Economics of tipping

Tips are welcome in many occupations and are absolutely expected by restaurant servers who are paid well below the minimum wage.  Recently some restaurants have eliminated tipping, increased hourly wages and then hiked menu prices to compensate.

How do incentives change in a no-tip restaurant?  Under tipping the wait staff has two incentives: (1) provide good service because many customers have a "pay-for-performance" ethos and (2) upsell the customers because most base their tip on a percentage of the total tab.  In most cases tips are not shared with cooks and dishwashers, leading to less than optimal teamwork.  Finally tips are risky; restaurant traffic goes up and down with the weather and some customers are less than generous.  The result is partial alignment with the incentives of the restaurant owner.

Danny Meyer, CEO of Union Square Hospitality Group, has moved to the no-tip model.  The benefits, he argues in a recent WP op-ed, include more predictable income for wait staff and improved performance management (managers are in a better position to do this than customers).  But the implementation has been far from seamless.  With pay the same on every shift, servers who begged for weekend shifts (with their higher sales volume) now want to work the quieter weekdays.  Some customers balked at the higher menu prices, especially the ones that were less than generous tippers.