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 20th 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 20th 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
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).
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
position to receive tips may gain extra financial reward by, for example, over-
compensating 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
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,
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.

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