Equity Theory (Adams, 1963) - Leeds School of Business

Equity Theory (Adams, 1963) - Leeds School of Business

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. Management 40130 - Motivation The ories 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 Management 40130 - Motivation The ories 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. Management 40130 - Motivation The ories 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) Management 40130 - Motivation The ories 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.

Management 40130 - Motivation The ories 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. Management 40130 - Motivation The ories

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 Management 40130 - Motivation The ories 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. Management 40130 - Motivation The ories 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 Management 40130 - Motivation The ories 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. Management 40130 - Motivation The ories

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. Management 40130 - Motivation The ories

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. Management 40130 - Motivation The ories 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. Management 40130 - Motivation The ories

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