What is Equity Theory?

Meaning & Definition

Equity Theory

Equity theory, developed by behavioral psychologist J. Stacy Adams in the 1960s, is a psychological theory that explores how people perceive and respond to fairness or equity in social exchanges, including the workplace. The theory is based on the idea that individuals seek fairness and equity in their relationships and interactions with others, and they compare their inputs and outcomes (contributions and rewards) to those of others to assess whether they are being treated fairly.

Key principles of equity theory

• Inputs

Inputs represent what an individual contributes to a relationship or a situation. These can include factors like effort, time, skills, commitment, and personal sacrifices.

• Outcomes

Outcomes represent what an individual receives or gains from a relationship or a situation. These can include salary, recognition, promotions, job satisfaction, and other rewards.

• Comparisons

People continually compare their own input-to-outcome ratio with the input-to-outcome ratio of others. This can be in the form of social comparisons, where individuals assess how their contributions and rewards stack up against those of their peers or colleagues.

Based on these comparisons, individuals form perceptions of equity, which can fall into one of three categories:

• Equity

When an individual perceives that their input-to-outcome ratio is similar to that of their peers or colleagues, they consider the situation fair. They feel a sense of equity and are typically content with their circumstances.

• Under-reward Inequity

When an individual perceives that their input-to-outcome ratio is less favorable than that of others (they are under-rewarded), they perceive the situation as unfair. This inequity can lead to feelings of frustration, demotivation, and a desire to restore balance by seeking greater rewards or reducing their efforts.

• Over-reward Inequity

Conversely, when an individual perceives that their input-to-outcome ratio is more favorable than that of others (they are over-rewarded), they may also perceive the situation as unfair. In this case, the individual may experience guilt or discomfort and may attempt to rectify the imbalance, often by increasing their efforts or sharing their rewards.

Equity theory has significant implications for the workplace, as it suggests that employees’ perceptions of fairness play a crucial role in their job satisfaction, motivation, and overall engagement. When employees believe they are being treated equitably in relation to their peers, they are more likely to be content and motivated. On the other hand, perceived inequities, whether under-reward or over-reward, can lead to job dissatisfaction, reduced productivity, and even turnover.

Employers and managers should be mindful of equity theory when designing compensation systems, promotions, and recognition programs to ensure that they are perceived as fair by employees. Open and transparent communication can also help address perceived inequities and maintain a positive work environment.