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Introduction

First considered in 1965 by J. Stacy Adams, the equity theory attempts to explain the mechanism behind how workers determine what is fair in terms of the effort they put in and the rewards they receive compared to others (PSU WC L.5). The equity theory is a social theory in that it is based on the comparison to others as opposed to one's belief about their own performance (PSU WC, L.5).The perception of equity or inequity that results from this social comparison may in turn have a significant impact on the employee’s motivation, attitude and workplace effort or behavior (PSU WC L.5). The theory explains that individuals make comparisons between their inputs [the effort they expend, the work they do, their skills or talents] and outcomes [compensation, prestige, status, perks, benefits] and those of others. The individual, group or class of individuals that the worker compares him or herself to is called the ‘comparison other’ (PSU WC L.5) and is chosen based on the employee’s perception of which person or group of people are suitable or valid for such a comparison (PSU WC L.5). This perception may not be accurate, but is what the employee will base their equity analysis on none the less. 

The following case study will allow us to both illustrate the major tenets of theory and also show where certain equity-related problems can be identified by it and avoided or resolved by the stronger concept of Procedural Justice. This is not meant to demonstrate that all cases can be explained or resolved this way or by these specific applications or theories; this case is merely provided for illustrative and educational purposes, not as a proof of concept to replace the research that has and will continue to be done to explore and validate or disprove the theory and its components.

Definitions 

  • Input: Anything of value that a person believes that he or she brings to the job, such as experience, education, skills, intelligence and motivation. (PSU WC L.5)
  • Outcome: The benefits that an employee feels that he or she is receiving from the job. (PSU WC L.5)
  • Comparison other: Anyone or thing with whom the individual feels the need to compare themselves to including: co-workers, oneself, an ideal, an absolute standard, employees in other organizations, individuals in the same field, or even people with different jobs.(PSU WC L.5)
  • Procedural justice: Concern with the fairness of the process and the means used to allocate rewards. (Folger & Cropanzano, 1998)
  • Distributive justice - Concern with the fairness of the outcome or reward (Greenburg, 1990).

Case Scenario:

M & G Signs & Specialties, Inc (M&G), a small sign manufacturing and advertising specialty company is located in Pittsburgh, PA.  It is owned by Manny and Gertrude Berten, a husband and wife team who have been in this business since 1976. Annual sales are close to $900,000.  They employ 12-15 people who are divided into a sales staff, office staff and production staff.

In September 1996, M & G hired Donna to replace their bookkeeper who was going on maternity leave and did not plan on coming back to work after the baby was born.  Donna had not only bookkeeping experience but had also been a manager at various other businesses.  Her duties at the time of hire were to perform computerized bookkeeping, proof and ship out manufactured signage, be a back-up secretary, and salesperson.  She was 26 years old and single at that time.  Her starting salary was approximately $16,640 per year.

In March of 1997, M & G hired Dan as their sign installer.  He had worked at other sign companies in different states and had experience not only installing signs but manufacturing them as well.  His duties when he was hired were to install signage and be a back-up production person.  When he was hired he was single, 29 years of age and his starting salary was approximately $16,640 per year.

After each employee had been employed for three months, each received a small raise and health insurance at no cost to either employee.  After one year they received another raise as well as one week vacation and three sick days per year.  After two years they received another raise and one more week of vacation.

By 2001, both Donna and Dan had received promotions.  Dan was now the production manager and his duties included overseeing the production staff, scheduling installations, ordering materials and he still did some installations and manufactured signage.  Donna was now the office manager and had also moved into a sales position.  She still did a portion of the bookkeeping but was also responsible for hiring office staff, problem solving, providing customer service, and determining business goals.  Their salaries had increased and they were both making approximately $25,000 per year.  Donna was still single but had recently purchased a home and she also owned her own car.  Within the same year, Dan married a woman who had two children. She worked as a legal secretary and made a decent salary.  They were expecting their first child together.  They rented a home in the suburbs.  Their vehicle was M&G’s company truck.

When Christmas bonuses were handed out that year, Donna received a check in the amount of $500.  Dan’s bonus was $650.  Donna knew the amount of everyone’s bonuses because she was still doing the bookkeeping and was privy to the payroll as well as the bonus amounts.  When she saw that Dan received a larger bonus then she did she became upset.  She felt that her responsibilities were greater than his, that she was a more dedicated worker, and she had more seniority then he did.

Donna approached the owners and questioned the bonuses.  She was told that Dan was married and had a baby on the way, so they decided to give him more of a bonus this year.  Their answer still did not sit well with Donna.  She viewed the situation that she had as many, if not more, bills to pay on a single salary than Dan, who had his income and his wife’s to pay their bills.  They also had a company vehicle which they did not pay anything towards.  For a while, her attitude changed and she considered looking for another job.  Donna’s work remained consistent but she did not go over and above as she used to. She decided that if the same thing happened the following year, she would decide to leave the company.

 Case Resolution Lessons Utilizing Equity Theory

It is evident in the above case scenario that an employee felt an inequity in the workplace. This case is obviously not an isolated incident. It can, and does occur in many companies, whether intentionally or not. Applying our knowledge of equity theory can allow us to come up with some solutions so that we can avoid making the same mistakes in our professional careers. The following suggestions display both a behavioral and cognitive approach for employees to handle situations to reduce inequities.

1. Behavioral: When rewarding employees for their efforts, make it a point to focus on justice. There are two forms of justice but only one is utilized in Equity Theory. Distributive Justice explains that outcomes are spread evenly and fairly throughout an organization.(Stecher and Rosse, 2007) Procedural Justice, although not a part of equity theory, determines if the process of allocating outcomes/rewards is fair.(PSU WC L.5) It may be in the best interest of any employer to focus on both forms of justice and develop a written policy clearly stating the reward structure and how it will be implemented. When employees feel that they are not being rewarded for their efforts, they may adjust their inputs to match what their rewards are. Employees may also ask for some other type of compensation, or may choose to try and convince the comparison other to change their behaviors so that they are no longer "deserving" of the higher reward. Last, but not least, an employee may choose to leave the company to see equity from another employer.

In the above case scenario, the employer's bonus system was tied to non-work related factors. After being questioned about their actions, the employers could have realized that there was inequality in their decision making process. It clearly affected one employee, and had the potential to affect others in the future. In this case, Donna chose to match her input with the rewards she felt she was given. She also considered leaving the company.

2. Cognitive: Employers are only one of the factors in feelings of equity or inequity. There are some things that employees can also due to manage their own perceptions. Choosing a good model for a comparison other is essential in balancing perceptions or inequity against the actual level of equity in a given situation. A production worker shouldn't make a direct comparison of equity with someone in sales, the two jobs are very different and typically require different skill sets and different factors affect the motivation to perform for each type of job.  Employees should try to maintain a philosophy that allows for a world that doesn't necessarily rely on equity between all persons, things or situations that one could compare. The result may be the understanding that in order for an equity comparison to be useful, one should avoid comparing dissimilar things. While this mindset will not help in resolving perceived inequity between similar things or situations arising out of inadequate input and outcome analysis or actual inequity, it may serve as an aid in avoiding the choice of a poor comparison other.

Another way for employees to reduce potentially errant feelings of inequity is to be sure to base their analysis on more than just 1 or 2 inputs and outcomes. The most obvious inputs might be education, experience, hours worked, or projects completed and the most salient outcomes seem to be salary and promotions, but there are other inputs and outcomes that when added to an such analysis, may help tip the scales away from a perception of inequity. This may be especially true in cases where one is unwilling or unable to pick a suitable comparison other. Bob, who is in sales, may make a lot more money than Joe who works in production, but Bob puts in more hours away from the office and has very little job and pay security. Turnover in sales is often high and the pay is erratic. Sales people often trade the security of a stable paycheck and job security for the lure of high bonuses. Joe should consider what impact moving to an unpredictable,  feast or famine type of pay scale would have on him and his family. He may find that after these and other less than obvious factors are considered, that the situation isn't quite as inequitable as he previously thought.

In the above case scenario, Donna chose to go with a behavioral approach. Had she chosen a cognitive approach, she may have considered other alternatives (prior to approaching the owners) as to why Dan received more money than her. Since he is in a different department, she may have compared herself to someone within her own department or even compared herself to a few other people and not just one comparison other. This would give her a better idea of bonuses across the board, and not just one other person.

Conclusion

As we have focused on the ideas behind the equity theory, and have used Donna's situation as an example of an inequity, it's important to also review why equity is so important. Not only can it affect one's job performance, but it can affect their ideas of their job, their future, even other people (especially their employers). Because Donna compared herself to Dan (Dan being the comparison other), her motivation began to diminish, hence the idea of the Equity Theory. When one feels that they are not being treated with equality in comparison to another friend, co-worker, or even family member, it has a negative impact on how they feel about what they are doing. The Equity Theory can be applied to many situations, not just those in a workplace environment.

There are many factors that play into the avoidance of this type of situation. We discussed the behavioral and cognitive changes that can be made for the employee to overcome negativity, but what about the precautions that the employer can take to avoid this happening in their workplace? One important thing to consider is that Donna, as bookkeeper, has access to this information. Having the owners themselves run the bonuses to avoid anyone being able to obtain the bonus amount for someone else will help this issue in the future. Although it's not fair, it happens often. They could have written a policy explaining exactly how bonuses and other forms of compensation would be distributed. While this may seem a daunting task there are many options from which to choose. Length of employment, education level, experience in the given profession, and sales performance are all examples of factors that could be utilized. Although it is difficult to compare a salesperson's number of orders to the accountant's financial reports, if an employer implements standards for each department, the employees should theoretically perceive equity. If the Perception that the Distribution of rewards is fair among employees, a company can feel that they have worked toward providing Equity equilibrium.

References:

Folger, R., & Cropanzano, R. (1998). Organizational justice and human resource management. Thousand Oaks, CA: Sage.

Pennsylvania State University World Campus (2012). Work Attitudes & Motivation. PSYCH 484: Lesson 5: Equity Theory: Is what I get for my work fair compared to others? Retrieved February 8, 2012 from: https://courses.worldcampus.psu.edu/sp12/psych484/002/content/lesson05.htmlhttps://courses.worldcampus.psu.edu/sp12/psych484/002/content/lesson05.html

Stecher, M.D., & Rosse, J.G. (2007). Understanding reactions to workplace injustice through process theories of Motivation: A teaching module and simulation. Journal of Management Education, 31, 777-796.

Sweeney, P. D., & McFarlin, D. B. (1997). Process and outcome: Gender differences in the assessment of justice. Journal of Organizational Behavior, 18, 83-98.

Greenberg, J. (1990). Employee theft as a reaction to underpayment inequity: The hidden cost of pay cuts. Journal of Applied Psychology, 5, 561-568.

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