The equity theory is primarily Adams’s motivation theory, which is based on the comparison of perceived inputs and outputs. J. Stacy Adams popularized equity theory with his contention that people seek social equity in the rewards they receive (output) for their performance (input).

According to equity theory, people compare their inputs (effort, experience, seniority, status, intelligence, and so forth) and outputs (praise, recognition, pay promotions, increased status, supervisor’s approval, and the like) with those of relevant others. A relevant other could be a coworker or a group of employees from the same or from different organizations or even from a hypothetical situation.

Notice that our definition mentions perceived, not actual, inputs and outputs. Equity may actually exist. However, if employees believe there is inequity, they will change their behavior to create equity, such as doing less work, changing the situation (like getting a raise), or getting another job. Studies have demonstrated the importance of fairness. It is important to treat people ethically and fairly, because it is difficult to influence people when they don’t trust you.

Pay equity does affect performance, but most employees tend to inflate their own efforts or performance when comparing themselves with others. They also overestimate what others earn.