Adams' Equity Theory calls for a fair balance to be struck between an employee's inputs (hard work, skill level, acceptance, enthusiasm, and so on) and an employee's outputs (salary, benefits, intangibles such as recognition, and so on). According to the theory, finding this fair balance serves to ensure a strong and productive relationship is achieved with the employee, with the overall result being contented, motivated employees. Unlike basic motivation that consists of offering a reward such as pay for an action, the Equity Theory looks beyond just the individual and includes factors in the individual's setting that may affect motivation through comparison. The theory states that when a person compares himself to his co-workers and finds the results to be fair, he will be more motivated. If, on the other hand, he compares himself to his coworkers and finds the results to be unequal or "unfair," he will be less motivated. The essence of the Equity Theory lies in this sense of motivation through perceived fairness.
The easiest way to see the equity theory at work, and probably the most common way it does impact employees, is when colleagues compare the work they do to someone else that gets paid more than them. Equity theory is at play anytime employees say things like, 'John gets paid a lot more than me, but doesn't do nearly as much work,' or 'I get paid a lot less than Jane, but this place couldn't operate without me!' In each of those situations, someone is comparing their own effort-to-compensation ratio to someone else's and is losing motivation in the process. The Adams' Equity Theory model therefore extends beyond the individual self, and incorporates influence and comparison of other people's situations - for example colleagues and friends - in forming a comparative view and awareness of Equity, which commonly manifests as a sense of what is fair.
Adams called personal efforts and rewards and other similar 'give and take' issues at work respectively 'inputs' and 'outputs'. Inputs are logically what we give or put into our work. Outputs are everything we take out in return. These terms help emphasise that what people put into their work includes many factors besides working hours, and that what people receive from their work includes many things aside from money. Adams used the term 'referent' others to describe the reference points or people with whom we compare our own situation, which is the pivotal part of the theory. Adams Equity Theory goes beyond - and is quite different from merely assessing effort and reward. Equity Theory adds a crucial additional perspective of comparison with 'referent' others (people we consider in a similar situation). Equity theory thus helps explain why pay and conditions alone do not determine motivation.
In terms of how the theory applies to work and management, we each seek a fair balance between what we put into our job and what we get out of it. But how do we decide what is a fair balance? The answer lies in Equity Theory. Importantly we arrive at our measure of fairness - Equity - by comparing our balance of effort and reward, and other factors of give and take - the ratio of input and output - with the balance or ratio enjoyed by other people, whom we deem to be relevant reference points or examples ('referent' others). Crucially this means that Equity does not depend on our input-to-output ratio alone - it depends on our comparison between our ratio and the ratio of others. We form perceptions of what constitutes a fair ratio (a balance or trade) of inputs and outputs by comparing our own situation with other 'referents' (reference points or examples) in the market place as we see it. In practice this helps to explain why people are so strongly affected by the situations (and views and gossip) of colleagues, friends, partners etc., in establishing their own personal sense of fairness or equity in their work situations.
Adams' Equity Theory is therefore a far more complex and sophisticated motivational model than merely assessing effort (inputs) and reward (outputs). The actual sense of equity or fairness (or inequity or unfairness) within Equity Theory is arrived at only after incorporating a comparison between our own input and output ratio with the input and output ratios that we see or believe to be experienced or enjoyed by others in similar situations. This comparative aspect of Equity Theory provides a far more fluid and dynamic appreciation of motivation than typically arises in motivational theories and models based on individual circumstance alone. For example, Equity Theory explains why people can be happy and motivated by their situation one day, and yet with no change to their terms and working conditions can be made very unhappy and demotivated, if they learn for example that a colleague (or worse an entire group) is enjoying a better reward-to-effort ratio.
The Equity Theory is an important tool for businesses to assess employee satisfaction, the relationship between motivation and productivity and how to increase motivation to better reach company goals and objectives. For example, a hard-working employee might believe he is paid a fair salary until he becomes aware of the fact that he is one of the lowest-paid people on staff. This knowledge may lead him to become unmotivated and will thus threaten the success of the company.