The equity theory of motivation postulates that people are motivated to maintain a balance between what they perceive as their contributions and their rewards. It also states that if a person perceives an inequity, a tension or drive will develop that motivates them to reduce the tension and perceived inequity. In compensation, one can address external, internal, individual, and procedural equity. External equity refers to how a job’s pay rate in one company compares to the job’s pay rate in other companies.
Internal equity refers to how fair the job’s pay rate is when compared to other jobs within the same company. For instance, is the sales manager’s pay fair, when compared to what the production manager earns? Individual equity refers to the fairness of an individual’s pay as compared with what their coworkers are earning for the same or very similar jobs within the company, based on each person’s performance. Procedural equity refers to the perceived fairness of the processes and procedures used to make decisions regarding the allocation of pay.
Managers address equity issues in various ways. They use salary surveys (surveys of what other employers are paying) to monitor and maintain external equity. They use job analysis and job evaluation to maintain internal equity. They use performance appraisal and incentive pay to maintain individual equity. Some firms administer attitude surveys to monitor employees’ pay satisfaction. Questions typically include, “How satisfied are you with your pay?” and “What factors do you believe we used to determine your pay?”
Open pay policies—listing what everyone earns—may help reduce inequities (such as the gender pay gap), but can obviously cause other disagreements.
Some firms therefore maintain pay rate secrecy. The research concerning pay secrecy is inconclusive, and most employers don’t have open pay policies.
