Equity Theory

Equity Theory

A process-based motivation theory where employees judge the value of rewards by comparing them to what others receive

Key Concept of Equity Theory

Motivation depends on fairness—employees compare rewards to referents and ask if treatment is just

Referent

The person or group an employee chooses to compare themselves to

Management’s Role in Referents

Managers cannot choose referents—each employee decides for themselves

Inputs

The contributions employees bring to the job such as effort

Outputs

The rewards employees expect in return such as pay

Perceived Fairness

If employees believe their input/output ratio is equal to or better than their referents

Perceived Inequity

If employees believe they are rewarded less than their referents

Over-Reward Effect

Receiving much more than the referent group can also be demotivating if perceived as unfair

Example of Inequity

An employee receives a $10

Fairness Trap

People often overestimate their own effort and skills

Organizational Challenge

Life is seldom fair and pay is influenced by many factors beyond inputs

Management Response

Many organizations discourage employees from sharing salary information to avoid endless fairness disputes

Key Takeaway of Equity Theory

Motivation depends on fairness perceptions

rewards must be seen as equitable compared to referent groups to be effective