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COMPENSATION & REWARDS
May 2, 2016

Should the practice of tipping be eliminated?

New research suggests the process is advantageous for everyone concerned
    

By Claudine Kapel

Leaving a tip for a restaurant server or bartender is a common practice.

But from a compensation perspective, is it a good one?

A new research paper argues that while the practice of tipping restaurant servers and bartenders is facing criticism in the United States, opponents of tipping don’t fully understand the benefits of the exercise — or the consequences of eliminating tipping.

“Some academics and pundits, ostensibly speaking for servers, want to abolish tipping, calling it an ineffective form of compensation, as well as a form of oppression by restaurant owners and customers,” says the paper, published by the U.S. National Center for Policy Analysis (NCPA).

Opponents to tipping want to replace the practice with a higher minimum hourly wage or living wage, notes report author Richard McKenzie, a professor in the Merage School of Business at the University of California, Irvine and a senior fellow with the NCPA.

He notes a living wage is generally defined as the wage rate required to lift the living standards of a household or family with only one worker above the poverty line.

“Yet tipping opponents do not seem to appreciate the economics of tipping,” says McKenzie.

“Servers at many moderately priced or casual restaurants with table service earn far more than the abolitionists realize. Tipping has economic advantages for everyone concerned: restaurant owners, their customers, servers and other workers.”

As part of his research, McKenzie conducted an informal survey of servers at several casual, moderately priced sit-down restaurants in California. He asked the servers what minimum hourly rate of pay they would need to receive to voluntarily give up their current compensation package, including tips.

The average required hourly wage cited in response was $29.30 an hour. The median rate reported was $30 an hour, with 62 per cent of research participants indicating an hourly rate of $30 or more.

In his report, McKenzie identifies a few restaurant chains that have recently introduced no tipping policies, and have increased the price of menu items to cover the additional compensation costs. He notes other chains will be watching their experiences.

To underscore his central point, McKenzie also chronicles the less than positive experience of a two-restaurant organization in San Francisco that eliminated tipping in 2015 and raised prices by 20 per cent to provide higher hourly wages across servers and kitchen staff.

During the organization’s 10-month experiment, the restaurant lost 70 per cent of its servers. “The reason was clear on reflection: Servers experienced an hourly wage drop from a range of $35-45 to $20-$35,” notes McKenzie in his report.

He adds that tipping offers an added benefit in that it incents servers to deliver good service — which, in turn, drives better business performance. “Tipping aligns the incentives of servers, managers and owners for a common objective — to make people’s restaurant experiences a win for everyone.”

McKenzie concludes that while some restaurants may find that a “hospitality included” pricing plan works best for them, it will not necessarily work for others.

While his research focused specifically on the pay of restaurant servers, the key findings are pertinent to effective compensation management in general. Some good practices that can be distilled from the research findings include:

  • Be clear about what problem you’re trying to solve or what outcomes you’re seeking to achieve by redesigning a compensation program.
  • Examine how the changes you’re considering will impact employees from a total compensation perspective.
  • Consider how affected employees may react to the change. For example, a move to more variable pay may be welcomed by some, but could drive other employees to leave.
  • Recognize that a compensation practice that has been successful in another organization may not work in yours because of your specific circumstances.
  • Be mindful of the potential consequences of changes being considered.

Many organizations regularly refine and retool their compensation programs — particularly their variable pay components. By examining and understanding how changes could impact factors such as talent retention and service delivery, organizations can design more effective programs, while reducing the risk of unintended consequences.

    
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