Equity in Employee Benefits

Equity in employee benefits- The Equity Theory in economics proposes that people value fair treatment, which then causes them to be motivated and to reciprocate the fairness in their dealings with co-workers and the organization as a whole. Thus perceptions of fairness or unfairness affect productivity and morale, and employees will always try to maintain a balance between the effort they put into a job versus the outcome they get from the job to maintain a sense of equity. Equity theory also believes that employees will become demotivated and disenchanted with the employer-employee relationship where equity is not present. Equity theory thus affects an employer’s consideration of work factors such as job satisfaction, morale, motivation levels and so on.

Benefits that are provided to employees in addition to the base wages or salary that is paid form an important part of attraction, retention and motivation tools for an organization’s workforce. Applying the equity theory to benefits then means understanding how to provide employees with this component of compensation in a manner that is considered fair across the entire employee population. A close look at the balance between worker inputs (effort, loyalty, skill, flexibility and any number of qualities that define worker input) and worker outputs (financial rewards, recognition, reputation, sense of achievement, professional growth, job security and so on) will yield opportunities for improving the design of a benefits program to address any equity gaps.

Another aspect of equity in compensation is tied to taxation and its effects on employees. There are two widely accepted hypotheses related to taxation equity in employee compensation:

Horizontal Equity: Horizontal equity means that all individuals are provided with the same of benefits or have to face the same liabilities. There is no discrimination between individuals on any basis.
Vertical Equity: Vertical Equity believes that benefits and liabilities should increase progressively with levels of income. These people with higher incomes have more ability to pay and so will have higher taxation levels. Vertical equity aims to redress income disparities with.

Note, that while horizontal equity is related to tax neutrality, vertical taxation is associated with redistribution of wealth.