Equity Theory

What are the characteristics you look for when choosing a job? Whether it’s dependent on geographic proximity, work hours, the type of work you’ll be doing, or the company, you likely want to work somewhere that is fair. Would you be satisfied at a job where you felt like all your efforts were going unnoticed and you were poorly compensated?

Equity theory focuses on whether there is a fair balance between an employee’s inputs (such as hard work, enthusiasm, and skills) and their outcomes (such as recognition, salary, and benefits).¹ According to the theory, striking this balance is necessary for a strong and productive work relationship. In order to maximize individuals’ rewards, organizations strive to create systems that fairly distribute resources across members of a group. Otherwise, inequalities will result in levels of unhappiness proportional to the amount of inequality.

Cognitive dissonance: An inconsistency between beliefs and behaviors that cause uncomfortable psychological tension. Typically, people are motivated to change one of the inconsistent elements to reduce the dissonance.

Equity theory: A special case of cognitive dissonance, equity theory specifies the conditions under which inequities will occur and the means by which they can be reduced or eliminated.

Inequity: In the context of work, inequity exists whenever one’s perceived job inputs and/or outcomes are opposite to what they believe are the inputs and/or outcomes of another.

Inputs: What an individual believes are their contributions, brought by them to the job, for which they expect a fair return.

Outcomes: The rewards received by an individual in exchange for their services.

Equity theory was developed in 1963 by John Stacy Adams, an American workplace and behavioral psychologist.¹ At the time of its conception, inequity was a prevalent concern in the fields of labor and government, but it was not fully understood. People were beginning to realize that equity between employees and employers was more than just an economic matter, so Adams set out to understand workplace inequity. Adams based his equity theory on Leon Festinger’s theory of cognitive dissonance: humans are uncomfortable when presented with conflicting beliefs and information, so we avoid such dissonance by changing one of the inconsistent elements.²

Adams first distinguished between inputs, a worker’s contributions, and outcomes.¹ He emphasized that inputs are perceived by their contributor, and they may be perceived differently by an employer. Thus, there are two distinct characteristics of inputs:

1. Recognition: Either the contributor or the other party of an exchange, or both, may recognize a certain attribute.¹ As long as the contributor recognizes its existence, it has the potential to be an input. However, if only the other party recognizes its existence, it is not considered an input.
2. Relevance: If the contributor recognizes the existence of an attribute, its potential to be an input is dependent on the contributor’s perception of its relevance to the exchange.¹ If perceived to be relevant and the contributor expects a fair return for it, but the other party does not consider it to be relevant, problems of inequity occur.

On the other hand, outcomes were defined as a worker’s compensation, whether monetary or intangible.¹ Examples of outcomes include pay, intrinsic rewards, seniority benefits and job status, and outcomes tend to be correlated (i.e. greater pay and higher job status). Similar to inputs, perceptions of outcomes are based on recognition and relevance. If both parties recognize the relevance of an attribute, then it has potential to be an acceptable outcome. The role of relevance in perception is important when determining what is equitable: a salary increase may be inadequate if the employee wanted and had greater use for a formalized status bump.

Adams then addressed the need for a rigorous definition of inequity, as measured in his theory.¹ Influenced by Festinger, inequity was deemed to exist when someone’s perceived job inputs and/or outcomes were opposite to what they perceived another’s inputs and/or outcomes to be. Importantly, it is the perception of an individual’s and another person’s inputs and outcomes that matter, rather than actual inputs and outcomes. This distinction highlights how equity is rarely considered in isolation. Rather, employees will compare the ratio of their inputs and outcomes to the ratio of others’ inputs and outcomes. If an inequity is perceived to exist based on ratios, then the employee will adjust their inputs accordingly.

Inequity does not only occur when employees feel like they got the short end of the stick.¹ Adams theorized that if an employee knows that they are relatively overpaid, they will recognize that inequity exists and feel tense, similar to how they would feel if they were underpaid. In accordance with Festinger’s theory of cognitive dissonance, employees who recognize inequity will be motivated to reduce it,² with the strength of said motivation proportional to the amount of tension created.¹ 

Adams extended his theory to explore how employees try to reduce the dissonance that comes with inequity.¹ People may increase or decrease their inputs or outcomes, distort their perceptions of their inputs and outcomes, distort their perceptions of others’ inputs and outcomes, or leave their position when inequities cannot be addressed. Additionally, people may change their referent group, which is the employee’s comparison group. According to Adams, there are four possible referent groups:

1. Self-inside: The employee’s experience within their present organization;
2. Self-outside: The employee’s experience with other organizations;
3. Others-inside: Other people within the employee’s present organization; and,
4. Others-outside: Other people outside of the organization.¹

Adams used both observational and experimental data to support his equity theory.¹ Using such evidence, he explored how the guilt and hostility that result from inequity can decrease motivation and productivity within the workplace, subsequently impacting quality of work.

There are two main implications based on Adams’ work:

1. If rewards are to motivate employees, they must be perceived as fair; and,
2. It’s necessary to consider the referential others with whom the employee makes their equity comparisons.¹

By better understanding the consequences of perceived inequities in an organization, researchers and business stakeholders can identify potential factors of social conflict, and increase the degree of control that they exercise.

In fact, equity theory has been applied to many business settings in hopes of understanding employee satisfaction and motivation, focusing on implications for managers.³ Those in executive positions must understand that employee behavior will be influenced by perceptions of workplace equity and positivity. To achieve management and productivity goals, employee outcomes must be maximized - but this extends beyond monetary compensation. Research also highlights how important it is for executives to understand their employees, including the variables that influence their perceptions of equity and how they adjust input and outcome levels.⁴

While mostly developed for relationships within an organization (i.e. between an employee and their employer), equity theory has also extended to external business applications.^{5 6} For example, high outcome policies for handling consumer complaints - such as full and longer return policies - have been suggested to be most effective. High outcome policies will make customers feel that they are being treated fairly, maximizing the possibility of their return and minimizing negative word of mouth that could hurt business. Retail workers can use these findings to inform strategies for addressing consumer complaints, producing a competitive advantage.

Some people have criticized Adams’ equity theory for its simplicity, arguing that a number of demographic variables (i.e. age, sex, and nationality) and personality traits (i.e. wok ethic and Machiavellianism) can influence people’s perceptions of equity.⁷ While Adams addressed the need for future research to determine which variables guide people’s choices of referent groups, he did not specify variables that guided people’s comparisons.¹ It is possible that perceptions of equity are much more subjective than a ratio between inputs and outcomes, which are subjective on their own.

The equity sensitivity construct was developed in 1987, in response to the criticisms above.⁷ The construct proposed that people have consistent but different preferences for equity, influencing their reactions to perceived inequity. These preferences are expressed on a continuum, from preferences for extreme under-benefit to preferences for extreme over-benefit, with three classes of people:

1. Benevolent individuals who prefer when their own input and outcome ratios are lower than those of their referent groups. These people prefer to under-benefit.
2. Equity sensitives who prefer when their input and outcome rations are equal to those of their referent groups.
3. Entitled individuals who prefer when their own input and outcome ratios are greater than those of their referent groups. These people prefer to over-benefit.

Other criticisms have highlighted how perceptions of inequity may extend beyond inputs and outcomes of relationship, such that they are also dependent on the overall system that determines said inputs and outcomes.⁸ For example, two employees may be compensated equitably in relation to each other, but they may feel that the overall compensation system is unfair. In this case, while there is no inequity as defined by Adams, employees may be unsatisfied with the organization.

To address concerns of overall equity, some researchers have developed an alternative way to measure fairness in workplaces.⁸ Rather than specifying a specific referent person or group, employees assess equity based on their internally derived standards for comparison. This way, comparisons will result in an overall feeling of fairness about the relationship of all elements in the employee’s environment.

Two-tier wage structures

Two-tier wage structures ensure that the top rate of pay for new employees is substantially lower than the pay for old employees.⁹ Such wage structures have been controversial in workplace organization: employers favor them, while employee reactions range from acceptance to outright rejection. Under a two-tier wage structure, one’s hiring date is the only criterion for whether an employee is placed on the low- or high-wage tier. As a result, employees could have the same job titles and responsibilities, yet receive different pay outcomes for similar inputs of effort.

Applying Adams’ equity theory, researchers explored employee perceptions of equity under a two-tier wage structure and implications for workplace performance.⁹ Surveying retail employees who were paid under this wage structure, low-tier employees perceived significantly lower equity. Additionally, low-tier employees in new stores had significantly higher scores compared to low-tier employees in old stores, in commitment to employer; perceived fairness of pay compared to people doing the same work for other employers (external equity); perceived fairness of pay compared to people doing the same work in their store (internal equity); and overall satisfaction with pay.

The study’s findings supported equity theory in a field setting, extending equity theory’s relevance to two-tiered wage structures.⁹ The findings emphasized the need for those in management positions to consider matters of perceived equity before implementing a two-tier wage structure. While organizations cannot control all employees’ perceptions of equity, they can control the structures that influence such perceptions.

Working with individuals with intellectual disabilities

Increasing research on the role that staff play in the lives of individuals with intellectual disabilities has emerged since the 1990s.¹⁰ While theoretical models have been used to assess specific and individual staff outcomes within intellectual disability services, they have tended to only be applicable to a narrow range of outcomes. However, a broader understanding is required to understand the role that equity plays in staff performance, who play an important role in the lives and well-being of those with intellectual disabilities. Equity theory can be used beyond the scope of traditional businesses to consider a broad range of staff outcomes including stress, burnout, turnover, behavior, performance, and satisfaction.

Based on a systematic review of the existing literature, Adams’ theory was found to explain the relationships between staff outcomes and the characteristics of staff, such that differences in weightings of specific inputs or outcomes lead to different perceptions of equity.¹⁰ For example, males seem to give more weight to rates of pay than females, especially when since is often difficult for direct-care staff to increase their hourly wage. Staff may also differ in the referent groups they use, such that individuals with higher levels of education are more likely to determine equity by comparing their outcomes with people outside of the organization. Higher levels of dissatisfaction and turnover among more educated direct-care staff may be the reason for these external comparisons.

Staff may also differ in the ways they restore equity: higher turnover rates among males and higher rates of absenteeism among females may reflect gender differences in ways of dealing with perceived inequity.¹⁰ Characteristics of the service user may also influence perceptions of equity, such that staff tend to have higher levels of stress and turnover when working with individuals with more challenging behaviors. Considering the variability in perceptions of equity and the impact they can have on staff and service users alike, increasing research needs to be done to understand how Adams’ equity theory plays out for staff who work with individuals with intellectual disabilities. Importantly, equity theory can capture a broader range of staff outcomes than prior theories that were used to assess isolated outcomes.

Employment and work performance

Learn about some more interventions related to organizational performance, such as incentives and nudges!

I think I am, therefore I am

Aside from perceptions of equity, are there other factors that influence productivity and performance in the workplace? Take a dive into this article to explore the implications of positive perceptions and misperceptions for the workplace.

1. Adams, J. S. (1963). Toward an understanding of inequity. Journal of Abnormal and Social Psychology, 67(5), 422-436.
2. Festinger, L. (1957). A Theory of Cognitive Dissonance (Vol. 2). Stanford University Press.
3. Jewczyn, N. (2010). A comparison of equity theory and expectancy theory and some implications for managers in a global work environment. Journal of Business Management and Entrepreneurship, 1(8), 1-11.
4. Konopaske, R., & Werner, S. (2002). Equity in non-North American contexts: Adapting equity theory to the new global business environment. Human Resource Management Review, 12(3), 405-418.
5. Huppertz, J. W., Arenson, S. J., & Evans, R. H. (1978). An application of equity theory to buyer-seller exchange situations. Journal of Marketing Research, 15(2), 250-260.
6. Lapidus, R. S., & Pinkerton, L. (1995). Customer complaint situations: An equity theory perspective. Psychology & Marketing, 12(2), 105-122.
7. Huseman, R. C., Hatfield, J. D., & Miles, E. W. (1987). A new perspective on equity theory: The equity sensitivity construct. Academy of Management Review, 12(2), 222-234.
8. Carrell, M. R., & Dittrich, J. E. (1978). Equity theory: The recent literature, methodological considerations, and new directions. The Academy of Management Review, 3(2), 202-210.
9. Martin, J. E., & Peterson, M. M. (1987). Two-tier wage structures: Implications for equity theory. Academy of Management, 30(2), 297-315.
10. Disley, P., Hatton, C., & Dagnan, D. (2009). Applying equity theory to staff working with individuals with intellectual disabilities. Journal of Intellectual & Developmental Disability, 34(1), 55-66.