Equity theory is a theory that argues that we prefer situations of balance, or equity, which exist when we perceive the ratio of our inputs and outcomes to be equal to the ratio of inputs and outcomes for a comparison other. The selection of the person with whom we compare ourselves depend on our own view of appropriate comparisons. For example, in considering the equity of pay raise, a person might compare her or his pay with that of certain coworker, peers in other units, or a friend with similar credentials who works for another company. In making equity judgement, we consider equity in relative terms (comparison with other) rather than absolute terms (comparison with a set standard). The inputs we consider in assessing the ratio of our inputs and outcomes relative to the ratio of other may cover a broad range of variables, including additional background, skills, experience, hours worked, and performance result. Outcome might include such factors as pay, bonuses, praise, parking place, office space and work assignments. The inputs and outcomes that we use assess the equity of a situation are based strictly on our own perceptions of what is relevant.
According to the theory, two types of inequities create tension within us. In the first, underreward, we percieve our inputs-outcomes ratio to be less than the inputs-outcomes ratio of a comparison other. In the second, overreward, we percieve our inputs-outcomes ratio to be greater than the inputs-outcomes ratio of the comparison other. Interestingly, research on equity theory suggest that we are usually able to overreward condition rather quickly-apparently concluding that our inputs are worth considerably more than we originally thought. Situations of underreward are usually more difficult to rectify.
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