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The Utility of Equity Theory in Enhancing Organizational
Effectiveness
Dr. Abdelghafour Al-Zawahreh, Dr. Faisal Al-Madi Department of business Administration, the Hashemite University, Jordan
Abstract This paper will focus on examining equity theory, its propositions and underlying assumptions. I will examine the research on equity theory in regard to pay since it is assumed to be one of the essential and most important outcomes. A critique will follow to determine the falsibility and utility of the theory. Finally, there would be summary and recommendations for future research. The research question is to explore the effect pay outcome has on other outcome variables such as motivation, job satisfaction, and performance. The second research question is whether or not comparison other, communication, or status in occupation has an influence on the perceived fairness of pay. This paper will provide human resource professionals with a broad understanding of the importance of pay in motivating employees and in improving their productivity. It appears that pay is a major factor in perceived equity therefore; attention needs to be given to this concept.
Keywords : Equity theory, organizational effectiveness, and Jordan
European Journal of Economics, Finance and Administrative Sciences
The Utility of Equity Theory in Enhancing Organizational
Effectiveness
Introduction What motivates people to work? According to equity theory, it is the perception of equitability and in-equitability. Equity theory focuses on two sides: the input and the outcome. An employee compares his or her job’s inputs with an outcomes ratio. If the employee perceives inequality, he or she he will act to correct the inequity. The employee may lower productivity or reduce the quality of their job. Many times inequities can lead to an increase in absenteeism and even resignation of an organization (Greenberg, 1999). Equity theory deals with human motives and it should have wide applications in understanding organizational behavior. HRD needs to take equity theory under serious consideration when dealing with people whether in cases of administering simple tasks like pay, promotions, and recognition or in cases of training, improvements, and development. Equity theory will help HRD explain employee’s behavior and provide them with the possible factors that might decrease efficiency and performance. Equity theory has received more attention lately from human resource professionals especially regarding the fairness of outcomes. Equity, or more precisely, inequity is a major concern of industry, labor, and government. The fairness of exchange between employees and employer is not usually perceived by the employees as simply as an economic matter, an element of relative justice is involved. Equity theory could be applied to any social situation in which an exchange takes place (e.g., between a man and his wife, between football team mates, and between employee and his employer). When two people exchange something, there is a
The next few pages will shed light on the major propositions and assumptions of equity theory, the antecedents of inequity and the strategies used to reduce inequity when it exists. I also attempt to identify through literature the importance of pay outcomes as a precedent and requirement for improved performance, job satisfaction, motivation, and some will also explore the effect comparison other, communication, and occupation status have in perceived fairness of pay. A critique of equity theory and its major constructs will be examined. Finally, summary and recommendations for future research will follow.
Antecedents of inequity
According to Adams (1965) the focus of the theory is on the exchange relationship where individuals give something and expect something in return. What the individual gives is called inputs. On the other side of the exchange, is what the individual receives, called outcomes. The third variable in addition to inputs and outcomes is called the reference person or group. This reference group can be a coworker, relative, neighbor, or group of coworkers. It may even be the person himself in another job or another social role. Table 1 above lists these inputs and outcomes in details.
Table 1. inputs and Outcomes of Equity Theory
Table 1 has showed what inputs and outcomes are expected. If an individual perceives any of them as an input then it is an input and hence he or she expects a just return for it. The problem arises if only the employee views a particular input and not the employer. In this case, felt injustice is experienced for example an employer may base his promotion on seniority rather than promotion; the employee “feels” that injustice has been done (Adams, 1965). Whether a social exchange is considered equitable or inequitable depends upon the individual’s perception of the relationship between their inputs and outcomes (Adams, 1963, 1965; Adams and Freedman, 1976; Walster, Berscheid and Walster, 1973). A state of perceived equity occurs when an individuals perceives his or her inputs balanced with his or her outcomes and when he or she also perceives others inputs are balanced with others outcomes (Pritchard, 1969). Equity theory assumes further that even an individual’s inputs and outcomes do not
Inputs Outcomes Education, intelligence, experience, training Pay, intrinsic rewards, satisfying supervision Skills, seniority, age, sex, ethnic background Seniority benefits, fringe benefits, job status Social status, job effort, personal appearance, health, spouse’s characteristics.
Status symbols, job perquisites, poor working conditions, monotony, fate, uncertainty.
In interpersonal relationships, a person will try to maximize his or her outcomes (where outcome = reward - cost). Groups can maximize the probability of equitable behavior among members when they develop a system where resources are distributed equitably among members. A group also will reward members who behave equitably toward others and punish those who do not (Adams & Walster, 1973). Consequences of Inequity According to Adams (1965) felt injustice will lead to dissatisfaction, anger, and guilt. People will feel angry and dissatisfied when they are getting less of what they expect in comparison to what they input, and people also will feel guilty if they receive more than their worth. Adams calls this “guilt” when over-rewarded advantageous inequity whereas, calls “anger” reaction when under-rewarded (disadvantageous inequity). This anger is usually directed toward other people and institutions that caused inequity and sometimes it is self-directed where no other party is targeted for punishment or retaliation. Because of that Adams (1965) theorized that perceived inequity feels unpleasant and encourages people to move in the direction of reducing it, and the strength of motivation to do so will vary directly with the magnitude of inequity experienced. As a result Adams proposed several means called “means of inequity reduction”. These means are:
- Person altering his inputs: in the case of felt inequity, a person may increase or decrease his inputs depending on whether the inequity is advantageous or disadvantageous. The individual might increase his inputs such as productivity and/or quality of work or might decrease. Factors like education and skill level are more easily altered but factors like sex, race, and ethnic background are not modifiable. There are two assumptions introduced by Adams: (a) the threshold for the perception
of inequity is higher when person is over rewarded than when he or she is under rewarded. (b) There is an assumption that a person is motivated to minimize his or her costs and maximize his gain. In the second assumption a person will move to reduce inequity in a way that will yield him or her the maximum outcomes.
- Person altering his outcomes: a person may vary his outcome either by increasing or decreasing them depending on whether the equity is advantageous or disadvantageous. Either by increasing outcomes or decreasing inputs a person will reduce inequity.
- Person distorting his inputs and outcomes cognitively: it is possible mentally to switch from one reference group or person to another, while still remaining physically in the same primary exchange relationship (Folger and Cropanzano, 1994). When an employee feels underpaid, a thought might come to mind that the amount of money he or she is making is more than his or her father made at this age or his or her peers in different industry, this process would be an example of changing the comparison object to reduce inequity. Some people might choose to leave their job.
- Person leaving the field: an individual might quit his or her job, obtain a transfer, or experience higher absenteeism are common examples of people leaving the field in an employment situation.
- Person acting on other: in the face of injustice a person may attempt to alter or cognitively distort others inputs and outcomes, or try to force others to leave the field. If a person has less experience than others, he or she may attempt to decrease those people inputs instead of increasing his or her inputs.
examine in details the pay outcome variable and the different relationships that are connected to it. Literature Review Organizations are attempting to develop a work force that is self-managing and autonomous, a sense of justice becomes even more essential as the glue that holds the organization together and maintains teamwork (Cropanzano & Kacmar, 1995). The essential idea behind equity theory is that when individuals work for an organization they present certain inputs (e.g., abilities or job performance). Based on what they input in, people expect to get something in return, for example when people input high performance they expect to get a high pay level (Cropanzano, 1993). Adams (1965) expressed this as a ratio of outcomes per inputs. The difficult thing for workers is to determine when a given ratio is fair. Adams argued that individuals determine fairness by comparing their ratio to the ratio of some comparison other; this allows someone to see if a reasonable amount were obtained. Equity theory predicts that low rewards produce dissatisfaction; this would in turn motivate people to take action and reduce the discrepancy between their ratio and the ratio of the comparison other. For example, one might reduce inputs (lower performance), or if possible increase outcomes. According to Adams (1965) when a person is over rewarded he/she might experience guilt, shame, or remorse instead of anger or resentment. These emotions are negative and therefore should motivate individuals to move toward reducing the imbalance. Because individuals do not usually forego positive outcomes, people are generally likely to respond by increasing inputs. That is, they are expected to work harder. For the purpose of this research paper an attempt would be to determine the effect pay would have on employees. Pay, in my opinion, is considered the most important outcome. Pay in
the workplace is considered a potentially motivating force or learning device, and potentially rewarding outcome. Pay may gain in importance because it refers to decisions made by the employee as to how high and good his/her contribution to the organization will be. Pay is important to the extent it provides performance feedback (Thierry, 1992). Living in the United States, a capitalistic society, money plays an important role in our daily life. People depend on pay to sustain themselves and survive. Equity theory deals with this issue as source of motivation (Rice, 1993). Employees realize that pay will lead to some security in living, recognition by peers, and status in his or her professional group. In other words pay is more important to the extent that it is seen as a way to realize more motives, even those employees who are dissatisfied with other factors in their job (e.g., working conditions), will accept more pay to compensate for that lack of satisfaction. According to Thierry (1992) pay will represent the following:
- Salient motives: pay is often seen as the vehicle that leads to the satisfaction of a specific motive or goal. Pay is expected to provide more security, more status, less anxiety, and more recognition.
- Relative position: pay may refer to the degree of progress in the employee’s task performance relative to task goals set. Pay thus informs us about the effectiveness of performance behavior, it also provides more opportunity to correct one’s course of action. Pay reflects how well someone’s performance has been relative to others.
- Control: pay may convey to an employee how effective he or she has been in affecting the behaviors of others.
investigate the role of reference groups outside and inside the organization within the framework of equity theory. Attitudes toward pay were used as the base for comparison. The result of the study indicated the following:
- The author suggested that some people might choose one reference group while others may choose more than one reference group.
- When using both comparisons, employees were more satisfied with just using one comparison.
- Both comparisons were associated with overall pay satisfaction.
- Propensity to stay or leave the organization was significantly related with the outside comparison. Therefore, the findings indicate that comparison to others outside and inside the organization contributes to pay satisfaction for employees (Ronen, 1986). Goodman (1974) studied 214 managers in a single firm. The purpose of the study was to show the relationship between comparison with referents and pay satisfaction. He used three classes of referents (other, self, and system). “Other” represents someone in the same organization, in a different organization; it can also be friends or neighbors. “Self” refers to the input/outcome ratio from the past job. “System” refers to the contract between the employer and the employee. The employees when comparing themselves to referent other were the major determinant in their pay satisfaction (Goodman, 1974). Summers and DeNisi (1990) retested the Goodman study but tested the study on a nationwide level. The study involved 1043 managers from all levels of restaurant chain. Sixty five percent (65%) reported have feelings underpaid and the majority (34.5%) used self as a comparison group. This study supports the hypothesis that comparison with referent (other, self,
system) is a major determinant of pay satisfaction. This supports Adams equity theory that people tend to use a number of various referents simultaneously. Underpayment inequity in comparison to a series of referents (others in your job category at your company, your pay in previous jobs) was associated with lower pay satisfaction in a sample of restaurant managers (Summers & DeNisi, 1991). Summers and Hendrix (1991) investigated how manager’s perception of pay equity with respect to their three most important referents influenced the manager’s performance and turnover intentions. Perceptions of pay equity had no impact on performance, but did have an indirect impact on turnover intentions that was mediated by a variety of attitudinal measures (e.g., job satisfaction, pay satisfaction). It appears that there is a focus on the comparison other in determining pay equity. Employees feel that pay differences based on performance differences are fair. The research suggests that in the event of equal pay, employees will feel underpaid when their comparison other is a poorer performer and will feel overpaid if their comparison other is a superior performer (Werner and Ones, 2000). The authors also proposed several hypotheses that address seniority in relation to pay. First, employees will feel that pay differences based on seniority differences are fair because it is assumed that seniority is related to high performance and higher productivity. Second, employees will feel underpaid when their comparison other has less seniority considering the pay is equal and will feel overpaid when their comparison other has more seniority. Third, in regard to gender, since there is a lot of stereotypes associated with gender, pay being equal, males will feel underpaid when their comparison other are females; females will feel overpaid when their comparison other are males (Werner and Ones, 2000). The authors also emphasized that these perceived inequities were less pronounced when the pay system was explained to the employees.
underpayment and stole over twice as much compared to when they felt equitably paid. It is possible that the pay cut produced anger and frustration for employees, which motivated the act of theft. It is also possible that the act of theft was used as a mean to restore equity. On the other side, when employees were provided with direct and honest explanation, the feeling of underpayment inequity was reduced in comparison to the group who did not receive any explanation (Greenberg, 1990). Berkowitz, Fraser, Treasure, and Cochren (1987) studied pay perceptions and satisfaction among a random sample of employed men. They found that the more the employees strongly believed their pay was fair; the more satisfied they were with their earnings. In fact pay equity was a strong predictor of pay satisfaction (Berkowitz etal, 1987). The idea that the perceived fairness of one’s pay is a better predictor of pay satisfaction, then the absolute amount of pay received is in keeping with the evidence showing that the concept of pay fairness and pay satisfaction are strongly related (Scarpello, 1988). According to equity theory people can readdress states of inequity cognitively, for instance, altering their beliefs about the outcomes they received from their jobs. Equity theory asserts that workers who are underpaid financially may be able to reestablish overall level of equity by convincing themselves that they are well compensated with respect to other outcomes. A study on 114 salaried clerical workers, whose pay was reduced, felt that they were inequitably underpaid. Their pay cut created an underpayment inequity. In this case the employees followed two approaches. First, enhanced the perceived importance of other outcomes (work environment). Second, exaggerate the perceived level of these outcomes needed to establish equity. This behavior equity theory calls cognitive distortion. This study showed that there was no reduction in the level of job satisfaction when a pay cut occurred. It further tells us that
cognitive reevaluation of this situation will minimize the distressing effect of inequity (Greenberg, 1989). Heneman’s (1985) review showed that pay satisfaction affects on overall job satisfaction and has a big effect on behaviors such as turnover, absenteeism, and the effort exerted on the job. However, overpayment does not produce these results, usually underpayment does that consistently (Mowday, 1987). Motivation and Pay Dumville (1993) has also indicated a strong relationship to exist between pay satisfaction and motivation. Work motivation is viewed as an invisible and internal construct; it should result in satisfaction and performance. A study was conducted on players in a major league baseball team, in the year prior to their free agency. As predicted by equity theory, individuals who were under compensated choose to decrease their performance and had less motivation (Ambrose & Kulik, 1999). Communication and Pay From reviewing the literature it appears that when there is two-way communication between managers and employees, it will increase their satisfaction with their jobs and pay will not be an employee top priority. A study was conducted on ten corporate locations which found that when managers and employees have two-way communication, their perception of pay equity was higher than the other group where there was no communication. Even though both groups were paid almost the same as the first group, the first group felt that they were equitably paid while the second group had the perception that they were underpaid (Huseman & Hatfield, 1990).
The study also found that individual’s perception of equitable pay may be affected by two demographic variables: current pay level and earnings potential (Carrell & Dittrich, 1978). Theory Critique Equity theory has a one major proposition which is the comparison of one’s inputs and outcomes to others inputs and outcomes and as a result of this comparison one might experience equity or inequity. This proposition is very clear and parsimonious unlike many theories in the social science. Every one can understand this theory since it has to deal with our feelings toward equity and justice. These are very important issues to humans and that is why people will be inclined to understand this theory more clearly (Rice, 1993). Researchers emphasized that theories should not be too broad or too narrow. Equity theory has achieved this limitation. Equity theory has focused on what motivates employees and describes that employees input something and expect something back in return. This equalization of relationship will tend to motivate employees to perform. The theory also emphasized two situations of inequity, which is the case of overreward and underreward and how humans tend to react in either situation. Equity theory is considered to be one of the most valid frameworks to understand human attitudes and motivation (Miner, 1984). According to Miner (1980), equity theory has the following characteristics:
- Prediction of performance: the evidence of research showed that both overreward and underreward will have an effect on performance, but the question that remained unanswered is for how long this effect will last before corrected by cognitive distortion. On balance the theory seems to predict performance at least for a short period of time.
- Prediction of work satisfaction: the research done in this area gives strong support for equity theory. In over-reward situations guilt and dissatisfaction was experienced which led workers to increase inputs, and under-reward created anger and resentment, which led in many cases to turnover and absenteeism, and lowering inputs.
- Construct validity: the central construct of the theory is equity motivation. Or perhaps two constructs involving guilt or shame reduction and anger reduction. The theory lacks precision in regard to what factors operate as inputs and what factors operate as outputs and under what circumstances.
- Utility: able to predict performance and work satisfaction.
- Falsibility: the problem of individual, who will respond to inequity stimulation and who will not. There is also a problem in regard to a comparison other, how it is chosen and why, how factors come to be viewed as inputs and outputs and why. In the appendices there are two models, which represent equity theory, and clarify it. These models will allow us to see the relationships more clearly. The first model presents a clear relationship. When we compare ourselves to a referent other, the result is either equity or inequity. In the case of inequity a person will experience anger or guilt and this anger or guilt will motivate individuals to reduce inequity by following one of seven methods or a combination. This relationship is falsifiable; it is constructed in a way that can be refuted by researchers. Inequity may not lead to anger or guilt in some situations. The draw back of equity theory is that it has not accounted for individual differences and for different cultures. More research needs to be conducted to further explore this relationship.
