To tip or not to tip

Tipping is expected in restaurants, cabs, and a variety of other service industries.  At its most basic, the concept is simple -- the customer is in the best position to judge service quality, so why not have an incentive scheme where the voice of the customer speaks loudly?

Once you think more deeply about the motives associated with tipping, it starts to sound less appealing.  In many cases a customer will be at a particular establishment only once, so there is no financial penalty if the customer is a cheapskate and leaves no tip at all.  Also, service depends on a number of factors beyond the control of the person being tipped; the waiter cannot control backups in the kitchen and cabbies cannot control crosstown traffic.  Customers do not know that and penalize waiters unjustly.

A recent WP article reports that more restaurants are moving to a flat 20% service charge, and some are using this revenue stream to raise wages.  The benefit to employees is quite clear -- a steadier and larger stream of income.  Also most customers tip the same percentage (around 20% actually) all the time, so this process is not such a radical departure.

But what do customers get?  Now instead of voting with their tip dollars, customers would have to communicate directly with management about good and not so good service.  If they speak up, this would actually help management make more informed personnel decisions.  However, a customer might just as easily keep quiet about poor service and simply take his business elsewhere.

Shared tips or a flat fee also create incentives for waiters to cooperate, something management should encourage.  Finally, regardless of whether the waits get paid by tips or a percentage fee, I will still usually hear "Dr. Allen would you like to see the dessert menu?"  Restaurant owners will still have an incentive to get you to buy more.

Is tipping an effective form of incentive pay?

Wait staffs depend on tips for most of their income.  In theory, this gives them an incentive to be well informed, courteous, and efficient.  From an economic perspective, there are some serious issues with this arrangement.  Suppose you are traveling and visit a restaurant that you know you will never visit again.  You and the wait staff are complete strangers.  The wait staff have no idea what kind of tip you will leave, making it unlikely that your tip will have any impact on their service.  Knowing that you will never go back, you have a monetary incentive to walk out the door and not leave any tip.

Sushi Yasuda in Manhattan caused a stir recently (NYT) when it raised its prices across the board and instituted a no-tipping policy.  Columbia b-school economist Nachum Sicherman argues that this approach is likely to lead to better performance.  Most patrons tip the same percentage regardless of service.  In most restaurants, tips are pooled and shared.  Also, waiters are but part of a complicated food production and delivery process; customers often fail to see that.  Sicherman thinks restaurant managers and owners are in a much better position to judge service than customers.

Admittedly there would be sticker shock in menu prices, which would have to go up 15 to 20 percent to cover lost tips.  Tips are not subject to sales taxes, so I would expect some redistribution of income from customers, wait staff and restaurant owners to state and local governments.  The most challenging aspects of any new pay system for wait staff would be providing incentives and managing risk sharing.  Managers will want to avoid a straight salary or hourly wage system, because it does not reward performance and shifts more of the risk of slow nights back to the establishment.  Wait staff who get higher than average tips (e.g., those who turn tables more quickly or have more engaging personalities) will not like a salary-based system; those who get lower than average tips will welcome it.  Highly popular restaurants would be the ones most likely to dump tips.  Maybe Ashley Christensen, owner of the always-mobbed Poole's Diner, will be the first to take the plunge.