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On Tip Based Compensation

Normally, I love everything on the Priceonomics website – it is exceptional in delivering content well cited, researched, and thought provoking. Though I took major issue with a recent article entitled “A Tipless Restaurant is a Well-Run Restaurant.” I have had a great deal of experience with this subject, both as a front of the house employee as well as manager deciding the overall compensation structure for a midsize restaurant. Slate magazine has also published a piece on the subject that warrants discussion (Also got some Eater NY Coverage).

In mind, the question has deeper economic underlying considerations. Dr. Milton Friedman was a master at pointing out that the world runs on individuals working alone to pursue their common interests. I would be the first to point out that resaturant efficiency is directly tied to cooperation, yet when that cooperation becomes controlled, economic self interest is manipulated. Excellence is brought about by the the challenges of competition, not the complacence of uniformity.

No attention has been given to the point that dining out is approaching the same cost as buying and producing one’s own food. To remove tip based compensation would certainly affect this positive trend for the restaurant industry. The cost increase would immediately pass to the consumer, which psychologically would have a negative effect.

Ask anyone who has been to London and they will tell you how not great (generally) the service is there. After all, if your waiter is getting the same compensation no matter how attentive he/she is or uninterested, won’t average or below average be more frequent occurrence. The Slate piece does make some great points regarding the less than lucid legality of tips in general. Yet, as John Maynard Keynes points out, “The avoidance of taxes is the only intellectual pursuit that still carries any reward.”

Alex Mayyasi makes a few points that I would like to address individually.

1. Tips are unrelated to good service

First of all, the Slate piece as well as the Priceonomics piece cite dated studies; I would argue their irrelevance (http://www.jstor.org/discover/10.2307/2489426?uid=3739560&uid=2&uid=4&uid=3739256&sid=21102524455603 – the Feinberg study from 1986 ). Credit card behavior in the 1980s? People barely had credit cards then. While I might agree that people tip more on credit cards, I don’t think this disproves a service correlation. Even what might constitute a statistically insignificant correlation in a study can make a difference over the course of a year.

This study (http://tippingresearch.com/uploads/managing_tips.pdf) argues tips are only weakly correlated to service conducts studies in Hong Kong, Ithaca New York, and Houston Texas (places just overflowing with Michelin stars). As well, this study is based on some shaky experimentation, it ‘compared managers’ reports’ based upon server tips and found that among other activities, larger tips arose from when servers ‘draw a “Happy Face” on the backs of checks.’ Also – “authors did report finding that tips were higher at restaurants where servers do extra food preparation at the table and at restaurants where servers visit their tables very often than at restaurants where these things did not occur”

This study (http://www.ncbi.nlm.nih.gov/pubmed/12921413) based upon the magnitude of the charge being inversely related to compensation is accurate and relevant, but every hospitality professional I know is familar with the term, “auto grat”, the automatic gratuity on large parties. As well, the possibility of going above a common level of service for the reward of tipping on top of the gratuity is what motivates most large party waiters, bartenders, and sommeliers.

Basically, Good tips are not just good luck. Performance differences account for greater than 2% differences; 20-25% is what an excellent server can expect. High performing hospitality professionals seek out and advance to higher check average establishments, their compensation is tied to their knowledge, experience, and energy as well as performance,

2. It’s un-American

This is preposterous and barely relevant. Christianity is un-American, I don’t see people lining up to dismantle churches. (“Millions of innocent men, women and children, since the introduction of Christianity, have been burned, tortured, fined and imprisoned. What has been the effect of this coercion? To make one half the world fools and the other half hypocrites; to support roguery and error all over the earth… – Thomas Jefferson, Notes on the State of Virginia 1787). 

Slavery is also American. Just ask Solomon Northup or Fredrick Douglass about that (12 years as a slave.. also! highly recommend the recent documentary on James Baldwin from PBS http://www.pbs.org/wnet/americanmasters/episodes/james-baldwin/bibliography/2651/)

Service in Europe vs Service in America aren’t the same thing at all. The American ideal of service evolved under the aegis of Capitalism and Freedom. (Most) American’s have had the freedom to choose since their birth, and thus service has evolved as a differentiator in the marketplace. As an actor in a capitalist system, it has perscribed value ( service is the Alpha that investment managers are judged by). Service is how two cheesesteak places in Philadelphia can stay in business for decades, right across the street from each other. This doesn’t happen in Europe, or Canada for that matter.

3. Economists don’t get it

Which economists? Paul Krugman? Keynes? I give you Dr. Friedman again. http://www.youtube.com/watch?v=g-o0kD9f6wo

4. It’s borderline racist

Servers are better compensated because they have a different skill set and education than dishwashers and cooks. Just like lawyers are better compensated than clerks, and Doctors better compensated than administrative assistants. Why the difference in the hospitality industry? That’s not racism, it’s capitalism. The solution is not to artificially level the playing field so we feel better about the natural market forces, that would be socialism. Yes, you want to see a good looking host/hostess and yes, you want your server to speak perfect English or Spanish. That’s human nature making itself known through subconscious bias, not racism.

5. We don’t tip doctors

Yeah, but we should be! Maybe that might positively affect the standard of care. No we don’t, because they charge whatever the @$# they want. The NY Times recently reported on a study featuring data from 3,300 hospitals showing hows “wide variations not only regionally but among hospitals in the same area or city.” Why would a doctor need a tip when they charge and arm and a leg more often than they fix them?

And lastly, I’ve been a couple restaurants in San Diego.. I wasn’t impressed with the service so i’m sure a non tipped experiment down there is going to be successful. I doubt you’ll catch Danny Meyer, Daniel Boulud, or Eric Ripert changing that around anytime soon. My guess is that there would be a FOH revolt.

Removing tip based compensation in restaurants places them on a path to mediocrity of service, something that so many other industries in this country have already reached. I think tipping should be vastly expanded, we should be tipping in all kinds of professions – plumbers, politicians, doctors, lawyers, etc. Ironic how it is all but certain those professions would be uniform in their dislike of the introduction of tipping.

2 Comments

  1. Alex Mayyasi Alex Mayyasi

    Hi Michael. I only come to the debate as an informed observer, but I’ll do my best to add something as you requested.

    What is interesting to me is that you (citing your exp with compensation in a mid size restaurant) and Jay Porter (restaurant owner whose experiences and writing I wrote about) came to such different conclusions. He writes well about how and why none of his best servers ever think about money or tips and how tipping creates perverse incentives for the staff. As an outsider, I don’t know what most restaurant owners/managers would say. I do find Porter more convincing.

    You, like a number of commenters on no tipping ideas, point to bad service in various European countries that don’t tip. I experienced it about once a day living in Egypt. But as many other commenters will point out, other countries w/o tipping practices (think Japan) have exceptional service. I commonly look to money as THE incentive that motivates in my writing, but service seems much (in broad strokes) about culture than monetary incentives.

    That’s why I would disagree with your response to the “it’s un-american” point. I would definitely disagree with the idea that tipping somehow evolved as an expression of american enthusiasm for capitalism and competition. When I lived in France, I saw just how unusual America’s excellent customer service and “the customer is always right” attitude are. I saw it in cafes on occasion. But mostly I saw it in college administrators and librarians, shops and post offices. In short, America’s great customer service is great and probably has to do with american apple pie capitalism, but it has zip to do with tipping.

    I’m only taking the time to respond to a few of your remarks, but as your biggest premise/concern seems to be the capitalist thrust, I’d point out that there’s nothing more capitalist than getting rid of tips as Jay Porter describes it. He believes that tipping creates perverse incentive systems that detract from teamwork and quality service. It’s an empirical question about whether he is correct, but there is nothing more American, capitalist, Alec Baldwin in Glen Gary Glen Ross than improving your workers incentive system to improve productivity and product quality. But paying a fair wage, removing weird power imbalances, and not allowing racial biases to impact compensation are seem to be among the very attractive side benefits.

    • Alex,

      Thanks very much for your comments.

      One thing I would point out, not as a slight to Mr. Porter, is that neither of his restaurants are still open. While they might have achieved some considerable success, their closure for whatever reason I find pertinent. A runaway successful restaurant usually is sold, or remains open – and I would be curious to discover if the increased cost associated with eliminating tips contributed to the demise.

      I disagree fundamentally that tip based compensation is a, ‘perverse incentive system.’ Mr. Porter’s ideas to that effect are the result of an isolated survey in one restaurant. I’ve worked in over 20 restaurants in my career, I still make tips every night, and I would rather keep them over a higher wage. As well – Capitalism itself is an incentive system; the definition of wage labor is a worker voluntarily entering into a wage contract with his/her employer where wages are market determined. As I said in my response, the difference in compensation in a restaurant environment is not a “weird power imbalance,’ but the result of education, training, ability, and preference – no different (generally speaking) than the compensation stratification in any other industry. There are no barriers for a back of the house employee to decide he wants to start working in the front of the house should he/she garner the skills and ability. This is precisely what I did.

      Tip based compensation is like a comment box for service, it allows waiters a view into the psychology of their patrons; the studies you cited prove that psychology a major actor. I believe that tipping evolved less as an expression of American enthusiasm so much as a component to a capitalist system via the increase of the velocity of money. If I argued that the basis of American customer service is tipping, then I wasn’t clear. I think tipping is a variable in the equation, and removing a variable affects both sides of the equation. I fail to grasp the argument for radical biases.

      I fail to see your argument a purely economic basis, citing the work of Thomas Sowell, Milton Friedman (who have argued for removing the minimum wage entirely), and countless others that removing so called “perverse incentive systems” in favor of socialist ones to be more capitalist. Regardless of what Mr. Porter thinks about the tipping system, Studies have shown that when you raise the price of anything, people take less of it, including labor. Eliminating tips is raising a price.

      I would rather keep the current system, let the market continue to determine what constitutes a ‘fair wage’ rather than arbitrarily assigning it.

      Thank you very much for your thoughtful comments. Greatly appreciated.

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