Psychological Contract

The psychological contract communicates a combination of beliefs and mutual understandings shared by an employee and an employer with regard to the expectations of one another in the workplace. It can be described as the set of reciprocal but not necessarily articulated expectations that exist between individuals and their employers (Maunder, 1998). Its merit is that unlike a written contract, it focuses on what drives day-to-day behaviour; the moral bargain of work revolves around understandings of obligations, expectations and promises. Schein (1965) quotes:

‘The notion of the psychological contract implies that there is an unwritten set of expectations operating at all times between every member of an organisation and the various managers and others in that organisation.’

Related to social exchange theory (Blau, 1964) which stresses the dynamism and complexity of social relationships, the psychological contract is the idea that both parties have a clear understanding of the employment relationship, going above what is communicated in the contract of employment. Unlike conventional employment contracts, the psychological contract may contain hundreds of different expectations and attitudes. These subjective and often articulated beliefs are recurrently a key source of conflict between both parties, since some matters may have been explicitly discussed whilst others only inferred. These expectations change as the individual and organisation’s expectations change, allowing people to fill in the blanks along the way (Rousseau, 1994). From a functional viewpoint, psychological contracts accomplish two tasks: they help to predict the kind of outputs employers will get from employees and they help to predict what kind of rewards the employee will get from investing time and effort in the organisation. Understanding the contract allows us to explore why the management of people presents a problem for organisations.

In the contemporary working environment, the psychological contract has become paramount in monitoring and controlling employee beliefs and expectations. The ‘state’ of the contract informs the actions of the employee on a regular working basis, i.e. whether they choose to work to their full potential or withdraw from giving their full effort. Figure 1 displays the way in which the contract is shaped by inputs such as HR practices, along with the broader context of the employee such as age, level of education and experience. These factors, along with organisational influences- such as competitive strategy, form the key elements of the psychological contract that determines it’s ‘state.’

[pic 1]

The psychological contract has always existed, however it was not defined and managed by organisations until the 1980’s. The rapid changes in the economic and business life over the last decades significantly transformed organisations. Intense competition on a global scale, political developments and numerous other factors forced organisations to adapt its structure towards a leaner, flexible more efficient approach that could withstand competitive pressures (Hiltrop, 1995).

A lot of the initial interest in the psychological contract originated to meet the need for organisational flexibility and adaptability. The traditional employment relationship was based on an exchange of job security in return for loyalty and commitment (Adamson et al, 1998), employees were expected to completely invest themselves in their company and the company, in turn, did whatever was necessary to make the employee succeed in their job and career (Whyte, 1956). CIPD (2009b) suggests that the ‘new’ psychological contract is made up of employee commitments such as assurances to hard work, to develop new skills and update old ones and be flexible, in exchange for employer promises to provide pay commensurate with performance, opportunities for training and development in interesting and challenging work. In addition to this, the labour market has also seen a substantial change over recent years in terms of age and ethnicity and the flexible ways in which companies employ labour. This has presented a complex set of relationships for employers to manage, as each employee obtains different expectations about their terms of employment.

Management of the topic has seen many changes in contemporary working organisations, the most significant being the inability of organisations to offer job security to full time workers. In the 1950s and 1960s most people were afforded a sense of stability and permanence within their organisation. Not only was the organisational structure clear, but so was each person's current and future place in it now and in the future (De Meuse and Tornow, 1990). This sense of clarity most likely provided employees with a sense of security, assuring their commitment and loyalty to the organisation- this in turn acquired a stable workforce for the employer. In recent years however, the tie that binds employers and employees has become severely strained (De Meuse and Tornow, 1990). Cost reduction is a major factor that has affected the need for dramatic productivity improvements. Large companies have been forced to eliminate jobs, not just at the lowest hierarchical levels, but also among those who have traditionally been offered a long-term career. This is an example of breaching the psychological contract; psychological contract breach involves an employee’s perception that one or more obligations of the employer are unfulfilled (Morrison & Robinson, 1997).  Practices such as downsizing, increased use of contingent employment, corporate mergers, outsourcing, and the movement of operations to cheaper offshore locations truly have been transformative to employment relationships, with employees experiencing many and varied violations to traditional employment expectations (Robinson, Kraatz, & Rousseau, 1994). Perceptions of unmet obligations may occur as a result of reneging by the employer (e.g., the employer is unwilling or unable to deliver on a promised outcome), or because of incongruence in the expectations of the employer and employee (e.g., the employer has a different understanding of the promised outcome) (Morrison & Robinson, 1997). Psychological contract breach is expected to have significant consequences for employees’ work attitudes and behaviour, because contracts are so fundamental to individuals’ employment-related beliefs and experiences (Morrison & Robinson, 1997). Violating employee expectations often results in failure to co-operate and failure to perform specified responsibilities.