Equity Theory

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CASE STUDY 2

It’s not fair !Semester 1 First Half 2015

MBA 531 – Organizational BehaviorProf. W.P. Gamini De Alwis

Postgraduate & Mid-Career Development UnitFaculty of Management & Finance

University of Colombo

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Presented by

MBA IN HRM 2015/17GROUP NO.2

IntroductionMr. M.M. Maddumabandara (2015/MBA/WE/HRM/09)

Question – 01Mr. L.D.R.S. Lankage (2015/MBA/WE/HRM/08)

Question – 02Mr. Hiran Kularatne (2015/MBA/WE/HRM/07)

Question – 03Mr. L. Havikkumar (2015/MBA/WE/HRM/04)

Question – 04, Sri Lankan Context & SummaryMs. S.V.N Perera (2015/MBA/WE/HRM/14)

Fundamentals of Equity

It is Subjective and Results Feelings

Perception BasedValue Based

What is Equity Theory?

(Goodman P.S. , 1974, Ronan S, 1986)

Equity Theory

Compare

• Effort• Experience• Education

• Salary • Increment•Recognition

<Inequity as

Over rewarded

=Equity results

happiness

>Inequity as

under rewarded

Individuals compare their job inputs & outcomes with those of others and then

respond to eliminate any inequities

SadGuilty Happy

Reaction for Inequity

6. Leave the field (quit the job).

1. Change inputs - Put less effort if underpaid

2. Change outcomes - Lower quantity of units

3. Distort perceptions of self - “I used to work at a moderate pace, but now I realize I work a lot harder than everyone else”

4. Distort perceptions of others - “Mike’s job isn’t as desirable as I thought”

5. Choose a different referent - “I may not make as much as my brother-in-law, but I’m doing a lot better than my Dad did when he was my age”

Feeling Change in Behavior

Achieve feeling of

Equity

Sad

Guilty

Why ‘Equity’ is important for Organizations?

Equity Part of a ‘Bigger Picture’ Motivation

Early Theories Contemporary Theories

“Emphasis on what motivates Individuals”

“Emphasis on actual process of motivation”

- Maslow’s Theory of Needs- ERG Theory of Alderfer- Greagor’s Theory of X and Y- Herzberg’s Two Factor Theory- McClelland’s Theory of Needs

- Self Determination Theory- Goal-Setting Theory- Self-Efficacy Theory- Reinforcement Theory- Vroom’s Expectancy Theory

- Equity Theory

“Processes that account for an individual’sintensity, direction, and persistence of effort toward attaining a goal”

(Robbins S., 2005, Judge T., 2005)

Motivational Theories

Case Study -“Its Not Fair” Extracted from – Organizational Behavior by

Stephen Robbins & Timothy Judge

Key Highlights of the Study

Executive Compensation

Use of Equity Theory in

Compensation

2008 Financial Crisis

Compensation Committees

Organizational JusticeReward Success

not Status

Question 1

1. Gross violation - ‘Other-inside’ was not adequately looked at.

2. Board members were half blind – look at well paid others

3. Absence of a proper market compensation survey

4. “Fair level” right across the board ?? 5. Equity - A myth for some OR far to reach ?

e.g. AA pilots’ protest

Why executive compensation is not equitable?

How does the Executive Compensation issue relate to Equity Theory?Q 1.a

Self–inside Other–inside

All four referent comparisons to be carefully looked at

Fair blend – not only similar scale

eg: Factory Manager/s of Tristar Apparels Vs Union Apparel Vs MAS

(Goodman P.S. , 1974, Ronan S, 1986)

Self–outside Other–outside

An employee’s experiences in a

different position inside The employee’s

current organization

An employee’s experiences in a

situation or position outside the employee’s

current organization

Another individual or group of individuals

inside the employee’s organization

Another individual or group of individuals outside the employee’s organization

Who do you think should be the ‘referent other’ in these equity judgments?Q 1.b

1. Strategic Leadership2. Personal Branding3. Earned Goodwill4. Impact and Influential Capability5. Education6. Change Management 7. Strong Financial Background

What are the relevant inputs for Top Executives?Q 1.c

Question 2

Procedural Justice

Process Control Explanation

Justification of outcome by the management

Your view of what your expected outcome’

‘Perceived fairness of the process used to determine the reward distribution’

What are Procedural Justice implications related to the ways pay policies for Top Executives instituted?Q 2.a

Accurate information

Consider specific referent others who are specially

well paid”

Unbiased

Favorable to Top Executives

Consistent

Across people & time

Open to Appeal

Do these pay-making decision follow the procedural justice principles outline in the chapter?Q 2.b

? ?

Question 3

Why

However propose

An Advisory Role, NO,

Create Sustainable

Business Ecosystem

1. Political Intervention may hinder Organizational Growth

2. May not align with Organizational Philosophy

Do you think the Government has a legitimated role in Executive Compensation?Q 3.a

1. Maximum Wage Cap No

2. Minimum Wage Yes

E.g. Recent Government Budget Proposal to increase the Provate Sector Minimum Wage to Rs. 10,000

Distributive justice “How much we get paid, relative to what we think we should be paid”

Procedural justice

Proposal

Organization Compensation Committee

1. Maximum Wage Cap No

2. Minimum Wage Yes

Proposal

How might we use Distributive and Procedural Justice Theories to inform this debate?Q 3.b

National

Advisory

Council

“Perceived fairness of the process which used to determine the distribution of rewards”

Question 4

Yes

Why

Employee sense of equity

Results Employee Motivation and positive

work environment

So

However, be mindful when

structuring Executive Pay

Why

e.g. – 2008 Financial Crisis

Due to focus on Short Term Wins than creating a Long Term Sustainable Business

Are there any positive motivational consequences when pay is linked to firm performance?Q 4.a

Sri Lankan Context

Executive Compensation issue is evident in Sri Lankan Corporate Sector

Compensation mechanism is not complete Transparent

Inequity exist in Public Sector

Sri Lankan Context

Conclusion

Although subjective, equity plays in important part in Organizational Justice

Have a direct impact on motivation and individual behavior

Government should play an Advisory role in maintain equity while ensuring the competitiveness of Corporate Sector

Conclusion

“Equity theory deals with productivity, satisfaction, absence, and turnover

variables. However, its strongest legacy is that it provided the spark for research on organizational justice, which has more support in the literature…”

References

- Robbins, S. P., Judge, T. A. & Vohra, N. (2013). Organizational behaviour. (15 th edition). New

Delhi:Pearson

- Goodman,P.S.(1974). An examination of referents used in the evaluation of pay,

Organazational Behavior and Human Performance,12(2),170-195

- Goodman,P.S.,Friedman,A.(1971).An examination of adam's theory of inequity, Administrative

Science Quartely,16(3),271-288

- Leventhal,G.S. (1980)What should be done with equity theory? new approaches to the study

of fairness in social relationships,” in K. Gergen, M. Greenberg, & R. Willis (eds.), Social exchange:

advances in theory and research (27–55). New York: Plenum.

- Holtz, B.C, Harold,C.M.(2009) Fair today, fair tomorrow? a longitudinal investigation of overall justice

perceptions, Journal of Applied Psychology, 94(5) 1185–1199.

- Walster,E., Walster G.W., & Scott, W.G.(1989)Equity: theory and research (Boston: Allyn & Bacon,

1978); & J. Greenberg, cognitive reevaluation of outcomes in response to underpayment inequity,

Academy of Management Journal, 174–184.

Thank You and Open for Discussion