The equity theory of motivation holds that employees have a strong need to maintain a balance between what they perceive and their inputs to their jobs and what they receive form their jobs in form of rewards.
Employees who perceive inequalities will take action to eliminate or reduce them. E.g. If an employee believes that he/she is underpaid will likely reduce effort working more slowly, taking off early or simply being absent. If an employee believes that he/she is overpaid, he/she is likely to work harder or for longer hours.
There are several dimensions of equity to consider when looking at pay equity.
- Internal equity – this concerns what an employee is being paid for doing a given job compared to what other employees in the same organization are being paid to do their jobs.
- External equity – this deals with what employees in other organizations are being paid for performing similar jobs.
- Individual equity – this addresses the issue of rewarding individual performance. It is closely related to pay-for-performance.
Organisational equity – this concerns how profit are divided up within the organisation i.e. organizations profits are fairly distributed.