Equity Theory

1. Equity Theory

think about it

Suppose you have worked for a company for several years. Your performance has been excellent, you have received regular pay increases, and you get along with your boss and coworkers. One day you come to work to find that a new person has been hired to work at the same job that you do. You are pleased to have the extra help. Then, you find out the new person is making $100 more per week than you, despite your longer service and greater experience. How do you feel? If you’re like most of us, you’re quite unhappy. Your satisfaction has just evaporated. Nothing about your job has changed: You receive the same pay, do the same job, and work for the same supervisor. Yet, the addition of one new employee has transformed you from a happy to an unhappy employee. This feeling of unfairness is the basis for equity theory.

Developed by workplace behavioral psychologist J. Stacy Adams in the 1960s, equity theory is the concept that motivation is affected by the outcomes we receive for our inputs compared to the outcomes and inputs of people in similar roles. This theory is based on the earlier theory of social exchange, the concept that one perceives social relationships in terms of investment and return.

EXAMPLE

Ken and Janice are friends at work. Ken frequently helps Janice out, such as covering her phone when she’s away from her desk or running copies for her when she is going to the copy room anyway. Over time, Ken realizes Janice never returns the favor, and the friendship sours.

In terms of work, we don’t just ask ourselves, “Are my contributions (time and labor) worth the rewards (compensation and recognition)?” but also ask, “How do my contributions and rewards compare to my coworkers’ contributions and rewards?” Equity theory suggests that the second question is more important than the first, that we are dissatisfied if we feel our efforts are greater than other coworkers with the same salary, or similarly, if our coworkers are paid more for doing the same job. In short, we don’t just want the outcomes to be worth the effort, we want to be treated fairly.

terms to know

Equity Theory

The concept that motivation is affected by the outcomes we receive for our inputs compared to the outcomes and inputs of people in similar roles.

Social Exchange

The concept that one perceives social relationships in terms of investment and return.

2. The Basic Equity Model

In determining whether we are being treated fairly, we consider four factors:

Personal inputs are what we contribute to the organization that we perceive as valuable and relevant. This is based on our own perceptions; whether or not anyone else agrees doesn’t matter. These inputs include time, effort, performance, education level, skill levels, and bypassed opportunities. Since any factor we consider valuable and relevant is included in our evaluation of equity, inputs may include elements that the organization (or even the law) might argue are not important, such as our personality or our demographic characteristics.

Personal outcomes are anything we perceive we are getting back from the organization in exchange for our inputs. Again, the value attached to an outcome is based on our perceptions. Common outcomes from organizations include pay, working conditions, job status, feelings of achievement, and friendship opportunities. Both positive and negative outcomes influence our evaluation of equity. Stress, headaches, and fatigue are also potential outcomes. Since any outcome we consider relevant to the exchange influences our equity perception, we include personal factors like peer disapproval and family reactions to our job.

Equity theory predicts that we will first compare our outcomes to our inputs as a ratio. If we perceive that the outcomes we receive are commensurate with our inputs, we are satisfied. If we believe that the outcomes are not commensurate with our inputs, we are dissatisfied. This dissatisfaction can lead to ineffective behaviors for the organization if they continue, effectively lowering the inputs to match the outcomes.

But the bigger premise of equity theory is that we compare our inputs and outputs to referent others. These other people are called referent others because we refer to them when we judge equity. Usually, referent others are people we work with who do similar work and have the same amount of experience. The other two factors we thus consider are:

• Referent others’ inputs are the contributions of people in similar positions to our own.
• Referent others’ outcomes are the outcomes (pay, praise, office space, etc.) that people in similar positions to our own receive.

• State of equity: Our outcome-to-input ratio is equal to our referent others.
• Overreward inequity: Our ratio is greater than the referent others, meaning we are better rewarded for our contributions than others.
• Underreward inequity: Our ratio is lesser than the referent others, meaning we are not as well rewarded for contributions than others.

terms to know

Personal Inputs

Any factors we contribute to the organization that we feel have value and are relevant to the organization.

Personal Outcomes

Anything we perceive we are getting back from the organization in exchange for our inputs.

Referent Others

People we work with who do similar work and have the same amount of experience.

Referent Others’ Inputs

The contributions of people in similar positions to our own.

Referent Others’ Outcomes

The outcomes that people in similar positions to our own receive.

State of Equity

Our outcome-to-input ratio is equal to the referent others.

Overreward Inequity

Our outcome-to-input ratio is greater than the referent other’s (i.e., we get more reward for our contributions).

Underreward Inequity

We perceive our ratio to be less than that of the referent other (i.e., we get less reward for our contributions).

2a. Perceived Overreward Inequity

When we perceive that overreward inequity exists (that is, we unfairly make more than others), it is rare that we are dissatisfied, guilty, or sufficiently motivated to make changes to produce a state of perceived equity. Indeed, feelings of overreward, when they occur, are quite transient. Very few of us go to our employers and complain that we’re overpaid! Most people are less sensitive to overreward inequities than they are to underreward inequities. If a person is dissatisfied, they may take the same actions described below.

2b. Perceived Underreward Inequity

When we perceive that underreward inequity exists (that is, others unfairly make more than we do), we will likely be dissatisfied, angered, and motivated to change the situation (or change jobs) in order to produce a state of perceived equity. As we discuss shortly, people can take many actions to deal with underreward inequity.

try it

Two automobile assembly workers in Detroit, John and Mary, fasten lug nuts to wheels on cars as they come down the assembly line, with John on the left side and Mary on the right. Their inputs are equal (both fasten the same number of lug nuts at the same pace, about 40 an hour), but Mary makes $15.40 per hour and John makes $16.00 per hour. Such gender pay inequity is unfortunately common. Their equity ratios are thus:

Mary	John
10 lug nuts per car x 4 cars per hour x 40 hours @ $15.40 per hour	10 lug nuts per car x 4 cars per hour x 40 hours @ $16.00 per hour
$616/week	$640/week

As you can see, their ratios are not equal; that is, John receives greater outcomes for equal input.

Who is experiencing inequity?

According to equity theory, both John and Mary experience inequity—underreward inequity for Mary, and overreward inequity for John.

2c. Reducing Perceptions of Inequity

Adams identified a number of things people do to reduce the tension produced by a perceived state of inequity. You might see that while the effectiveness of these varies for the employee, several are also less than ideal for the employer. It is also important to note that often, these responses by employees, whether positive or negative, can be somewhat subconscious.

3. Implications of Equity Theory

Equity theory is widely used, and its implications are clear. In the vast majority of cases, employees experience (or perceive) underreward inequity rather than overreward, which is really a matter of perceived fairness. As said above, most of the behaviors that result from underreward inequity are not desirable for employers. Thus, employers try to prevent unnecessary perceptions of inequity. They do this in a number of ways.

1. Historically, many employers had policies against discussing salaries; this is now illegal. However, employers can still practice discretion and avoid perceived inequities by simply not being transparent. This may be ineffective since employees are vulnerable to human traits of overrating their own performance and may also overestimate the salaries of other employees.
2. A better solution is to try to be as fair as possible in allocating pay initially (upon hire) to employees. This can be done through pay transparency and ensuring different pay levels are set upon hire for different job categories.
3. Once the pay level for different positions has been set, have a set schedule and objective criteria for employees to get raises or promotions.
4. If there is performance-based compensation, it should be based on clear and objective measures.
5. Some companies, due to their implementation of pay procedures and policies, have removed negotiation from the hiring process, which can ensure that managers do not do side negotiations to hire new people.
6. Don’t forget, though, that while pay is important, equity may also be reached by offering other benefits, like a flexible working schedule or opportunities for growth. We will examine this more in the next tutorial.