Equity Theory

The equity theory is a psychological approach that examines people's perceptions of fairness and equity in interactions, including the workplace. Developed by psychologist John Stacy Adams in the 1960s, equity theory suggests that people try to keep a balance between the input (effort, contribution) they invest in a situation and the outcomes (reward, benefit) they get in return. In their theory, people look at the input-output ratio of others to see if they are being treated fairly. One symptom of the existence of resentment, dissatisfaction, or motivation to redress this balance is changing own efforts or bringing about changes in rewards.

Example of The Equity Theory

Think of a situation where Alice and Bob are employees in the same department and do the same job title with identical responsibilities. Though Alice's salary is much higher than Bob's, and she receives more comprehensive benefits, both their performance and tenure are similar. In this situation, as predicted by equity theory, Bob may perceive the uneven distribution of rewards as an injustice and become demotivated or dissatisfied at work. He would probably compare his input (effort, skills) with what Alice earns (salary, benefits) and conclude that there is an issue with equity in the workplace. Consequently, Bob might be less involved in his job responsibilities, be unhappy in his job or even seek new employment options in order to remedy the situation. Companies that grasp equity theory and develop compensation systems that are objective and open, rewarding contributions and maintaining a happy atmosphere, succeed.