Have you ever wondered what kind of grade the person sitting next to you in class makes on a test or on a major class assignment? Sure you have—most of us do! Being human, we tend to compare ourselves with others. If someone offered you $55,000 a year on your first job after graduating from college, you’d probably jump at the offer and report to work enthusiastic, ready to tackle whatever needed to be done, and certainly satisfied with your pay. How would you react, though, if you found out a month into the job that a coworker—another recent graduate, your age, with comparable grades from a comparable school, and with comparable work experience—was getting $60,000 a year? You’d probably be upset! Even though in absolute terms, $55,000 is a lot of money for a new graduate to make (and you know it!), that suddenly isn’t the issue. Now you see the issue as what you believe is fair—what is equitable. The term equity is related to the concept of fairness and equitable treatment compared with others who behave in similar ways. There’s considerable evidence that employees compare themselves to others and that inequities influence how much effort employees exert.32

Equity theory, developed by J. Stacey Adams, proposes that employees compare what they get from a job (outcomes) in relation to what they put into it (inputs) and then compare their input-outcome ratio with the input-outcome ratios of relevant others (Exhibit 12–7). If an employee perceives her ratio to be equitable in comparison to those of relevant others, there’s no problem. However, if the ratio is inequitable, she views herself as underrewarded or overrewarded. When inequities occur, employees attempt to do something about it.33 The result might be lower or higher productivity, improved or reduced quality of output, increased absenteeism, or voluntary resignation.

The referent—the other persons, systems, or selves individuals compare themselves against in order to assess equity—is an important variable in equity theory.34 Each of the three referent categories is important. (1) The “persons” category includes other individuals with similar jobs in the same organization but also includes friends, neighbors, or professional associates. Based on what they hear at work or read about in newspapers or trade journals, employees compare their pay with that of others. (2) The “system” category includes organizational pay policies, procedures, and allocation. (3) The “self” category refers to inputs-outcomes ratios that are unique to the individual. It reflects past personal experiences and contacts and is influenced by criteria such as past jobs or family commitments.

Originally, equity theory focused on distributive justice, which is the perceived fairness of the amount and allocation of rewards among individuals. More recent research has focused on looking at issues of procedural justice, which is the perceived fairness of the process used to determine the distribution of rewards. This research shows that distributive justice has a greater influence on employee satisfaction than procedural justice, while procedural justice tends to affect an employee’s organizational commitment, trust in his or her boss, and intention to quit.35 What are the implications for managers? They should consider openly sharing information on how allocation decisions are made, follow consistent and unbiased procedures, and engage in similar practices to increase the perception of procedural justice. By increasing the perception of procedural justice, employees are likely to view their bosses and the organization as positive even if they’re dissatisfied with pay, promotions, and other personal outcomes.