Equity income theory suggests that employees determine whether they are being fairly treated by management by comparing their own input/outcome ratio to the input/outcome ratio of others. Inputs are the experience, education, effort, time worked, and special skills workers bring to a job. Outcomes are pay, benefits, recognition, and other rewards given to workers. Equity income theory attempts to address almost every worker’s question, “Am I being treated fairly?” People develop a sense of inequity when a comparison of inputs and outcomes leads to a perceived imbalance relative to others. For example, teachers frequently complain that relative to their education and responsibilities, they are not paid equitably. In situations where employees perceive they are not being paid equitably, they often resort to any of three alternatives:
1. Reduce effort.
2. Work with colleagues to lobby for higher pay for each member of the affected group.
3. Seek EMPLOYMENT where pay is better.
Successful employee COMPENSATION AND BENEFITS systems incorporate the concept of equity income theory. Equitable compensation plans address internal, external, and individual equity concerns. Internal equity is the pay relationship among jobs within the organization. Employees expect senior executives to earn more than production workers, but when the differences become huge, the system is not perceived as internally equitable. Ben & Jerry’s Ice Cream company was legendary in the 1980s for mandating that the president receive no more than seven times the INCOME of the lowest paid worker. Enron executives apparently did not adhere to that sense of social, internal equity. External equity refers to workers’ comparisons of similar jobs in different organizations. In many rural areas of the United States, federal government jobs pay more than similar local, private-sector jobs. Local businesses often hire, train, and then lose employees to government and government-funded jobs in the area. In the 1990s, U.S. postal workers threatened to strike. When the postal workers’ pay scale became known, public ire over perceived pay inequity relative to the skills and effort required created resentment against postal workers, leading to such comments as “I will do their job for that pay.” Individual equity refers to comparisons among individuals doing the same or very similar job within an organization. Those in HUMAN RESOURCES management suggest this is the most important comparison. In the United States, most workers accept the concept of paying senior employees more than newer employees and paying moreproductive employees more than less-productive employees. Problems arise in defining and differentiating productivity. In service environments, measuring differences in productivity are difficult. Subjective evaluations often become popularity contests and create resentment among the workforce. Equity income theory suggests managers need to address all three types of equity concerns. Unionized work environments address pay differences in COLLECTIVE BARGAINING. New workers understand the pay system before they choose to join the workforce. In nonunion environments, pay inequities are a frequent source of conflict and sometimes litigation. The EQUAL PAY ACT (EPA, 1963) made illegal any pay discrimination based on gender. The act was designed to correct the wage gap for women at a time when women workers were being paid 60 percent of what men workers were making. By 1999 women were earning 75 percent of men’s wages, and many companies were closely evaluating their pay practices.
See also FORCED RANKING SYSTEMS; UNION.