Equity theory was first developed in 1963 by John Stacey Adams, a workplace and behavioral psychologist, who asserted that employees seek to maintain equity between the inputs that they bring to a job and the outcomes that they receive from it, against the perceived inputs and outcomes of others.
For example, if an employee was given a salary increase but a peer was given a larger salary increase for the same amount of work, the first employee would evaluate this change, perceive an inequality, and be distressed. However, if the first employee perceived the other employee being given more responsibility and therefore relatively more work along with the salary increase, then the first employee may evaluate the change, conclude that there was no loss in equality status, and not resist the change.
An individual will consider that he is treated fairly if he perceives the ratio of his inputs to his outcomes to be equivalent to those around him .
Formula expressing equal equity theory
Ratio of one individual's outputs to inputs is perceived as equal to that of another individual in comparison.
Defining Inputs & Outcomes
Inputs are defined as each participant's contributions to the relational exchange and are viewed as entitling him/her to rewards or costs. The inputs that a participant contributes to a relationship can be either assets (entitling him/her to rewards) or liabilities(entitling him/her to costs). Individual traits such as boorishness and cruelty are seen as liabilities entitling the possessor to costs. Inputs typically include:
- Time
- Effort
- Loyalty
- Commitment
- Adaptability
- Flexibility
- Tolerance
- Determination
- Enthusiasm
- Personal sacrifice
- Support from coworkers and colleagues
- Skill
Outcomes are defined as the positive and negative consequences that an individual perceives a participant has incurred as a consequence of his/her relationship with another. When the ratio of inputs to outcomes is close, then the employee should be very satisfied with their job. Outcomes can be both tangible and intangible.
Typical outcomes include:
- Job security
- Salary
- Expenses
- Recognition
- Responsibility
- Sense of achievement
- Praise
Four Propositions of Equity Theory
- Individuals will try to maximize their outcomes.
- A) Individuals can maximize collective rewards by evolving accepted systems for equitably apportioning resources among members. Thus, groups will evolve such systems of equity, and will attempt to induce members to accept and adhere to these systems. B) Groups will generally reward members who treat others equitably and generally punish members who treat each other inequitably.
- When individuals find themselves participating in inequitable relationships, they will become distressed. The more inequitable the relationship, the more distress they will feel. According to equity theory, the person who gets "too much" and the person who gets "too little" both feel distressed. The person who gets too much may feel guilt or shame. The person who gets too little may feel angry or humiliated.
- Individuals who discover they are in inequitable relationships will attempt to eliminate their distress by restoring equity.
Three Primary Equity Theory Assumptions Applied to Most Businesses
- Employees expect a fair return for what they contribute to their jobs, a concept referred to as the "equity norm."
- Employees determine what their equitable return should be after comparing their inputs and outcomes with those of their coworkers, a concept referred to as "social comparison."
- Employees who perceive themselves as being in an inequitable situation will seek to reduce the inequity either by distorting inputs and/or outcomes in their own minds, by directly altering inputs and/or outcomes, or by leaving the organization.
Implications for Managers
Equity theory has several implications for business managers:
- People measure the totals of their inputs and outcomes. This means a working mother may accept lower monetary compensation in return for more flexible working hours.
- Different employees ascribe personal values to inputs and outcomes. Thus, two employees of equal experience and qualification performing the same work for the same pay may have quite different perceptions of the fairness of the deal.
- Employees are able to adjust for purchasing power and local market conditions. Thus a teacher from Alberta may accept lower compensation than his colleague in Toronto if his cost of living is different, while a teacher in a remote African village may accept a totally different pay structure.
- Although it may be acceptable for more senior staff to receive higher compensation, there are limits to the balance of the scales of equity and employees can find excessive executive pay demotivating.
- Staff perceptions of inputs and outcomes of themselves and others may be incorrect, and perceptions need to be managed effectively.