Equity Theory

What is the Equity Theory?

Equity theory is a motivation theory that says that employee motivation is mostly determined by their sense of fairness at work. Employees keep a mental record of their job's inputs and outputs, and then utilise that record to compare their inputs and outputs to those of others. Effort, performance, skills, education, and experience are examples of inputs, whereas compensation, benefits, and promotions are examples of results. Employees may feel demotivated and unsatisfied with their jobs if they believe their input-to-output ratio is not equal to that of their peers.

Employee contributions: Inputs and outputs

Inputs are the actions taken by an employee to assist an organisation in achieving a goal. Time, loyalty, effort, tolerance, flexibility, personal sacrifice, skill, and trust in superiors a few of the 'inputs,' or what an employee offers to an organisation.  

Outputs are the outcomes that an employee gains as a result of assisting a company in achieving a goal. In addition to criteria like compensation, job security, flexible working hours and employee perks, outcomes include intangibles like appreciation, sense of achievement and recognition.

Adam’s Equity Theory

Equity theory of motivation, established by behavioural psychologist John Stacey Adams in the early 1960s, is focused with defining and assessing employee relational satisfaction. Employees should aim to strike a balance between what they provide to an organisation and what they receive, according to Adams, and base their satisfaction with their own balance on colleagues' opinions of the same balance.

Employee perception and equity theory of motivation

Equity equals the outputs of a person divided by the same person’s inputs. Employees who perceive inequity will change their inputs to restore balance. According to Adam's Equity Theory of motivation, employees don't merely grasp equality in isolation, instead, they look around and compare themselves to others.  

An employee will become demotivated if their outputs are lower than their inputs in comparison to others. Similarly, if an employee’s outputs are higher than those doing the same work, they may find the need to fix their distorting inputs or work upon altering inputs. Essentially, employees who perceive inequity will strive to restore the balance.  

What are the four propositions of Equity theory?

A referent group is a group of people that an employee utilises to make comparisons. People compare themselves to four referent groups in Adam's Equity Theory of Motivation:  

  • Self-inside: a person's experience within their current company.  
  • Outside of the self: the individual's interactions with other organisations.  
  • Others-on-the-inside: those in the individual's current workplace.
  • Others-outside: people who are not affiliated with a specific group.  

When a programmer compares their pay to that of other programmers in the same company, the referent group is the others-inside. The referent group is others-outside if they compare themselves to programmers they know socially. The referent group is self-outside if they compare themselves to what they earned in their former work.

What are the applications of Equity Theory?

Industrial psychologists have commonly used equity theory to describe the relationship between an employee's motivation and his or her sense of equitable or inequitable treatment in the workplace.

Equity theory assumptions applied to business

The three main assumptions underlying most equity theory applications in business can be described as follows:  

Employees expect a fair return for the time and effort they put into their professions, a concept known as the "equity norm."  

After comparing their inputs and outcomes to those of their peers, employees evaluate what their fair return should be. "Social comparison" is the term for this concept. ]

Employees who believe they are in an inequitable environment will try to lessen the imbalance by distorting inputs and/or outcomes un their minds ("cognitive distortion"), actively modifying inputs and/or outputs, or leaving the company. (Carrell and Dittrich, 1978)  

Cognitive distortion

Employees who feel distressed may (unconsciously) modify their impressions of the relative importance of their contributions by hanging their actual contributions. This is accomplished by a cognitive distortion mechanism.  They can pursue justice in two separate ways by using cognitive distortion. They can choose from the following options:  

Inflate their sense of contribution to the organisation

Deflate their sense of contribution to the organisation.  

While inflating what employees think they are worth and deflating what employees think others are worth can help settle a sense of unfairness. When they inevitably move into a new peer group, the cognitive distortions they construct are often shattered. Employees will have to re-evaluate themselves in a new community, and they might learn some unpleasant realities.

What are the implications of equity theory for business managers?

For business managers, equity theory has various implications:  

  • Employees measure the totals of their inputs and outputs. This means that a working mother may be willing to accept lower pay in exchange for more flexible working hours.
  • Inputs and results are assigned personal values by different personnel. As a result, two employees with the same level of experience and qualifications performing the same job for the same compensation may have quite different views on the fairness of the contract.
  • Employees are allowed to adapt for purchasing power and market conditions in their respective areas. As a result, a teacher in Alberta may accept lower pay than a colleague in Toronto if their cost of living differs, while a teacher in a distant African hamlet may accept a whole different pay structure.
  • Even though it might be acceptable for more senior employees to be paid more, there are limits to the balance of the scales of equity, and excessive executive pay can be demotivating to employees.
  • Employee perception of their own and others' inputs and outcomes may be inaccurate, and perceptions must be handled successfully.
  • Employees who believe they are overpaid may put forth more effort. He can, however, change the values he assigns to his own personal inputs. It's possible that he internalises a sense of superiority and, as a result, reduces his efforts.
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