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Equity Theory of Motivation in Management: Definition & Examples

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  • 0:02 Equity Theory Defined
  • 1:19 Importance of Referent Groups
  • 3:00 Assumptions of Equity Theory
  • 4:09 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

In this lesson, you'll learn the fundamental principles of John Stacey Adams' equity theory and understand how it can affect the workplace. You will also be able to test your knowledge with a quiz.

Equity Theory Defined

In 1963, John Stacey Adams introduced the idea that fairness and equity are key components of a motivated individual. Equity theory is based in the idea that individuals are motivated by fairness, and if they identify inequities in the input or output ratios of themselves and their referent group, they will seek to adjust their input to reach their perceived equity. Adams suggested that the higher an individual's perception of equity, the more motivated they will be and vice versa: if someone perceives an unfair environment, they will be de-motivated.

The easiest way to see the equity theory at work, and probably the most common way it does impact employees, is when colleagues compare the work they do to someone else that gets paid more than them. Equity theory is at play anytime employees say things like, 'John gets paid a lot more than me, but doesn't do nearly as much work,' or 'I get paid a lot less than Jane, but this place couldn't operate without me!' In each of those situations, someone is comparing their own effort-to-compensation ratio to someone else's and is losing motivation in the process.

Importance of Referent Groups

A referent group is a selection of people an individual relates to or uses when comparing themselves to the larger population. If a salesperson compares themselves to the rest of the sales staff, the referent group is the sales staff. As it relates to equity theory, there are four basic referent groups that people use:

  1. Self-inside: your own experience within your current organization ('When I worked for Bob, things were better… .')
  2. Self-outside: your own experience within another organization ('When I did this same job for XYZ, I was paid a lot less… .')
  3. Others-inside: other people within your current organization ('The management team just sits around a conference table all day and gets paid way too much… .')
  4. Others-outside: other people outside your current organization ('Our competitor has some pretty weak benefits… .')

Comparisons don't need to be between people making the same money or doing the same type of work. The key concept of equity theory is that of output-input ratio, the ratio of contribution to reward. The output-input ratio allows people to make comparisons to people outside their immediate referent group. This type of other-outside comparison is happening when someone says, 'The CEO gets paid 300 times more than us, but does she do 300 times the work?'

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