Equity theory: Helping your employees feel more fairly paid

November 29, 2017

Equity theory: Helping your employees feel more fairly paid

On the blog recently, I wrote about the importance of paying employees properly – properly meaning accurately. So this week, I thought we could explore the importance of paying employees properly – but this time, meaning fairly.

To help tackle this subject, I’ve been speaking again to business psychologist Simon Kilpatrick, founder of Intrinsic Links. And it turns out that there’s actually a name for how fairly employees feel they’re being paid.

It’s called “Equity Theory”.

What is equity theory?

Equity theory (Adams, 1965) is all about whether or not employees feel they are being paid fairly.

“It’s important to note that this is nothing to do with whether you are or are not paying them fairly” explains Simon. “It’s about whether or not they feel they are being paid fairly. It’s a matter of perception.”

Simon tells me that the theory is drawn from the principle of social comparison, and is based on the perception of fair treatment or justice. It suggests that how hard a person is willing to work, is actually a function of comparisons with the efforts of others.

How people react to perceived pay inequality

Simon says that while all people are different, equity theory outlines three distinct reactions to perceived pay equality/inequality:

  1. Pay equity. Employee feels satisfied.
  2. Overpayment inequity. Employee tends to feel lucky, guilty, or both.
  3. Underpayment inequity. Employee feels angry and frustrated.

“Something you might notice” says Simon “is that many employees take action to ‘balance the books’. This isn’t necessarily a conscious choice. But somebody feeling guilty because they believe they are overpaid, may begin to turn up early, work late, and put more energy into projects. They feel like they must make up the difference, so that they feel their salary is justified.”

Underpayment inequity can lead to bad behaviour

Just like an employee who feels overpaid may put in extra work to balance the books, Simon tells me that an employee who feels underpaid may find creative ways to ‘get their fair share’. This could take many forms, such as:

  • Putting in less effort during working hours
  • Cutting down working time by leaving early, arriving late & calling in sick
  • Stealing items from work

Simon says that the stealing side of things is often as simple as pads of paper from the stationary cupboard. Yes, petty theft at work can often be the result of an employee who feels underpaid, subconsciously trying to balance the books!

Of course, feeling unfairly paid doesn’t stand up as a defence for stealing from work. It is wrong, illegal, and could lead to dismissal and/or prosecution.

How employees calculate their perception of payment equity

How each employee determines whether or not their pay is fair, will vary from person to person. But the equity theory suggests that judgements tend to be made, in some form or another, based on a comparison against others. This comparison could be made against colleagues in similar roles, or even industry averages.

“The public sector has fewer problems with this, because there are national guidelines and pay scales. Private sector is a little bit different, because it’s less regulated. The law says you have to pay minimum wage, and there are guidelines set by industry averages, but beyond this, it’s a free for all. So people tend to judge how fairly they are being paid by comparing themselves with their peers.”

Of course, an employee’s perception of what is fair, isn’t always accurate. It is often subjective, imprecise, and at times, even based on rumours.

Advice to management on improving perceptions of equity

It starts with actually making sure you’re paying employees fairly, of course. But because their perceptions are based on other factors – not just what you consider fair – there are other things you can do.

“Good line management can be a good way to ‘even the equity’” explains Simon. “Make sure performance reviews are done in the right way, and show clearly how pay is being linked to performance. Also, if you pay a little more than industry average, then don’t be afraid to point this out.”

In summary, Simon gives the following advice to management:

  • Employees need to feel they are fairly dealt with
  • Feelings of inequity leads to resentment and tension
  • Employees compare their pay with their peers
  • This is not always reliable – it can be imprecise and subjective
  • Management should circulate accurate information about rewards
  • Management should link pay with performance

About Simon Kilpatrick

Simon is a business psychologist, and founder of Intrinsic Links. He is also a lecturer of psychology at Leeds Beckett University. His company helps to teach positive psychology and management techniques that build great teams and top performers. You can visit Simon’s website here: www.intrinsiclinks.com

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