The Implications of Eliminating the Tipped Wage, Part III: An Assessment

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Image: Elite Daily

This is the third and final installment of our three-part series on the implications of tip elimination. In parts one and two we looked at factors for operators to consider and some original research we conducted regarding the attitudes of tipped servers and managers toward this potential change. In part three we will apply existing research and information, our own original research, and lessons learned from the passage of at least some time to assess the implications of eliminating the tipped wage. 

Does tip amount have anything to do with service quality? Maybe the amount doesn’t…but tipping might.

In theory, employees working for a gratuity do their best, motivated by the prospect of a large gratuity at the end of the meal. In practice, the size of a tip has less to do with the quality of service provided and more to do with the size of the bill. In his research, Cornell professor Mike Lynn concludes that customers are reluctant to leave anything less than the normal 20% gratuity for fear of social disapproval, perhaps at the hands of fellow diners or even service staff. A gratuity unlikely to fluctuate is unlikely to motivate.

Servers don’t seem to feel this is the case. Nearly half of our respondents suggested the quality of service they would provide would diminish if they were not working for tips. Only 3% anticipated improving the level of service provided if not working for tips. Contrary to the information above, many tipped servers do seem motivated by the belief that their compensation is tied directly to the quality of their efforts.

Do tips make it hard for managers to manage? Most managers don’t think so. 

Danny Meyer astutely opines that the direct transaction between the customer and the service provider leaves no place for the manager. He claims that eliminating tips puts the manager between these two parties, allowing them to incent and reward excellent performance through pay increases, bonuses and promotions. Meyer is confident that his managers will be better at this than his customers.

We asked managers for their opinion on the elimination of the tipped wage. Nearly three-quarters of our respondents had an unfavorable opinion of such a move. Restaurant Business reports a similar result in research conducted on their behalf by Technomic. Seventy-five percent of managers in that survey consider tipping to be an effective means of compensating servers.

Do service charges work? Customers don’t like them.

High profile operators like Thomas Keller and Alice Waters have eliminated tipping at their restaurants and have instead instituted mandatory service charges. There’s been extensive research on consumer attitudes toward service charges and they conclude that customers don’t like them (Zagat reports that 80% of consumers dislike these charges). Regardless of their unwillingness to tip less than the norm or not at all, customers feel a sense of transactional power where tipping is involved. Mandatory service charges result in the opposite feeling – mandatory means customers have no choice and thus are made to feel powerless. 

Most people would give their first born to eat at The French Laundry, so being made to pay a service charge is probably not that big a deal. It is a big deal everywhere else.

How have consumers reacted to higher menu prices? Well…that depends.

The kinds of increases in menu prices instituted by Danny Meyer would result in sticker shock for most customers at most bars and restaurants. This is not likely to be the case at the Union Square eateries where customers are drawn by quality and therefore exhibit little or no sensitivity to price. 

Maybe you run an operation like this, but more likely you don’t. You do a nice job, but still need to provide a value proposition for your patrons. How would they react to your prices increasing by 20% across the board when you eliminate tipping – especially if none of your competitors do the same? This was the experience at Joe’s Crab Shack. Their no tipping experiment resulted in higher labor costs and a reduction in customer traffic by as much as 10%. Parent company Ignite Restaurant Group has abandoned the no tipping experiment at 14 of 18 restaurants. Price sensitivity may not exist in some corners of the industry, but it certainly exists in most.

How are servers likely to react to the elimination of tipping? Not well!

For tipping to be eliminated on a grand scale, this population will need to buy in. Our new research and what is already known about the general characteristics of servers provides some insight into their likely reaction.

1. Servers are motivated by money. Serving and bartending are tough. The work can be physically demanding, the hours are long, the workweek is unconventional, and the public can be difficult. The primary motivation for doing these jobs is that they pay well. Yes, you need a passion to provide great service, but you could do that at Target without having to clock out at 2:00 AM on a Sunday morning. The sacrifice warrants a reward.

2. Servers are risk takers. We surveyed some of our students who are professional servers, asking them if they would prefer a steady hourly rate over the uncertainty of tips. All of them indicated they preferred tips, with many mentioning the actual amount of money they can make on a busy Friday. When asked about a dead Tuesday, they again mentioned the bonanza on Friday.

3. Servers are entrepreneurial. This same group of our students indicated that they worked hard to provide great service and to upsell because of the direct financial benefit to them. They preferred working alone and expected to benefit from their effort. They didn’t expect the house or their co-workers to take what they had earned.

4. Servers are transitory. So many servers are really something else. They are students paying their way through school, out of work accountants looking to make ends meet until the next accounting job comes along, teachers looking to supplement their incomes or stay busy during the summer. Point is, they are on their way to something else and serving or bartending is a part time gig or temporary way station. They want to make as much money as they can until they can move on. This is reality. They are not likely to be interested in professional development, promotion, specialized training, or 401Ks. These items motivate careerists, not transients.

These factors surely help explain the preference for the tipped wage we found among respondents to our survey. Eighty-nine percent of tipped employees indicated an unfavorable opinion of its elimination. Perhaps even more significant, we asked if the elimination of tips would result in our respondents “moving on.” One in four would stay in their current position if a tipped wage were eliminated. Forty percent indicate they would seek out an establishment with tipping while another 25% would simply leave the industry.

These results have significant ramifications for operators considering the elimination of tips at their establishment. You can expect a significant number of your staff to leave. If tips were eliminated industry-wide, one-in-four servers indicate they would move on from the industry. An unintended consequence may be a resultant shortage in servers and bartenders to go along with the one in the kitchen currently plaguing the industry.

What’s the bottom line?

The evidence above seems to indicate that an organic shift away from the tipped wage for service employees is unlikely. The great majority of industry constituent groups – consumers, operators and managers, and tipped employees – don’t like the idea. Thus far a few operators in a few locales have adopted a no tipping model. These early converts have tended to be in cities and states with a unique set of conditions, especially a higher-than-average minimum wage and shortage of skilled kitchen employees. They have also tended to have average guest checks at the highest end of the industry, where their customer base displays less price sensitivity and is therefore more likely to accept the higher menu costs associated with the elimination of gratuity. If the elimination of tipping is driven by industry forces, it is likely to come slowly and be driven by increased consumer acceptance at all industry segments.

If the elimination of tips is to come any time soon, it is likely to be driven by policymakers increasing minimum wage and eroding the tip credit, making it difficult all over to attract skilled hourly employees to work in the kitchen. Many operators will look to the front of the house to find the increased money needed to pay those working in back. The shift could result in at least a temporary shortage of servers until the industry adjusts and a new normal appears.

The authors wish to acknowledge the support and guidance of Robert Gable, Ed.D and Felice Billups, Ed.D at the Center for Research and Evaluation at Johnson & Wales University and Kristen Santoro and Ashley Garceau of Nightclub & Bar.