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Equity theory, in Business seeks to describe a relationship between employees Motivation and their perception of being treated fairly. The theory suggests that employees seek to ascribe values to their inputs and outputs.


Inputs


The most obvious input that people have to offer is their time. Inputs also include:
  • Expertise

  • Qualifications

  • Experience

  • Personal qualities such as drive, ambition, empathy or intelligence.

  • Interpersonal Skills



Outcomes


Outcomes include:

  • Monetary compensation

  • Perquisites ('Perks')

  • Flexible working arrangements

  • Job Variety

  • Satisfaction of altruistic ambitions

  • Power

  • Status



Equity


An employee will consider that he is treated fairly if he perceives the ratio of his inputs to his outcomes to be equivalent to those around him. Thus it would be acceptable for a more senior colleague to receive higher compensation, since the value of his experience is higher.


Analysis


Equity theory has some implications for managers:

  • People measure the totals of their inputs and outcomes. This means a working mother may accept lower monetary compensation in return for more flexible working hours.


  • Different employees ascribe personal values to inputs and outcomes. Thus, two employees of equal experience and qualification performing the same work for the same pay may have quite different preceptions of the fairness of the deal.


  • Employees are able to adjust for purchasing power and local market conditions. Thus a teacher from Alberta may accept lower compensation than his colleague in Toronto if his cost of living is different, while a teacher in a remote African village may accept a totally different pay structure.


  • Although it may be acceptable for more senior staff to receive higher compensation, there are limits to the balance of the scales of equity and employees can find excessive executive pay demotivating.


  • Staff perceptions of inputs and outcomes of themselves and others may be incorrect, and perceptions need to be managed effectively.


  • An employee who believes he is under-compensated may withdraw good will and reduce effort.


  • An employee who believes he is over-compensated may increase his effort. However he may also adjust the values that he ascribes to his own personal inputs.