Equity Theory

Fairness, or what people perceive to be fair, is also a critical issue in organizations. Equity theory says that people will be motivated at work when they perceive that they are being treated fairly. Equity theory stresses the importance of perceptions. So, regardless of the actual level of rewards people receive, they must also perceive that, relative to others, they are being treated fairly.

The basic components of equity theory are inputs, outcomes, and referents. Inputs are the contributions employees make to the organization. Outcomes are what employees receive in exchange for their contributions to the organization. And, because perceptions of equity depend on comparisons, referents are other people with whom people compare themselves to determine if they have been treated fairly.

According to equity theory, employees compare their outcomes (the rewards they receive from the organization) with their inputs (their contributions to the organization). This comparison of outcomes with inputs is called the outcome/input (O/I) ratio.

Equity theory focuses on distributive justice, the perceived degree to which outcomes and rewards are fairly distributed or allocated. However, procedural justice, the perceived fairness of the procedures used to make reward allocation decisions, is just as important. Procedural justice matters because even when employees are unhappy with their outcomes (that is, low pay), they’re much less likely to be unhappy with company management if they believe that the procedures used to allocate outcomes were fair.