Equity Theory (Adams, 1963)

1
Equity Theory (Adams, 1963)

• People develop beliefs about what is a fair
  reward for one job contribution - an exchange
• People compare their exchanges with their
  employer to exchanges with others-insiders and
  outsiders called referents
• If an employee believes his treatment is
  inequitable, compared to others, he or she will
  be motivated to do something about it -- that is,
  seek justice.

2
Model of Equity Theory

• Is versus Ir
• Os Or
• I Inputs - employees contribution to
  employer
• R Referent - comparison person
• S Subject the employee who is judging fairness
  of the exchange

3
Equity Theory - Exchange Scenarios

• Case 1 Equity -- pay allocation is perceived to
  be to be fair - motivation is sustained
• Case 2 Inequity -- Underpayment. Employee is
  motivated to seek justice. Work motivation is
  disrupted.
• Case 3 Inequity - Overpayment. Could be
  problem. Inefficient. In other cultures
  employees lose face.

4
Consequences of Inequity

• The employee is motivated to have an equitable
  exchange with the employer.
• To reduce inequity, employee may
• Reduce inputs (reduce effort)
• Try to influence manager to increase outcomes
  (complain, file grievance, etc.)
• Try to influence co-workers inputs (criticize
  others outcomes or inputs)
• Withdraw emotionally - or physically (engage in
  absenteeism, tardiness, or quit)

5
Equity Theory Applications

• Develop tools to pay people in proportion to
  their contributions
• Let employees know who their pay referents are in
  the pay system identify pay competitors and
  internal pay comparators.
• Strive for consistent pay allocations
• Monitor internal pay structure and position in
  the labor market for consistency.

6
Reinforcement Theory (Skinner, 1953)

• Behavior that is rewarded will be more likely to
  be repeated and strengthened (Thorndike, 1911).
• Behavior --gt Consequence
• - Reinforcement/No
  reinforcement/
• Punishment
• Reinforcement - a desirable consequence, e.g.,
  rewarded behavior increases the probability it
  will occur in future.

7
Reinforcement Theory (Contd)

• Extinction - the process of unlearning a behavior
  and the consequences that formerly reinforced it.
• Schedules of Reinforcement
• Output Schedule (number of units)
• Fixed Ratio
• Variable Ratio
• Time-based Schedule (daily, weekly,yearly, etc)
• Fixed Interval
• Variable Interval

8
Schedules of Reinforcement

• Continuous Schedule - reinforce every behavior or
  unit.
• Useful for learning new skills
• Not practical for pay system
• Behavior is quickly extinguished w/o
  reinforcement
• Intermittent Schedule - behavior is reinforced on
  a partial basis.
• Behavior is strengthened an takes longer to
  become extinct once it is learned.

9
Intermittent Reinforcement Schedule

• Fixed Interval
• Reinforcement received after the passage of time.
• Least resistant to extinction. (people expect it)
• Ex. Monthly salary, hourly wage, annual bonus.
• Variable Interval
• Reinforcement received on a variable (uncertain)
  schedule.
• Reward less likely to be viewed as entitlement.
• Ex. Quarterly profit sharing (some quarters occur
  without profits) / Spot cash reward - paid out
  after the fact

10
Intermittent Reinforcement (Contd)

• Fixed Ratio
• Reinforcement received according to fixed amount
  of output
• Ex. Piecework pay - worker get 1 for picking 12
  apples / Sales commission - 6 of house selling
  price.
• Variable Ratio
• Reinforcement received according to variable
  (uncertain) amount of output.
• This schedule is most resistant to extinction.
• Ex. Entrepreneurship Rewards - One takes risks
  with ones capital and is uncertain how much
  output will lead to a big reward. / Gamboling
  behavior - slot machines.

11
Reinforcement Theory - Applications

• Continuous reinforcement increases rate of
  learning
• Intermittent reinforcement strengthens behavior
  that is learned.
• Ratio schedules produce greater motivation than
  interval schedules.
• Variable schedules produce stronger motivation
  than fixed schedules.
• Pay may not always work with ratio or variable
  schedules, but praise, recognition and feedback
  can be used effectively with intermittent
  reinforcement.

12
Agency Theory (Fama, 1980)

• Principal - Agent Relationship
• Principal is the owner, and delegates
  responsibility to the agent to manage the
  business.
• Agent - is a manager hired by the owner to run
  the business.
• Assumptions - 1) agents act in self-interest. 2)
  agents have more knowledge about business than
  the owner (information asymmetry) 3) agents are
  more risk averse than owner.

13
Agency Theory (Contd)

• Agency Problem
• Agents interest may conflict with principals
  interest - leading to opportunism (moral hazard).
• How can agent be motivated to behave in owners
  interests? It can be costly to monitor agents
  behavior.
• Solution to Agency Problem - Agency Contract
• Contract aligns interests of principal and
  agents.
• Compensation is a tool of incentive alignment.
• Tie rewards for agent to outcomes desired by
  principal.
• Ex. Executive Pay - Tie large share of CEO
  (agent) pay to increasing the share price of the
  stock (agents goal). Stock options is an
  incentive alignment tool.