Tuesday, October 27, 2015

To Tip or Not to Tip, That is the (HR Policy) Question

I often think that us Americans know how to take a good thing and push it too far (e.g., youth sports, St Patrick’s Day, the size of burritos). Maybe tipping is next? Just as tipping seems to be expanding, a leading New York City restauranteur has announced an end to tipping in his restaurants. Why? With larger tips being given to servers and front-of-the-house workers but not shared with cooks, dishwashers, and other back-of-the-house workers, income differentials have widened. Ending tipping and raising menu prices is seen as a way to raise the pay of the back-of-the-house workers.

From an academic perspective, this could be seen as a contest of economic versus psychological approaches to human resources (HR). A system of tipping is consistent with an economics mindset—that is, the prospect of receiving a larger tip is believed to provide an incentive for providing better service to the customer. This is because economics assumes that workers are motivated by money, and need money to be motivated. As with many incentives, there can be additional effects. Some servers might expect that certain customers will be stingy tippers (like economists at a conference!), and provide weaker service from the start. And the prospect of tips provides an incentive for servers to turn over tables, which can also be good for the business but not necessarily for the diners. And if tipping prevents higher wages for back-of-the-house staff, then this makes those jobs less attractive, which can be a challenge for restaurants (to be frank, it’s not clear to me why tipping prevents raising back-of-the-house pay, but that’s the story the restaurant industry seems to believe, or wants us to believe).

Economic theory predicts that replacing tips with a higher charge that can be distributed to all employees will weaken these incentives and reduce customer service. From a different perspective, however, this shift is seen as creating greater levels of workplace fairness. Consistent with simple psychological theorizing (which is also taking hold in behavioral economics), greater levels of fairness should promote cooperation among employees. A manager at a Twin Cities restaurant with a no-tipping policy was quoted in the paper as saying “Without that giant pay disparity, the front-of-the-house/back-of-the-house dynamic is definitely different here” (StarTribune, October 22, 2015) And if employees are motivated intrinsically and value fairness, then customer service shouldn’t suffer. Tipped workers also bear the psychological burden of variability and unpredictability (e.g., some shifts are slower, and thus tips lower, than others) so eliminating tips can have other benefits for workers which can, in turn, benefit customers.

As an aside, traditional economic theory also suggests that pooling tips to share and replacing tips with higher menu prices distributed to all workers are essentially the same, and incentives will be weakened in either case. But psychological and behavioral economics thinking suggests that these are not the same if there is a psychological process involved with a server earning the tip and then being forced to share it. So there are many layers to this issue.

So what will happen in practice? Time will tell, and the responses and outcomes will probably vary—after all, workers are heterogeneous and bring different values, goals, and outlooks to their work. But I think this is a good example of the issues that HR professionals need to wrestle with, and it illustrates how critically important it is for HR professionals to have a deep understanding of the complex drivers of human behavior. It should also serve (no pun intended) as a reminder that managing people is not just about leadership (which is all the rage these days), but is also about wise policy design and implementation. Bon appétit!  

33 comments:

  1. It's really a good thing,..
    Thanks for the share about Tip,
    "Online Tipping Service"

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  2. I worked as a waitress during my time at university to make some extra money for living ... And I can tell you I was glad about the tips because the money I got paid was not very much. But as this happened some time ago I'm not sure how the situation has changed in the meantime. Nowadays I would try crowdworking I think because I would be much more independent with this kind of work ...

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  3. I think Professor Budd pretty much sums it up at the end of paragraph two:

    "to be frank, it’s not clear to me why tipping prevents raising back-of-the-house pay, but that’s the story the restaurant industry seems to believe, or wants us to believe."

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  4. It's a very interesting topic. In the past I worked for a time as a waiter. I was in different restaurants and had the opportunity to learn about different policies on tips. In one, the tip was charged in the account and the customer could choose to pay or not. At the end of the week, the tip was distributed, according to the position and time intensity of each worker. The vast majority warmly welcomed policy.

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    1. The case note you mentioned here is very interesting. I think it is better that customers were given the choice to choose between tipping or not tipping and also that the restaurant management is made aware of how much tip is given (though I don't know how the information about the amount tipped gets to the management. I guess the customers fill in that information somewhere). This way, the tips are collectively distributed among both the back-of-house workers and Front-of-house workers. And since it was a longstanding policy of the restaurant the workers welcomed it. If you look at it the other way too, the restaurant does not increase the cost of their service and gets to keep their customers feeling satisfied. Good one.

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  5. I lived in Japan for three years during my time in the Navy. In the first week of arriving into the country I was given many different briefings about living in Japan. One of the interesting points was that there was no tipping in the culture. The workers there considered it insulting to tip, and it was a way for the patron to tell the worker that they don't make enough money, and they are not good enough to get a good enough paying job. I spoke with a few of the Japanese nationals about this and they all were consistent in saying that there was an expectation of work first, even before the idea of pay or wages. They were proud of their work and found it to be a civil duty and a matter or personal pride in doing a job well. Working harder to get a tip was "foreign" to them. They believe it's a duty to work hard period.

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    1. Great culture! Looking forward to experience it this Sep on my trip there.

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    2. I think that is a great idea! We could learn something from their concept of tipping.

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    3. really lovely culture...other country should learn from this.

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  6. I have experienced several times that culture of tipping can actually ruin the experience of dining in a restaurant where the waiter pester for tips regardless of the services rendered.

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  7. Well, it can become annoying at times. I personally don't like when a waitress/waiter hang around myself while having my meal. But the culture is that they do so expectantly and if we don't tip , it is almost a crime. For the back & front staff problem the solution might be placing a collection box or something and distribute it at the end of the week.

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  8. When the waitress smiled in front of the rich man, he asked her why you are smiling ? To this, she replied - you tipped me 5 dollars whereas your daughter tipped 300 dollars. The rich man replied that she is the daughter of rich man and I am the son of a carpenter. Now the thing is, if there is so much variation in tipping, then certainly the back office staff would like to share. To overcome this problem, a certain amount needs to be fixed by the HR for waiter / waitress. In case the amount of tip is in excess, this should be kept in reserve. On the other hand if less, then they are to be compensated from this reserved amount. Though I do not support Tip, but definitely, sometimes the customers feel ashamed / shy when they do not have sufficient amount in their pocket to tip whereas others are tipping.

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  9. Very good reflection about policy of tip in a workplace like restaurant. This article gives us the right example of strategic HR management that tend to satisfy the work force.

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  10. The NPR Radio show This American Life did an experiment on what servers get the better tips - and it's not necessarily what you'd think!

    You can listen to the story here: http://www.thisamericanlife.org/radio-archives/episode/245/allure-of-the-mean-friend?act=2

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  11. Interesting story! In korea there is no tip culture. The price on the menu contains taxes and tips. So I think... For me this system is better for both workers and customers. Works feel fare and customers just can pay the price on the menu no extra tips.

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  12. I think the tips offset that fact that waiters and waitresses do not get paid as much as a cook. What I do not agree with is forced gratuity charged for large group. This force me to break up my family member on separate table when we go out. Additionally, I do not like the suggested tip when tipping is not an obligation.

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  13. I think in that case the industry will lose prospective employee who have the natural talent of service. Waiters are sales people and no tipping will drive them to other commission based paying jobs. Restaurants will lose the extra effort of their servers.

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  14. Such a great point to emphasize that a vast majority of people are motivated by money, and money when taken away (such as tips), can lead to shirking, lack of interest and a curse, once the motivation is taken away and the new motivation becomes working for a living.

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  15. I believe that servers earn their tips with outstanding smiles and service and turn a meal into a true dining experience. For this i believe they deserve to be intrinsically motivated and rewarded.

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  16. I have read a similar article about this happening in New York where restaurant owners actually find it difficult to find quality cooks even though many are graduating from cook schools. Supposedly many cooks are deciding to work in the front half of the restaurant so they can make more money due to this wage difference issue discussed in the article.

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  17. Thanks Prof for this topical issue of tip or not to tip. I personally do not like the word tipping or to tip workers as it encourages eye service and pretences. I like people to first do their work pleasantly and promote the organisation or restaurant as a place to get good service with good food.
    Then more people will patronise the restaurant and make enough money to pay all the workers well and give incentives.
    If only the front office workers get all the tips and the back office workers do not, then the back office workers may not deliver quality cooking that can entice the customers, therefore nobody gets tipping for just serving, while others do the hard work at the back.

    So tipping should be discouraged. Regina Ujomu.

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  18. Thanks Prof for this topical issue of tip or not to tip. I personally do not like the word tipping or to tip workers as it encourages eye service and pretences. I like people to first do their work pleasantly and promote the organisation or restaurant as a place to get good service with good food.
    Then more people will patronise the restaurant and make enough money to pay all the workers well and give incentives.
    If only the front office workers get all the tips and the back office workers do not, then the back office workers may not deliver quality cooking that can entice the customers, therefore nobody gets tipping for just serving, while others do the hard work at the back.

    So tipping should be discouraged. Regina Ujomu

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  19. Typically, servers only make around $2.13 an hour so they depend on these tips to make a decent living wage. The Back-of-House staff generally make minimum wage or higher, so in theory, they're already being paid a fair living wage. Getting rid of the tipping system would guarantee that a server working an 8 hours shift actually gets paid a fair amount of money instead of it being a gamble. Maybe restaurant owners can offer servers a commission based off of their sales.

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  20. When I was in Europe for a summer, tipping is not encouraged. In fact, I noticed that services was better. For me, service includes not feeling rushed by a restaruant. When waitresses rely on tips, they will want to rush patrons out in order to serve more tables, thus earning more tips. This is bad service in my eyes.

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  21. Appreciate this thought from a long ago.
    one study based on Indian Coffee House in India since 1936, once you go through their system of tipping and even other HR policies which yet not get changed, are based on equal tipping at the end of the day and not only the condition on present but on absent or leave days too. because they believe on the total Team Work and unity.
    I request or if you wish too please have a look on the story of Indian Coffee House.
    Thank you for reading my comment

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  22. I thought this last phrase was particularly enlightening for me: "managing people is not just about leadership (which is all the rage these days), but is also about wise policy design and implementation". HR management is a definitely my weak point as a Manager. To correct this, my HR department sent me for training in leadership skill. I thought that would help and that I was then equipped. However, issues with HR management came back in my managerial life, for this reason I am now taking this course. Nothing of what you teach here has been even alluded to during my past training courses. Also, one of the assignment I evaluated today as part of the peer review process identified "strategic leadership" as the managerial style to adopt in their particular case (I did flag that). So, I now have some understanding of the difference between HR management and leadership. Thanks for pointing this out, perhaps the topic would deserve an article per se?

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    1. Thanks for your nice comment, and for the good idea about a future blog post.

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