What is equity theory in compensation?

What is Equity Theory?

Pursuant to Equity theory, individuals are motivated by being treated fairly. Perceptions of fairness is generally a result of social comparison. That is, we compare our efforts (inputs) and the results of our effort (outputs) with the efforts and results of others (referents). Each of these is defined below

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• Inputs - This includes any contribution that an individual makes toward an organized activity. This can include specialized knowledge, experience, tenure at the organization, number of hours, forgone opportunities, task prioritization, etc.
• Outputs - These are the rewards received as a result of the input. This can include compensation, title, recognition, autonomy, etc.
• Referent - The referent may be a specific person or a category of people. The important point is that the referent is comparable to the individual employees situation - such as those with similar positions, titles, roles, etc.

It is important to understand that the perceptions regarding inputs and outputs are subjective. They may be based in reality or a result of misunderstanding or bias. 

If we believe that our ratio of input to output does not align with or equal the input to output ratio of others, then it is not fair. Perceptions of inequity drive actions to reduce inequity. 

Individual Reactions

The Equity Theory identifies numerous potential reactions to the perceived inequity.

• Distort Perceptions - Look at the situation differently to justify the inequity in the input/output ratio.
• Increase Inputs - This could mean working harder, gaining more skills, etc.
• Reduce Inputs - This could mean working less or reducing the quality of the work.
• Increasing Outputs - This can include negotiating more compensation, responsibility, title, recognition, autonomy, etc.
• Change Referent - This involves changing to whom you compare yourself.
• Leave the Situation - This generally means quitting the job.
• Seek Legal Action - Pursue a legal action for an identified form of discrimination based upon being in a protected class of individuals.

An interesting aspect of equity theory is that the same reactions are not generally present when an individual feels that they are over-rewarded (more output) than is otherwise deserved or warranted based upon the input. In summary, people just do not react negatively to being overcompensated.

Equity theory is a concept belonging to John S. Adams, a behavioural psychologist. The theory helps explain why your employees’ motivation levels can go up and down at work.

As we’ve talked about many times here at BrightHR, your business needs motivated staff to operate at its full capacity. Otherwise, the standard of work and services that your staff produce will drop.

Then, you risk losing customers.

And after that, you lose revenue.

A definition of equity theory

Adams devised his equity theory on the basis that when your employee feels like you’re treating them in an advantageous way, they’re more likely to be motivated to work hard. Their morale is high and they’re full of energy.

And on the flip side, when one of your employees feels like you’re treating them unfairly, they’re more prone to demotivation because they don’t feel satisfied.

Note: An employee’s feeling of unfair treatment doesn’t have to be because of something you have done to them—it can be because of how they compare their current situation to someone in a similar situation to them.

Here, we’ll explain further.

Equity theory can be a model for measuring how satisfied an employee is in their job.

According to John S. Adams, your staff try to keep a balance between how much they give to you (inputs), and what they receive from your business in return (outputs).

But, what an employee thinks of their current input-output balance can change day-to-day if they think one of their colleagues currently has a better balance between what they give and what they get back.

In the theory, Adams labelled the colleagues as “referents”. The referents are anybody your employee feels they are in a similar situation to—for example, if two people have the same job title and duties.

An employee’s inputs

Put in plain English, this refers to what one of your staff “puts in” to their job. What they give to you—their employer.

• Time.
• Effort.
• Commitment.
• Personal sacrifice.
• Skill.
• Enthusiasm.
• Loyalty.
• Trust in their workplace superiors—management.

An employee’s outputs

This is what they get in return for all of their inputs.

• Salary or wage.
• Job security.
• Pension auto-enrolment.
• Benefits.
• Praise.
• Responsibility.
• Stimuli.
• A sense of achievement.

Depending on what’s in someone’s contract, their company benefits could include things like a company phone or laptop, company car, travel expenses, childcare vouchers, private healthcare enrolment, retail benefits, flexible working, pension, and more.

So, these are the inputs and the outputs.

And we know that the referent is an employee in a similar or identical role.

An employee’s response to inequity at work

Your staff will typically value their salary above the other outputs. And so, salary concerns count for many examples of inequity among employees everywhere.

If one of your team feels like their contributions, time, and effort are not earning the rewards they should be—especially when they think that colleague X, who earns a higher salary despite doing a similar job, does less work—you can expect a reaction.

Your employee might begin to perform their work at a lower level. They might become unfriendly, even hostile, towards their co-workers or your management team.

They might start looking for other jobs.

Remember, your staff can experience a feeling of inequity without you changing their terms or their working conditions, and without you changing how you interact with them—if they think you’re treating their colleagues better than them.

What can you do to stop demotivation in your workplace?

1. Reviews

First, make sure all of your staff know how often you will perform salary reviews. The most common instances are:

• Yearly performance and salary reviews.
• A review upon completing the probation period.
• A review upon achieving a promotion.

Make sure you send your employee a calendar invite for any review meetings well in advance—this will show them that you’re thinking about their performance.

It could also help your staff to regain any lost motivation. If they have a review date coming up, they know they need to impress you with their work and attitude.

2. Open door policy

Second, have an open door policy.

It should be common knowledge that if one of your staff has a problem, they can come and speak to you—but of course, this doesn’t mean you’ll automatically solve their problem. Otherwise, you’d have a queue of employees all ready to demand pay increases.

3. Use an employee assistance programme

With an employee assistance programme (EAP), your staff have access to confidential, round-the-clock support from trained professionals.

When your people feel at their best, they perform better and they take fewer sick days.

And we all know that a healthier and more successful workplace is a happier workplace.

Need help?

In most workplaces, the term “equity theory” doesn’t even get a mention. But it's in play—everywhere.

All BrightHR customers can get free employment law advice from our experts—we call them the BrightAdvice team. They can help you if you're unsure about equity theory or any other employment law topic.

So, call 0800 783 2806 today to become a BrightHR customer for as little as £3 per month.

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