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.
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 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
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 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.

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 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)
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 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.

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 Reinforcement Theory (Skinner, 1953)

Behavior that is rewarded will be more likely to be

repeated and strengthened (Thorndike, 1911).

Behavior --> Consequence

- Reinforcement/No reinforcement/
Punishment
Reinforcement - a desirable consequence, e.g.,
rewarded behavior increases the probability it will
occur in future.
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 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

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 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.
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 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

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 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.

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 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.
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 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.

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 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.

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