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The Equity theory was proposed by a Behavioral Psychologist, John Stacey Adams. It states that:

‘The motivation of an individual is positively correlated to his perception of justice and fair treatment practiced by the management.

The employee seeks a balance between the amount of efforts he pours in (Input) and the kind of compensation he receives (Output). 

The Individual compares this input-output balance with the other employees in the organization (known as ‘referents’)

Inputs: time, effort, loyalty, commitment, reliability, integrity, tolerance etc

Outcomes: pay, bonus, perks, benefits, praise, reputation, responsibility etc

–          If the individual’s output to input ratio is lower than the partner’s ratio, he feels under-rewarded and demotivated. The phenomenon is called Equity Tension.

–          When the Output-Input ratio is equal to the referents’ ratio, Perfect Equity is said to be developed and the employee feels motivated.

–          If the employee’s ratio is greater than the referents’ ratio, the employee feels over-rewarded and again, Equity Tension is said to be developed.