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COMPENSATION & REWARDS
Jul 7, 2014

Move to 'no tipping' policy highlights key pay questions

Knowing what you want to achieve can help you avoid unintended consequences
    

By Claudine Kapel

There have been some stories in the news lately about restaurants that have adopted a “no tipping” policy.

Instead of having tips form part of the compensation package, these establishments are increasing the amount they pay servers and kitchen staff. Restaurant customers pay more for their meals, but no longer leave tips.

The rationale is that such an approach narrows the gap between what servers earn, relative to cooking staff, enhancing teamwork and reducing the tension around how earnings compare between the two groups.

The shift in pay strategy by the restaurants implementing no tipping policies highlights the types of considerations that shape how compensation programs are designed.

Effectively designed pay programs strike the right balance across a number of considerations, including:

  • cost
  • Attracting and retaining talent
  • Driving desired performance and results.

In this case, the restaurants are increasing their fixed compensation costs by increasing the hourly rates of servers and kitchen staff and eliminating the variable pay component represented by tips. One restaurant quoted in the media said it expected the change to enhance its ability to attract and retain talent through the higher compensation rates while improving the overall work environment, since concerns about the allocation of tips would be eliminated.

As is generally the case with compensation programs, there’s no one-size-fits-all solution. While a no tipping policy could work for some establishments, it may not work for others, depending on their unique circumstances.

Here are some questions that the restaurants likely explored, and that are equally salient for any organization contemplating a change to its compensation approach.

What will happen to the competitiveness of the compensation program? A restaurant considering a no tipping policy would need to consider what its new compensation program would deliver relative to what an employee could earn elsewhere at a comparable establishment that maintains a tipping policy.

The reality is that some types of environments yield more tips than others. What are the establishment’s hours of operation? What types of customers does it attract? What kinds of meals are served and how expensive are they? Does the establishment serve alcohol? Does it have a patio?

For a no tip environment to work, the staff would need to have a comparable earnings opportunity to what they could have made with tips, or be willing to work for less to be part of a no-tip environment. Otherwise, attracting and retaining talent could become a challenge.

Perhaps an even more significant consideration is the impact the shift in compensation might have on customer service and customer satisfaction. The reality is that tips are a form of variable pay. That means there’s a link between performance and the amount of compensation earned.

While an organization can achieve high levels of performance without the use of variable pay, any organization should consider what might happen to performance when a pay program used to drive particular behaviours and outcomes is eliminated.

Because tips are dependent to a certain – and potentially high – degree on level of service, what will happen to service levels in restaurants when tips are eliminated? The reality is that service levels could remain high, as many people are intrinsically motivated to do a good job.

But on the flip side, service could suffer if the desire to maximize tips was what inspired employees to go above and beyond. Further, the more tips represent as a percentage of total earnings, the more likely employees – especially top earners – will resist or resent the change and the harder it will be to keep employees “whole” when moving to a fixed base wage model.

These same constructs are examined and debated at some point by any company that uses variable pay plans, and especially when introducing or eliminating a plan. You need to consider the plan changes through a number of vantage points.

  • Can you afford to implement the change?
  • How will employees feel about the change?
  • How will it impact individual performance?
  • How will it impact team dynamics or cross-functional relationships?
  • How will it impact customer service?

When it comes to compensation design, there’s no single solution or right answer that works for every organization. The key is to really understand the implications of a potential change within the context of your unique environment, to determine what’s right for your organization and to guard against unintended consequences.

    
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