Full-service restaurants are unique in American business in that the incentive systems for service employees are perfectly aligned with the goals of the business.
It is an amazing sight to see employees working to benefit themselves and simultaneously benefitting the owners and managers of the establishment. Allow me to explain.
Servers in restaurants make a small minimum wage, mostly for taxes, and tips. Those tips are a percentage of their sales and that percentage in my experience can range from 10 to 30%. I was a really good server, and when I was on, I could easily make 30% per table, though 20% is the norm and occasionally you would get less than that.
When a server is compensated by tips, they are driven by their personal benefit to provide great service to their guests in the hopes of making a higher tip percentage. Maximizing the servers personal revenue per shift and the ROI for their time.
The servers are also incentivized to make recommendations and to upsell their guests to enhance the guests experience and to get the maximum check value on each table. In my experience if you sell the table too much food or super expensive items that they weren’t expecting it can hurt your tip percentage as the guest feels that they have been taken advantage of or scammed.
Servers also get paid on volume. Meaning that a server on a busy shift wants to turn each table as many times as they can without rushing their guests out of the restaurant. Once again there is a fine line between pushing someone out the door, which if the guest feels rushed could affect the server’s tip percentage vs. being very efficient at delivering the check and processing payment so the guest leaves and the server can get another party at that table.
To sum up servers are incentivized to deliver great service, to maximize check value without going overboard, and to move customers in and out of the restaurant as quickly as the guest allows. When servers work toward these incentives, they maximize their earnings for that shift.
The restaurant owners benefit from servers that take great care of guests, increase sales by upselling, and move guests efficiently through the restaurant maximizing throughput and sales each meal period.
Both groups incentives are properly aligned with each other, and they both win and lose together.
Another point that needs to be made is that both teams lose together as well.
If servers provide horrible service and guests stop coming both the servers and owners of the restaurant will suffer. The owners will suffer more as the servers will eventually leave and the owners will be stuck with a business that has become known for bad service.
If the owners don’t do a good job of delivering a great product the servers and the owners will suffer because people won’t come to the restaurant, sales will be down, and the servers won’t make as much money.
In this relationship the servers and owners once again are linked at the hip.
There are other employees in the restaurant that are directly compensated off of the servers earnings. Bussers, bartenders, food runners, and sometimes hosts are all affected by server tips. When I was a waiter at P.F. Chang’s this is how we distributed our tips:
Total tips for night $200:
- Busser: 15 to 20% or $40 – a busser usually served 2 to 3 servers, and I always tipped 20% because a busser can bury a server, or make it hard for the server to turn tables. It was important to me to make sure that I took care of my busser.
- Food Runner: 10% or $20
- Bartender: 1% Sales or $10
- Bartenders and food runners, if there are more than one working, pool their tips from the servers and distribute amongst the team that was working that shift and are paid a higher minimum wage.
A lot of these cities are proposing a $15 minimum wage and getting rid of tips. When I was working as a server on a good Friday night, I planned on making $120 to $140 net in 5 to 6 hours. At $15 an hour and a 6-hour shift you are making $40 less a shift than you would have been if you were working for tips.
I’ve read an article that we blogged about in the spring that was pro no tips where the servers said they liked the paycheck but that they were making less money. I don’t know of a great server that would trade working for tips for an hourly wage because they know that they will make less money.
Another argument that is being put forth by people who don’t like tips is in regards to BOH staff: cooks, dishwashers, prep cooks, etc..
These are completely different jobs and have different risk levels and different rewards. A cook is guaranteed a higher base wage each hour of each shift. A cook gets paid their full wages for the hours they work if the restaurant is slow or busy. Therefore, a cook or BOH employee assumes no risk or variance in their wages shifts to shift.
An FOH staff member: server, busser, a bartender is completely dependent upon the level of business and their service for tips. The FOH staff assumes a large amount of personal risk and opportunity cost each day that they go to work.
I can’t tell you how many times I was sent home early because the restaurant wasn’t busy. Each shift the restaurant staffs themselves anticipating being very busy and if the business isn’t there the manager’s cut staff and send people home early.
What is amazing about sending people home early is that it isn’t looked at as a bad thing by most restaurant employees. I would say that schedule flexibility is one of the main reasons people chose to work in the hospitality industry.
Managers ask the staff who would like to go home early, and there are usually volunteers who have something else they want to do and they leave and the people who need money stay.
In my experience if you get cut and sent home early too often you will probably go and look for another job at a different restaurant.
The argument that BOH employees aren’t treated fairly because of tipping is wrong. Salary is based on upon risk and reward and in my experience working in both the BOH and FOH it isn’t an issue for the employees working those jobs.
Also, we live in a free country, and we are all employed at will, nobody is forced to work anywhere or in any position people choose their jobs and employees and can quit at any time.
What happens if we get rid of tipping across the board?
When you work for an hourly wage, your incentives change and, therefore, your behavior will change as well.
In the examples above we discussed how servers are incentivized to take great care of their guests because that level of service will influence their tip percentage. That incentive no longer exists because the level of personal service you give doesn’t directly affect your wages.
You can make the case that a bad server who gives bad service will eventually be fired.
We discussed how servers were incentivized to upsell and make recommendations to increase the check to a level that will enhance the customers experience without going overboard. That incentive is now gone because the one thing that we didn’t mention earlier is that upselling and making recommendations requires more work of the server. The server has to think, react, ask questions, put themselves out there if the recommendation isn’t liked, deliver more food, and do more work. It is much easier to be an order taker and not do any of that stuff.
On an hourly wage system, you are not incentivized to do more work. Hourly workers that don’t get compensated by output are incentivized to do the least amount of work per hour. An example: why would you go through the hassle of selling a bottle of wine, presenting it, opening it, letting the guest taste it, and then serving it if it doesn’t directly enhance your bottom line. If a server is in the rush and they have to do a wine service it can take a couple of minutes and can throw them deeper into the weeds. Why tipped servers sell bottles of wine today is because a $30 bottle can enhance your tips by 5 to $6 dollars for that table.
Enjoy these excerpt from Office Space the Movie
Peter Gibbons: The thing is, Bob, it’s not that I’m lazy, it’s that I just don’t care.
Bob Porter: Don’t… don’t care?
Peter Gibbons: It’s a problem of motivation, all right? Now if I work my ass off and Initech ships a few extra units, I don’t see another dime, so where’s the motivation?
Finally, we discussed that servers working for tips are incentivized to turn tables quickly to maximize their tips per shift. This incentive is removed as turning tables is once again more work for a server with no reward. The server that is paid an hourly wage only incentive is to stay on the clock as long as possible per shift to maximize their personal revenue.
If you think that I’m making this stuff up, or I’m overly dramatic, eat at a restaurant in France or any other country where the service staff is paid hourly and not by tips. There is a reason that French waiters are stereotyped for horrible service it is because they majority of them deliver horrible service. The service in other countries doesn’t compare to the level of service that we get every day in the America. Check out this blog from a Frenchman about service.
These are my predictions for the industry if we move to no tipping policies:
- Restaurant owners that move to a no tipping policy will make less money than they did when they had employees that were compensated with tips.
- Servers who work for an hourly wage will make less money than they did when they worked for tips.
- Full-service restaurants that are less expensive will have a harder time with no tips than more expensive fine dining restaurants because they are more dependent on volume than price premium.
- Americans will enjoy worse service in restaurants that don’t have tips then they will in restaurants where tipping is still the norm.
At the end of the day, the American full-service restaurant is a highly successful social experiment that demonstrates that when you have alignment of incentives and goals employees and ownership can win together.
One last thought: why do you get better service at Nordstroms then Macy’s when the job is exactly the same? My guess is that the Nordstrom employee gets a % of their sales.