Equity Theory

 

“People like to be treated fairly at work” is the basic idea behind the Equity Theory. Here the “Equity” is defined as perceived fairness of what a person does compare to what a person gets for doing it (Mathis et al., 2015). It’s people’s nature to compare their own input/output ratio with others who perform a similar task (Edwards, 2017). In other words, it’s the rewards (outcomes) that people expect in exchange of the efforts (inputs) they deliver towards the organization (Armstrong and Taylor, 2014). Figure 1.0 shows the important ratios in equity theory.

Figure 1.0 Equity Theory

(Source: Mathis et al, 2015)

Equity again can be categorized into four main categories of compensations.

External Equity

The pay rate for a particular job in one company compared to the pay rate for the same job in a different company (Dessler, 2017). If the employer doesn’t pay reasonable payout compared to other companies. This will create a major HR issue of recruiting qualified and suitable people to the organization. Depending on outside labor markets, a lack of pay competitiveness from an external perspective can result in the employment of individuals who lack some of the knowledge, skills, and abilities necessary for them to do work effectively. This will lead to less contribution towards the work from demotivated employees. To overcome the difficulties Organisation can track external equity by doing a salary survey and check the reward policies introduced by the competitors. Then organization can adopt the best and it will increase the firm performance too (Mathis et at, 2015).

For example, when an employee observes to be earning less than he should, he will alter his work output to what he perceives is equal to his pay. The other option may be to negotiate with the employer in order to match work output with reward, or as a last resort leave employment altogether.

Internal Equity

The fairness of the pay rate for a job compared to a pay rate for a different job in the same company (Dessler, 2017). Internal equity means that employees are compensated fairly within the organization with regard to the knowledge, skills, and abilities they use in their jobs, as well as their responsibilities, accomplishments, and job performance. Given how fairness is emphasized, employees evaluate their ratio of effort to reward in comparison to coworkers on an ongoing basis. These evaluations often affect how willing employees are to make valuable contributions to the organization. This is why the different pay levels of employees should be compared internally to make sure that compensation is fair, particularly when individuals ask for pay increases. Internal equity can also relate to differences between the pay levels of managers and employees (Mathis et al, 2015).

As an example, in the organization where I work the research manager pays better than the finance manager, finance manager will compare whether it’s fair to get lower pay even though he gives the same job performance.

Individual Equity

 Refers to the fairness of an individual’s pay as compared with what other coworkers are getting for the same or similar jobs within the company, based on each person’s performance. (Bell, 2011).

Procedural Equity

refers to the recognize of fairness felt by an employee about the procedures and processes within the organization (Such as promotion, appraisal and performance base pay) (Dessler, 2017).

Organizations use various methods to address these areas of equity as it plays a key role in motivating the employees. Salary surveys to monitor and maintain the pay rates with other organizations, performance appraisal to maintain internal and individual equity and administering attitude surveys are few actions taken by organizations to maintain a proper equity (Dessler, 2017).

References

• Armstrong, M. and Taylor, S. (2014) Armstrong’s Handbook of Human Resource Management Practice. 13th Edn. Philadelphia.

•  Bell, R.L. (2011) Addressing employees' feelings of inequity: capitalizing on equity theory in modern management, [online] Available at: https://www.researchgate.net/publication/261551828_addressing_employees%27_feelings_of_inequity_capitalizing_on_equity_theory_in_modern_management [Accessed on 18th November 2022]

•  Dessler, G. (2017) Human Resource Management. 15^th Edn. USA: Pearson Education     Limited. 

• Edwards, T. and Rees, C. (2017) International Human Resource Management. 3^rd Edn. United Kingdom: Pearson Education Limited.

• Mathis, R.L., Jackson, J.H., Valentine, S.R. and Meglich, P.A. (2017) Human Resource Management. 15th Edn. Boston: Cengage Learning.