You’ve made the decision to eliminate tipping from your restaurant in order to stay competitive with your peers around you. Great, but where are you going to get the extra dough to compensate your team for the loss of their tips? Surcharge you say? Great idea. We’re into it – bonus points for not raising your menu prices; you’re a step ahead of the game. Now let’s talk strategy.
Our first compensation approach when removing the tip and adding a surcharge is a wage increase for your entire team. Now we all know you can’t simply willy-nilly pick a magic wage number to throw at your team and hope it sticks. The restaurant industry would chew you up and spit you out in an instant if that were your genius idea. To do this properly it’s essential to have a clear and concise plan of attack. First, you’ll need a few things on hand so you can determine exactly how much to raise wages for each member on your team. Historical data is paramount for this determination, and to be thorough, we tell our clients to have a year’s worth of data on hand (the previous year will be the most accurate). That being said, you’ll need the following three pieces of information:
1. SALES INFORMATION:
This can be pulled right off your income statement.
2. LABOR INFORMATION:
This needs to be split between the FOH and BOH by Job Code, and show both your average wages and total hours worked. To get your average wages by job code, you simply take the total wages and total tips paid and divide them out by the total number of hours worked. You can get that information from either a Payroll Details Report or a Work Center Details Report (both can be found in your RSI Report Card).
It’s important to note the total tips so you can understand the fully burdened rate for guests. In other words, you have to know how much to augment to cover the income that used to be tips – this will come into play when restructuring your team’s wages.
3. P&L INFORMATION:
This is extremely important because whenever you’re making a decision for your operation you’ll want to see exactly how it impacts the key areas of your financial statement. Note that you’re going to use this historical P&L information as your base for comparison when trying out each of the three strategies we’ll cover in this blog as well as the next two.
Now that you have your historical data on hand you can get started. In the example below, we’ll walk you through how a wage increase with a surcharge works. Anything in yellow is what YOU would enter based off of your operational information. Throughout the example, you’ll notice that you can always view a before/after wage increase scenario. Again, this is so you can view your base in comparison to your proposed change.
Right out of the gates we entered a surcharge percentage (15% in this example) to get an overall idea of how much extra cash it would get us. You can see that the 15% surcharge produced an extra $762,478.25 (you’ll be surprised to find that when you start inputting your specific metrics, the surcharge may turn out to be far less to get what you need, than what you expected!). Keep in mind that your State Sales Tax will be applied to the guest check after the surcharge.
The next step is to play around with your wages. In the example below you can see on the right-hand side we created a wage increase (after the consideration of tips) for each team player by job code. You can see that Barback went from $9.50 static wage to $15.50 and so on for the rest of the job codes.
We started conservatively because it can look daunting and quite honestly asinine when you see how much more your team will be getting compensated, but you have to remember that’s what the surcharge is for. That being said, if we now take a look at our EBITDA after our increased wages and surcharge addition, we’re at an excess of $111,000.
Based on this example we can now see that we haven’t distributed enough of that $700k+ we gained from the surcharge. The goal here isn’t to apply a surcharge and make an exorbitant amount of profit off of your guests; you’d drive them away. The goal is to increase wages just enough so that your change in EBITDA is as close to zero as possible (this means your EBITDA will be relatively similar to what it was before your tip elimination). You can play around with the numbers for your team members. Provide them with wages that are close to what they were making before since they’re now going to lose their tips. Just remember, people probably won’t work for less than what they were getting paid before (after tips). Below you will see our wage differences by job code after the increases as well as the differences in your operational labor costs.
Now let’s talk considerations for wage increases.
- Competitive hiring for the BOH
- If you’re a brand new restaurant working off of your budgeted sales with no history of past performance or no brand recognition, this could get extremely dicey for you. Let’s say you don’t meet your sales goals but you still have to pay your servers $25.00/hour, you’ve just taken a head-first dive into quicksand.
- The sentiment above is the same if you’re going through some rebranding.
- Lack of motivation for your FOH – what’s the incentive to provide outstanding service when their static wage is already so high?
In our next blog we’ll discuss our second strategy for compensation when removing a tip and adding a surcharge. You can also listen to our most recent Podcast episode as well as view our latest Webcast where we discussed all three strategies for compensation.