Tipping and Service Management

Tipping and Service Management Brigid Casey Otago Polytechnic brigid@tekotago.ac.nz Abstract Tipping is a complex social phenomenon, influenced by customs and values, which has economic significance as well as consequences for managing tourism and hospitality services. Interesting questions are addressed about the relationship between tipping, service quality and productivity in this review of research examining the tipping phenomenon. Tipping norms vary significantly across countries and until recently the practice has not been widely accepted in New Zealand. However, it is becoming more prevalent in this country and from the findings of this analysis we can draw conclusions about the role of managers in successfully delivering services in this changing environment. Keywords: service quality, tipping, tourism, hospitality

INTRODUCTION While the custom of tipping in New Zealand is poorly developed compared with many countries, it is evolving rapidly and there are a number of implications for the management of services. This paper reviews the relevant academic literature and explores these implications. Ironically, tipping is taking off in New Zealand when it is being argued elsewhere that services may be managed more successfully without it. Tipping is unlikely to disappear, however, and services may be more successful if tipping is managed proactively. Hospitality and tourism managers could benefit from a greater understanding of the complex issues around tipping, particularly how it can affect their workplace and influence customer satisfaction. Tipping is defined as money exchanged from customer to service provider which is not legally required by the agreement for purchase of the service (Casey, 1998). Tipping is a significant economic phenomenon but is not readily explained by traditional economic theory. It is generally considered to be a complex social phenomenon, influenced by local customs and cultural values. Different countries have different tipping customs. People usually tip in order to conform to social norms, thus avoiding social disapproval, guilt and embarrassment (Azar, 2004). It is likely tipping has existed since Roman times or since coins were used to purchase services. In Tudor England there was a custom of paying money to servants by guests to compensate for the extra work they created. Servants were motivated to perform by the fear that this voluntary compensation might be withheld. The practice quickly spread throughout European countries which had a servant class. Coffee houses in London City in the 17 th century had T.I.P. boxes to insure promptness, a form of pre-tipping for service (Lynn et al., 1993). Initially there was strong resistance to tipping in the USA; some states even had anti-tipping laws in the early 20 th century (Crespi, 1947). Now service charges are common in Europe and tipping is very American. Today the custom of tipping is widespread but varies between countries in the number of occupations tipped and the amounts considered normal (Star, 1988). From an informal, unpredictable and discretionary bonus for extra service, tipping has evolved in many countries into an explicit and recognised method of payment making up a significant portion of many workers income. 1

Tipping is not normal in egalitarian societies such as Finland and Norway and was not widely accepted in New Zealand until recently, possibly because a servant class was not established and immigrants were happy to leave the class system behind. Early in the country s history labour was well organised with a national award system for wages and working conditions. Although never illegal, tipping was formally discouraged until fairly recently with inbound tourists being greeted by signs at the airport: Tipping is not a New Zealand custom. Arguably tipping in New Zealand is at a stage it was in the United States (US) in the mid 20 th century few occupations are tipped, tips are not always expected, the practice is more frequent in cities and tourist destinations than in towns and rural areas, and tipping is possibly seen as a reward for extra service or an incentive to perform better service in the future (Casey, 2001a). Tipping is evolving, however, and while some New Zealanders may feel US style tipping is responsible for cosmetic and insincere service (Casey, 2001b), it may develop in New Zealand along US lines where a fixed rate of 15-20% is always expected, as many as 33 service occupations are tipped, and tips are considered to be wages and are used by employers to fulfil their obligations under minimum wage legislation (Azar, 2005). In general, people who receive tips enjoy the economic benefit and there appears to be support for tipping from the hospitality and tourism industries in New Zealand. However, there are a number of arguments against tipping, especially its adverse effects on the management of services. These issues will now be discussed. THE RELATIONSHIP BETWEEN TIPPING AND SERVICE QUALITY Intuitively people feel there is a relationship between service quality and tip size. However, several reviews and a meta-analysis of the research examining this relationship found it to be insignificant (Lynn and Graves, 1996; Lynn and McCall, 2000; Lynn 2001; Azar, 2003). This important finding has been described as the tipping-service puzzle and service managers are warned against relying on tips to motivate staff to perform good service, or using tips as a way of measuring staff performance, or as a means of identifying dissatisfied customers (Lynn, 2001; Lynn 2003; Azar, 2008). Furthermore, this research result implies that improving service quality does not increase tips (Conlin et al, 2003), and undermines the proposed 2

economic theory that tipping is the most efficient incentive and reward of server effort (Bodvarsson and Gibson, 1994). While it is a common research finding that tipping behaviour and service quality are unrelated, service quality is itself a complex construct and difficult to define and measure. Many variables contribute to customer satisfaction and their perception of quality, so more finely-tuned research into the relationship between tipping and specific elements of service quality is required. As a prerequisite to acceptable service, front-line workers need to be motivated and skilled in their jobs. In the specific context of New Zealand, where tips are not always expected, when a worker receives a tip it may motivate them to be more attentive to the next customer and put in extra effort in the hope of receiving another tip. However, if that tip is not forthcoming they are likely to be disappointed and frustrated, adding to their stress and reducing their overall motivation and job satisfaction (Casey, 1998). Estreicher and Nash (2004) warn of the danger of destructive competitive tipping where tipping encourages service providers to give good service to higher tippers to the exclusion of lower tippers. While staff may be motivated to give preferential treatment to customers they believe may tip, there is no evidence that tipping improves overall service. TIPPING IS INEQUITABLE There are a number of ways that tipping is considered to negatively affect service quality and productivity. Tipping is thought to encourage autonomy, individualism and competition in the workplace and this is counterproductive to the teamwork deemed necessary to provide excellent service. Generally, workers do a better job when they are motivated but there are a number of ways tipping may act as a de-motivator. Firstly, tipping is inequitable effort and skill are not necessarily matched by the reward. Also, where tip pooling and sharing are practised good staff may feel they are subsidising slack workers and these poor performers are rewarded for their lack of effort. At times friction between tipped and non-tipped staff may develop. For example, staff working back-of-house report extreme displeasure when big tips are flaunted in front of them (Casey, 1998). 3

Tipping is inequitable in ways that have repercussions for the recruitment and retention of mangers. Tipped employees may not wish to be promoted to management positions and have few incentives to gain training and qualifications in the industry because positions of responsibility do not attract tips. Managers, in the US, complain about the difficulty in recruiting back-of- house staff for these reasons and claim tips and gratuities are the curse of the industry (Raleigh, 1999, p.70). So discretionary tipping unfairly rewards only some of those responsible for guests overall satisfaction, and pooling tips may not solve these issues if employees have a preference against this practice. In a study of tipping in New Zealand a majority of respondents stated they would move jobs or not take jobs in restaurants where tip pooling was the practice (Casey, 1998). In the US, some states prohibit tip pooling by law and the Fair Labour Standards Act partly regulates the practice by limiting the percentage of tips that can be pooled (Margalioth, 2006; Azar, 2003). TIPS AS WAGES Tipping is a major source of income for some tourism and hospitality workers, possibly even in New Zealand. Should they be paid less than the minimum wage since they also earn tips? In the US, some states allow this. A ruling by the courts in Israel provides an example of the complexity surrounding policies on tipping. Prior to the ruling many restaurants did not pay servers wages but when minimum wage legislation for tipped workers was introduced, restaurants replaced tips with service charges, effectively decreasing waitstaff income (Azar, 2003). MANAGING TIPPING Managers may feel tipping is desirable because it relieves them of some of their responsibility to compensate and motivate staff. However, this may result in staff feeling undervalued by the organisation. The literature on tipping supports the idea that where tipping occurs employees have less commitment to the organisation. Commitment is valued because it is thought to reduce labour turnover and increase staff performance, improving service quality and productivity (Paxson, 1994). The hidden costs may be substantial when linked to dysfunctional behaviour such as cheating and pilferage, high staff turnover, absenteeism, tip solicitation and low employee effort (Mars and Nicod, 1981; Crick, 1991). Employees who are in a 4

position to receive tips may gain extra financial reward by, for example, overcompensating customers with problems at the expense of their employer. Managers may consider tipping to be a private transaction between staff and customers and choose to neglect managing this aspect of their operations. Nevertheless, even where tipping is the normal practice, managers still have ultimate control over the amount their staff earn. The menu prices, ratios of staff to customers, rosters, allocation of tables, and other organisational and marketing functions carried out by managers affect the staff s potential for earnings. Management policies may also actively encourage or discourage tipping. Some resorts and cruise companies, for example, have no-tipping rules where employees face dismissal if they accept tips. In these cases service charges may be levied on customers. Tips added to eftpos transactions or credit card payments may be absorbed as part of the gross receipts and not distributed to staff. UK law deems these to be the property of the employer and not the staff (Anonymous, 1996). To manage services effectively managers should attempt to understand how tipping effects their workplace. Proactive management and an explicit policy on tipping may be desirable but should also take into account the views of staff and customers. Anecdotal evidence suggests that in some establishments in New Zealand it is common for staff to solicit tips. Customers who find this behaviour unacceptable, even extortionate, are unlikely to return or talk favourably about the service they received. Ultimately it is the customer who decides to tip and how much to tip but their perspective is poorly understood. TAX EVASION As tipping is becoming more accepted in New Zealand there are wider public policy issues to consider that potentially impact on the management of services. A plausible economic explanation of tipping is that it facilitates tax evasion (Margalioth, 2006; Estreicher and Nash, 2004). Many workers in New Zealand may not consider tips taxable income and it is likely they are under-reported to the Inland Revenue Department (IRD). This is contrary to the law, but as New Zealand follows overseas trends, this aspect of tipping is likely to gain more attention from the authorities. In the US, it has been estimated that $42 billion dollars per year are earned in tips in the 5

food industry alone (Azar, 2007). The law in the US has got progressively tougher and now managers have ultimate responsibility for tax payments on the tip income of their staff. Furthermore, if tipping becomes widespread in New Zealand, tax revenue (GST) may be lost if restaurant prices are lowered in recognition of the customer s partial payment for the service through tipping. TIPPING AND PERCEPTIONS OF VALUE Another important aspect of tipping is the impact on perceived value of New Zealand as a destination for international tourists. Where tipping is the norm the service component of the meal, for example, is not included in the bill. However, in New Zealand the service component is included but it has been suggested there is still an expectation that tourists will tip (Casey, 2001a). Service and price are important variables in perceived value and tipping may be counter-productive to New Zealand s tourism industry if tourists feel obliged to tip, increasing their costs and decreasing the value and competitiveness of New Zealand as a destination. To some tourists, such as Americans, the cost of eating out in New Zealand may already appear high. In the past, New Zealand along with other South Pacific destinations enjoyed the unique status of no-tipping. It is likely that some New Zealanders reject tipping because they see it as an example of Coca-colonisation or McDisneyisation, i.e. the adoption of an American institution at the expense of our unique customs and values. Also, New Zealanders are not in the habit of add-ons to the price quoted on the ticket or menu. In an increasingly competitive global environment there might be a good argument for protecting these quaint customs that differentiate New Zealand from other destinations. TIPPING RESEARCH While tipping has received attention from sociologists, psychologists and more recently economists, there are few studies examining the impacts of tipping on the management of services, especially outside the US. Also, very few studies have examined the tipping phenomenon in settings other than restaurants. Variables that affect restaurant tipping such as bill size, method of payment, dining party size, etc. have been examined, using a narrow range of data gathering techniques (Lynn, 2006). There are issues in the research of poorly developed theory and definitions, 6

and questionable research methodology and analysis. While the research to date has contributed to our understanding of a number of aspects of the topic, there are many gaps in it. Despite the increased attention from researchers, the reason for tipping is unclear (Azar, 2007). At the individual level of analysis, the attitudes, preferences and explanations of individuals decisions about tipping are poorly understood. This aspect of tipping, the customer s perspective, as well as the attitudes and preferences of employees, would be useful information for service managers when planning and implementing policies on tipping. CONCLUSION Tipping has numerous consequences for the relationships between managers, employees, and customers. While tipping may allow for lower labour costs, researchers have found tipping negatively effects employee commitment and they warn service managers not to count on tipping to motivate staff to provide good service. Ironically, tipping is gaining momentum in New Zealand just as it is being argued elsewhere that alternatives such as service charges or all-inclusive pricing may be more desirable for the successful management of services. There are many aspects of tipping that are poorly understood, especially in relation to service management. Ultimately, it is the managers responsibility to motivate and enable staff to deliver excellent service, which tipping is unlikely to change. REFERENCES Anonymous (1996). Tips can be remuneration. IRS Employment Review 619:12-13. Azar, O. (2003). The Implications of Tipping for Economics and Management. International Journal of Social Economics 30(9/10): 1084-1995. Azar, O. (2004). What Sustains Social Norms and How They Evolve? The Case of Tipping. Journal of Economic Behavior and Organization 54: 49-64. Azar, O. (2005). Who Do We Tip and Why? An Empirical Investigation. Applied Economics 37(16): 1871-1879. Azar, O. (2007) Do People Tip Strategically to Improve Future Service? Theory and Evidence. Canadian Journal of Economics 40(2): 515-527. 7

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