Equity Theory is a concept developed by the Behavioral Scientist John Stacy Adams in 1963.His theory indicates that people will judge and analyze both the rewards and the outputs of effort to determine whether not they are being treated fairly within the workplace (Adams, 1965). These inputs and expenditures are subjective by nature as they are based upon the perceived rewards and efforts of others. When information is accurate employees are better able to accurately gauge the equity relationships with employers and produce more meaningful results.
An example can help in solidifying this concept. Let us say for a moment that John and Sally work for the same company. John works very hard each and every day but doesn’t seem to be getting anywhere at work. When he looks at Sally he believes that she works less but has received two raises within the past few years. He also notices that Sally is very friendly with her bosses and he interprets such actions rightly or wrongly as flirtation.
In this case example John may come to some conclusions about Sally and the reasons why she is receiving raises and he is not. John is understandably upset and confronts his boss about the inappropriate behavior. He finds out that Sally has been spending every weekend inventorying and adjusting products and saved the company significant amounts of money. John’s perception changes and he has a clearer picture what type of effort gets him a reward.
The subjectivity in this situation is based upon the available information to John, the transparency of the reward system, the perceived truthfulness of his boss, and the ability of John to understand the situation. This same concept applies across many layers of society when different racial, religious, and social groups compare themselves to each other. Based upon one’s limited perspective if they interpret the available information as an indication of inequality their motivation will decrease.
A workplace related example may be more appropriate. Locals in Chinese firms perceived the higher compensation of expatriates as fair but not the higher compensation of other locals (Chen, Choi, & Chi, 2002). The reason this situation exists is that ideologically the local Chinese within the study understood that expatriates obtained additional international skills while other local Chinese did not. It was this perception that gives proper justification to their understandings of expatriates and their more valuable skills but does not explain adequately those with the same skill level.
People have a quantitative value in their mind as to the amount of work that is needed versus to obtain expected outcomes. Often this formula is calculated using concrete concepts such as pay-per-hour or project compensation. However, it can take other difficult to define definitions such as satisfaction, meaning, purpose, relationships and much more. It is the totality of these perceptions of equality that takes precedence in determining the value of ones efforts when compared to the received rewards. It is beneficial to see it in terms of the following formula:
Fostering equity within the workplace can improve performance, as people are encouraged to put forward more effort. A review of literature indicates that pay is extremely important as an input value (Al-Zawahreh & Al-Madi, 2012). Researchers often rely heavily on pay to determine the appropriate factors that create equity only because it is simple to define and concrete. However, with surveys and other methods of evaluation it is possible to determine where the trade of effort matches less defined rewards such as status and satisfaction.
Employers are keen on using Equity Theory to define these values in terms of compensation. For example, start-ups like Google offered stock options because in their beginning money was short but stock was plentiful; some employees became millionaires overnight. Some non-profit organizations use a high position with low pay to develop equity. Progressive businesses often balance many approaches such as culture, compensation, status and benefits to create equity.
Even with these methods, it is important to let employees know what the value of their total rewards is to raise this perception. Transparency often offers this ability but should be enhanced with strong communication in newsletters, conversation, and statements. Through open communication with employees and fair allocation of rewards based on effort, employers can improve performance and reduce employee resentment. A positive employer-employee relationship can translate into higher firm value and profits.
Adams, J.S. 1965. Inequity in social exchange. Adv. Exp. Soc. Psychol. 62:335-343.
Al-Zawahreh, A. & Al-Madi, F. (2012). The utility of Equity Theory in enhancing organizational effectiveness. European Journal of Economics Finance & Administrative Sciences, 46.
Chao, C., Choi, J. & Chi, S. (2002). Making justice sense of local-expatriate compensation disparity: mitigation by local referents, ideological explanations and interpersonal sensitivity in China-Foreign ventures. Academy of Management Journal, 45 (4).