Hospitality executives and managers can compensate employees through voluntary tipping, service charges, or service-inclusive pricing. Rather than take a default position or simply follow local practices, managers should carefully weigh the pros and cons of each policy and should knowingly choose the approach that best suits their circumstances. This Center for Hospitality Research Report is design to facilitate such thoughtful decisions about how to compensate employees. It outlines the business issues surrounding tipping and its alternatives, summarizes what we know about those issues, and identifies questions in need of further research. The principal benefits to hospitality firms of voluntary tipping are that it lowers nominal prices, increases profits through price discrimination, motivates up-selling and service, and lowers FICA tax payments. However, tipping also motivates discrimination in service delivery, gives servers surplus income that could go the firms' bottom line, increases the risk of income-tax audits, and opens firms up to adverse-impact lawsuits. The alternatives to tipping (i.e., service charges and service-inclusive pricing) have their own sets of costs and benefits. Ultimately, no one policy is always necessarily the best. Therefore, the report presents the pros and cons of each policy with respect to nine different considerations.
Lynn, M. (2006). Tipping and its alternatives: A comparison of tipping, service charges, and service-inclusive pricing [Electronic article]. Cornell Hospitality Report, 6(5), 6-16.