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).
