Equity theory research has been in full throttle in the last few years. I believe it is one of the most fundamental theories to understand in order to have profit in your business. It will give you tremendous insight into how your employees feel and think about work. I shall make a short summary of how this theory may prove to be useful to you in the paragraphs below. But first I will try to explain in laymen terms what this theory states. At a very basic level, everything equity theory boils down to is the fact that employees will always take into consideration what they put in their work and what they get out of it. In other words they will always look to have equality between input and output. This can give you a better understanding in how your employees will react if they feel they are undervalued or overvalued. So let’s see what the main things an employer can learn from equity theory research are:

1.    Employees always measure the total of their inputs and outcomes. This is a fact that every employer needs to be aware of. Equity theory research has shown that this is a constant process that goes on in every employees head, and that they will be always seek to strike a balance between what they put in and what they get out of work. Of course what they put in is their own time, effort, and intelligence, and what they get out is in principle money, but also a sense of pride for accomplishing something. Although these two, the inputs and output, don’t seem to be quantifiable using a single denominator, this is what each one of us does every day.

2.    Different perception for different people. It is important to notice that equity theory research points out that the input and outcome is measured by every employee according to his or her own rules. This means that even though two people seem to put the same input in and get the same outcome, for them this equation may feel completely different. It is possible that one of them may feel that he is being cheated and that he is putting to much work in for the recognition he is getting while the other may feel overcompensated, even though for the outside observer they are putting in and getting out the same thing.

3.    Employees adjust to local market conditions. This is an important point that employers need to acknowledge. An employee will know that the cost of living is much greater let’s say in London than in Budapest so they will understand if that a job in Budapest will pay less than one in London.

4.    There’s a limit to a senior staffer’s higher compensation. Equity theory research has shown that employees understand that senior staff that has a more important position in a company will get better paid for their jobs. At the same time, research has shown that there is a limit to the difference between a senior staffer’s salary and rookies. You can’t pay a CEO let’s say for example five times the amount you pay your normal staff because this will demoralize them.

5.    Perceptions of inputs and outputs may be incorrect. This is a point that needs to be made in order to get team leaders to understand a big part of their job. An employee may have a distorted or incorrect perception of what he gets out of his work in relation to what he puts in. The job of a team leader is to constantly manage these perceptions in order for everybody to be satisfied with their jobs.

6.    If over-compensated an employee may increase the effort he puts in his work. This is one of the possibilities that equity theory research shows to be true in reaction to the feeling that employees believe their outcomes are greater than their inputs in their work.

7.    If over-compensated an employee may adjust the value that he puts on his work, and thus, he might be tented to feel a sense of superiority and actually decrease his work. This is the second possible outcome to the same problem of feeling over-compensated for the work an employee does. Of course this is the one that will harm your business, so this is why I feel I need to reiterate the important role of a good team leader to manage expectations.

Equity theory research has done a lot in the last few years in the way of explaining employee behavior in regards to what the compensation for their work should be. I believe that there are still a lot of questions to be answered, but at the same time equity theory just goes to prove the concept that there is a universal equilibrium that is imbedded in every one of us which structures the way we think.        

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