The Agency Relationship in Churches: An Empirical Analysis

ABSTRACT. The agency relationship has been observed in a variety of settings. Churches, like other organizations, are plagued with the typical agency problems of moral hazard, observability, goal displacement, and risk aversion. How do churches cope with these issues in dealing with their most critical resource, clergy? This study analyzes the agency relationship between churches and their clergy. Using data from nine denominations, this study finds strong evidence that pastor compensation is not tied directly to performance, but rather indirectly through promotion tournaments. Successful pastors are rewarded by being called to larger, presumably wealthier and more prestigious, congregations. Since it is so difficult to observe and measure a pastor's performance in specific activities, churches differentiate good pastors from mediocre ones by considering their total performance, rather than any specific activities. Agency theory has been applied to a variety of organizational types and organizational structures. Scholars have used it to analyze sectors as varied as retail sales (Eisenhardt 1988), the military (Asch 1990), the professional golf tour (Ehrenberg and Bognanno 1990), medicine (Gaynor and Pauly 1990), universities (Gomez-Mejia and Balkin 1992), banking (Blackwell, Brickley, and Weisbach 1994), and the oil industry (Nygaard and Myrtveit 2000). One type of organization where it has been applied on only a limited basis is a church (Zech 1998). But churches, while in many ways more complicated than either proprietary organizations or other nonprofits (e.g., lacking the incentive structure and bottom-line measure of success provided by profits, while providing their primary benefits in the afterlife) are the quintessential example of an organization built on a foundation of people-to-people relationships. This article considers one of the most critical types of agency relationship in churches, those involving pastors. Depending on church polity, pastors may be involved in an agency relationship in which they serve as an agent of either denominational officials or congregation members. But in either event, it is probably safe to assume that pastors respond to incentives, and that their agency relationships are plagued by the familiar agency problems of moral hazard, observability and measurement, goal displacement, and risk aversion. The following sections of this article will describe the agency relationship as it applies to pastors, discuss some possible solutions, and then theoretically model and empirically test elements of the pastor-agency relationship. Finally, some conclusions and policy recommendations are offered. I Pastors as Agents THE NOTION THAT PASTORS RESPOND TO ECONOMIC INCENTIVES is not a new one. Adam Smith devotes a whole chapter in The Wealth of Nations to detailing how clergy are motivated by self-interest. Finke and Stark (1992) argue that denominations that encourage and reward more entrepreneurial behavior on the part of their clergy have historically tended to grow faster. By the same token, these same two authors (Stark and Finke 2000) have found higher church costs and lower clergy productivity in those countries in which pastors are considered to be civil servants and are afforded civil service job security (2000: 230-231). Ekelund, Hebert, and Tollison (1989, 1996) demonstrate that many of medieval Catholicism's decisions (e.g., selling indulgences, the crusades, bans on usury) could be explained by the Church's reaction to economic incentives. But who are the principals in the pastors' agency relationship? That depends to a large degree on church polity. Douglas Allen (1995) has observed that there is a correlation between a church's professed doctrine and its organizational polity. Those churches that allow for a more individual interpretation of doctrine (e.g., the Southern Baptist Convention) tend to be decentralized, with much authority in the hands of congregation members, including the authority to hire ("call") and dismiss their own pastors. …