes to making decisions regarding compensation increases. This is the most common strategy used by churches as it rewards desired outcomes and motivates employees.

However, there are some downsides to basing compensation increases solely on performance. One of those is referred to as “wage compression”. This happens when new employees (whose pay will necessarily be based on the going market rate) come in at a starting salary close to or higher than your employees.

It’s very common for the market value of certain jobs to increase over time. Often this increase occurs at a higher rate than annual performance-based compensation increases, which are generally in the range of 1% – 4% of salary. As a result, new employees may end up earning close to or even more than a senior employees, unless of course you make a habit of taking the market value of a position into account when doing regular salary reviews.

Because of this, I recommend against taking market data completely out of compensation planning. It’s certainly okay to make performance your primary focus, but if a top performer can finagle a big raise because the value of their position has increased at a quicker pace than their salary, they may be tempted to do so.

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

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