Equity Theory More generally, the current ratio in compensation levels can also be discussed from an equity theory point of view. We investigate how the design of compensation systems influences workers’ behaviours at the organizational level by building upon the consequences of equity theory at the individual level. This means a working parent may accept lower monetary compensation in return for more flexible working hours. Equity, or more precisely, inequity is a major concern of industry, labor, and government. The most common form is stock options , yet employers use additional vehicles such as restricted stock , restricted stock units (RSU), employee stock purchase plan (ESPP), performance shares (PSU) and stock appreciation rights (SAR). Input includes hard work, skills, and enthusiasm. Equal pay compares the pay of similar jobs. Equity incentives are not perfect for every business, and there are certainly some key disadvantages. Application Significance of Incentive Theory in Compensation Management of Enterprises Incentive theory itself contains many contents, including Maslow's hierarchy of needs theory and Adams'equity theory. Equity-based compensation may create a problem when the founders want to sell the company instead of an IPO. Traditional theories explaining why firms o↵er equity suggest that work- ers with higher rank should receive compensation packages more heavily weighted in equity. When applied to the workplace, Equity Theory focuses on an employee's work-compensation relationship or "exchange relationship" as well as that employee's attempt to minimize any sense of unfairness that might result. Equity Theory proposes that a person's motivation is based on what he or she considers to be fair when compared to others (Redmond, 2010). Employees will compare themselves to other groups both inside and outside of the organization. Assumption ; a persons behavior is influenced by comparisons between their current status and some comparison other ; Inputs ; what people think they contribute to an organization ; Outputs ; what people think organization gives them in return; 2 Equity Theory (cont.) This paper will focus on examining equity theory, its propositions and underlying assumptions. 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. Instead of focusing on money alone, Adams’ Equity Theory looks at compensation in relation to our social environment, and its subsequent effect on motivation. The employee seeks a balance between the amount of efforts he pours in (Input) and the kind of compensation he receives (Output). Cause-and-Effect of Equity on Compensation Outline 3. Job evaluation is a more appropriate tool for internal equity pay comparisons than market pay surveys. Equity theory is based on perceived fairness and wheth-er individuals believe they are being treated fairly in an organization (Greenberg & Colquitt, 2005). Equity Theory More generally, the current ratio in compensation levels can also be discussed from an equity theory point of view. Ap-plying equity theory to merit pay, compensation would be an input and work would be an output. It's about the balance between the effort an employee puts into their work (input), and the result they get in return (output). TRUE. Title: Equity Theory 1 Equity Theory. Equity theory is based on a principle that peoples' actions and motivations are guided by fairness and that discrepancies in this fairness in the workplace will spur them to try and redress it. 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