Tipping: bad for customers, wait staff, and owners

At it's core tipping serves as a way to incentivize staff members to provide better service.  Good service should be rewarded, bad service should not rewarded, and in the end consumers should be left with a much better experience.  Keyword, should.

There are three parties that are affected by tipping: the customers, the waitstaff (dishwashers and other workers [1]), and the owners, and in my opinion tipping is detrimental to all of them.

Customers:

Think about the last time you went to a restaurant.  What dish did you order?  Can you recall the how much you paid?  Now let's pause for a moment.  Is the price you're thinking of the price that was on the menu or the menu price plus the tip?  Most people don't think about the tip, but it should be factored it.  It is a necessary expense for you to consume your meal.  This is one my biggest problems with tipping, it hides the true cost of a meal from the consumer.  An ad on TV may market a steak dinner for $15, but it doesn't have to mention the tip (or tax for that matter).

To make matters worse, the tips that are left by consumers don't function correctly. .The tip size is effected by whether the waiter touches you, has good posture, is of a certain race, compliments you, uses patriotic imagery, etc. This means that the staff that receives the larger tip is not necessarily the one who deserves it.  Not only that, but, even if a customer receives poor service, most of the time he is reluctant to leave a smaller tip, and the social rules for leaving a small tip vary widely from person to person (as you can see on this Quora thread).

Wait Staff:

In the US employers are required to pay tipped workers at least minimum wage (2).  That means if a tipped worker makes $2.13/hr, and is tipped an average of $4.50/hr ($6.63/hr) then the employer is required to pay $.62/hr to reach the minimum wage of $7.25 per hour.  If the employee is tipped an average of $8/hr for a total of 10.13/hr then the employer doesn't need to pay any additional wage.  In this article we're talking more about the lower wage wait staff, the ones who can be impacted significantly if their tips aren't adequate.

With no fixed wages (and generally low normal wages), planning financially can become difficult (it's already pretty darn hard considering the schooling in the US doesn't include even the most rudimentary of financial planning).  If for some reason business slows down, and tips become smaller, it can have a significant effect on ones quality of life.  Living on minimum wage is not easy, and living on a waitperson's salary is just as difficult, especially for waitresses.

The tipping system can have a negative effect on the mental state of the worker as well.  Tips are supposed to go to the person with the best performance, but as I mentioned in the section on customers, often give tips without regard to service.  That means that the ones who actually deserve the tips may not get them.  And if you're trying your hardest, but seeing other people get better tips, it can effect your mental state.

Owners:

For the owners of restaurants, there are tradeoffs to the current tipping system.  From an HR standpoint they don't have to manage an incentive system because tips do that for them (though not very well [3]).  The owners can also rely on customers to provide feedback regularly, on the best and the worst of service. But that is a problem There's an entire spectrum of feedback that won't grace the owner's ear and that is what matters most.  That means they won't have a very clear view of what is going on in their restaurant.  Sure they can leave surveys with customers, and watch the waiters, but their is only so much time for that.  The problem is, that information is paramount for making decisions, ideally the owner wants to keep, and promote the staff that has continually showed to bring back repeat customers, and without that information, they could be losing a decent amount of money.

The employees themselves can spell trouble for the owner as well.  Wait staff fears getting low wages, and it is possible for it to happen to them.  If worse comes to worse and they do have a few bad spells it will significantly increase their changes of looking of another employer.  In other words the tipping system could increase employee turnover and therefore increase the expenses that owners have to face. Turnover is a huge problem in the restaurant industry, some places have a higher turnover rate higher than 100% (4).

A Better Solution:

We have a few problems with the current tipping system because it:

1. Masks costs from consumers
2. Doesn't necessarily benefit the servers who bring back repeat customers
3. Obtaining reliable data about employee service is difficult 
4. Causes financial strife for wait staff
5. Employee turnover can be problematic

First off, tipping should be eliminated and the tip amount added to the price of the meal.  In the short term this may decrease the number of customers, but I believe that after a period of time it will stabilize as customers realize they were paying the same amount.

At first customers may feel uncomfortable not leaving anything. I think this is a perfect opportunity to switch the traditional tip with a feedback card.  If this becomes more of a habit it will be easier for restaurants to develop systems that track employee stressfulness in bringing back repeat customers (I'm sure some of the larger companies do this through matching up credit card transactions to the waiter who served the table, but this will make it a lot easier for the smaller companies).  With better knowledge of employee service, the owner can make better promotion and punishment decisions.

In addition the switch from tipping to a constant wage will provide wait staff with a much more stable source of income and relieve stress related to not knowing whether or not they will earn enough which in turn should decrease employee turnover.

Implementation:

Unfortunately if any significant change is going to occur, it has to come from the federal government.  Yes, one or two higher scale businesses may be able to get away with switching away from tipping because they can use it as a means of defining themselves from the competition.  But the majority of businesses will not be willing to make this change because of the fear that when they show their new prices (including tips), people will choose one of their competitors because the price appears to be lower.

 Regardless, the switch to no tipping can work, as it has at a restaurant called the Linkery, and I think we should consider it.



References

1. Carey Jones, "Ask the Critic: Here's how tipping works." http://newyork.seriouseats.com/2013/09/ask-the-critic-heres-how-tipping-actually-works.html (accessed 4/17/2014)

2. Division of Communication, "Wage and Hour Division." US Department of Labor http://www.dol.gov/whd/state/tipped.htm (accessed 4/17/2014)

3. Ryan Sager, "Tipping Doesn't Reward Good Behavior." http://www.marketwatch.com/story/tipping-doesnt-reward-good-behavior-1301325538049 (accessed 4/17/2014)

4. "Labors Lost." http://www.economist.com/node/5988 (accessed 4/17/2014)

Maslow's Hierachy of Business Needs

Maslow's hierarchy of needs has always stuck with me since I learned about it in grade school.  Despite its shortcomings, I've always thought it was an excellent way to think about think about human motivation and development.  Maslow created the model as a way to think about a person's needs and development.

For those of you who haven't heard of it before, the basic idea is that for a human to reach her full potential, she must first meet certain needs. Briefly described below.

Physiological -  food, water, shelter.  The basic stuff you need to survive.

Safety - Security in life, a job, health, resources to survive.  The stuff you need to feel comfortable and secure.

Love / Belonging - Friendship, family, community, intimacy.  Having the outside world accept you.

Esteem - Self esteem, others that believe in you, doing something that let's you feel needed.  You accepting yourself.

Self Actualization - Self defined morals, creativity, acceptance of life.  You're the best of the best, you know yourself, the world, and you accept and embrace it!

Or if you prefer a visual representation....

Recently I realized that Maslow's Hierarchy need not only be applied to one person.  If you have a group of people who are in a significantly similar situation it can also be applied.  A perfect example for this would be a business.

Most employers want their employees performing at their best, and to improve over time, taking leadership roles inside the company.  Maslow's Hierarchy is perfect for modeling this.

Physiological - To meet this level pay your employees a wage they can survive on.

Safety - Provide insurance and assistance in times of need and have them work hours that allow them to go home and rest.

Love / Belonging - Promote a culture of caring and helpfulness.

Esteem -Allow the employee to self direct her activities, provide feedback that let's the employee take pride in her work.

Self Actualization - Provide chances for the employee to challenge herself and improve.  Provide feedback that allows the employee to better herself.


Devil's Advocate.

This is a basic overview of what I was thinking, of course this model isn't viable for every company.  There are some companies that have business models and value creation processes need employees to stay at their current level of development.