Equity Theory - Meaning & Definition

Published in Human Resources Terms by MBA Skool Team, Last Updated: April 23, 2013

What is Equity Theory?

The equity theory was proposed by a Behavioral Psychologist, John Stacey Adams. It states that:

‘The motivation of an individual is positively correlated to his perception of justice and fair treatment practiced by the management. The employee seeks a balance between the amount of efforts he pours in (Input) and the kind of compensation he receives (Output). The Individual compares this input-output balance with the other employees in the organization (known as ‘referents’)

Inputs: time, effort, loyalty, commitment, reliability, integrity, tolerance etc

Outcomes: pay, bonus, perks, benefits, praise, reputation, responsibility etc

-          If the individual’s output to input ratio is lower than the partner’s ratio, he feels under-rewarded and demotivated. The phenomenon is called Equity Tension.

-          When the Output-Input ratio is equal to the referents’ ratio, Perfect Equity is said to be developed and the employee feels motivated.

-          If the employee’s ratio is greater than the referents’ ratio, the employee feels over-rewarded and again, Equity Tension is said to be developed.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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