Page 267 - Introduction to Business

CHAPTER 7 Motivating and Leading Employees 241

1. Relationship between an employee’s effort and performance. The employee’s
expectation is that a certain amount of effort will result in the desired
performance.
2. Relationship between employee performance and firm’s rewards. This is a
tricky relationship, since a firm’s conditions for providing the reward could be
opaque, making the employee’s outcome uncertain.
3. Relationship between a firm’s reward and an employee’s goals. The
expectations are clear, since the employee anticipates achieving his or her
goals soon after receiving the reward.
Expectancy theory helps explain why employees in certain countries of the for-
mer Soviet bloc did not work hard. Since all employees were paid almost the same
and salary increases were based on years of service, there was little motivation to
work hard. Expectancy theory does provide managers with ideas of how to motivate
employees. For example, making employee performance requirements clear and
attainable, linking rewards to performance in a transparent manner, and tying
rewards to employee goals will enable employees to respond appropriately—
through increased productivity. When employers enforce a piece-rate compensa-
tion system, they are inadvertently practicing expectancy theory.

Equity Theory
Equity theory is something that most of us are familiar with in our day-to-day lives.
Equity at the corporate level means fairness, justice, or evenhandedness in the
workplace. All of us like to be treated in a fair manner at work, school, and play and
in stores and restaurants. In countries such as the United States, the United King-
dom, France, Germany, South Africa, India, Sri Lanka, and so on, which have
diverse populations, equity theory plays an extremely important role in employee
satisfaction, motivation, and productivity. A major economic strength of these
countries is the diversity, primarily in race, religion, and class or caste, of their pop-
ulations and workforce. Unless all employees are treated fairly, employee morale
will be low and the firm may face legal action. Literally thousands of lawsuits have
been filed and won in the United States because employees were not treated equi-
tably by their employers.
Equity theory states that employees are motivated to work smart and con- equity theory The theory that employees
tribute to a firm’s success as long as they believe that they are treated and compen- are motivated to work smart and
contribute to the success of the firm as
sated fairly relative to others with similar, not identical, levels of education and
long as they believe that they are
professional experience. How do employees determine whether they are being treated and compensated fairly relative
treated in an equitable manner? Employees first try to decide whether the employer to others with similar levels of
rewards them in proportion to their input. Some of the major rewards they consider education and professional experience
are wages, benefits, promotion, and awards—called outcomes. Employees then
consider what they provide to the company in terms of hours worked, educational
level, professional experience, and skills—called inputs. The employees compute
the outcomes-to-inputs ratio to determine if they are being fairly treated by
the company. The question then becomes “With whom do employees compare
themselves?”
Employees generally do this in a stepwise manner. First, they try to compare
themselves with employees of similar background within the organization. Second,
they try to compare themselves with employees with similar background outside the
organization but in a similar line of business. Finally, they compare now to their past
experience with another company. After making these comparisons, if they find the
outcomes-to-inputs ratios to be somewhat similar, they will feel that the treatment is
fair and equitable and they will leave things alone. However, if they conclude that

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